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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
--- Exchange Act of 1934
For the quarterly period ended October 31, 2000 or
Transition report pursuant to Section 13 or 15(d) of the
--- Securities Exchange Act of 1934
For the transition period from to
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Commission file number 0-17521
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ZILA, INC
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(Exact Name of Registrant as Specified In Its Charter)
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<S> <C>
Delaware 86-0619668
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(State or Other Jurisdiction of Incorporation (IRS Employer Identification No.)
Organization)
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5227 North 7th Street, Phoenix, Arizona 85014
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (602) 266-6700
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
At October 31, 2000, the number of shares of common stock outstanding
was 43,512,528.
Exhibit Index 14
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Total pages 16
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TABLE OF CONTENTS
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Page no.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets as of October 31, 2000 and July
31, 2000 3
Condensed consolidated statements of operations and comprehensive
income for the three months ended October 31, 2000 and 1999 4
Condensed consolidated statements of cash flows for the three months
ended October 31, 2000 and 1999 5
Notes to condensed consolidated financial statements 6-9
Item 2. Management's discussion and analysis of financial condition and
results of operations 10-14
Item 3. Quantitative and qualitative disclosures about market risk 14
PART II. OTHER INFORMATION
Item 1. Legal proceedings 14
Item 6. Exhibits and reports on Form 8-K 15
SIGNATURES 16
</TABLE>
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ZILA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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<TABLE>
<CAPTION>
ASSETS October 31, 2000 July 31, 2000
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<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,455,549 $ 5,558,487
Trade receivables - net 11,123,645 9,893,587
Inventories - net 16,165,220 13,204,137
Prepaid expenses and other current assets 2,608,525 2,479,072
Deferred income taxes 244,788 244,788
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Total current assets 31,597,727 31,380,071
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PROPERTY AND EQUIPMENT - net 10,567,586 9,442,278
PURCHASED TECHNOLOGY RIGHTS - net 5,491,865 5,600,975
GOODWILL - net 12,431,549 12,725,978
TRADEMARKS and OTHER INTANGIBLE ASSETS - net 12,516,621 12,423,632
CASH HELD BY TRUSTEE 2,420,512 2,928,001
OTHER ASSETS 3,241,077 3,210,524
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TOTAL $ 78,266,937 $ 77,711,459
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,070,875 $ 6,599,702
Accrued liabilities 3,290,752 3,622,330
Short-term borrowings 2,269,627 51,770
Current portion of long-term debt 759,680 776,866
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Total current liabilities 11,390,934 11,050,668
LONG-TERM DEBT - net of current portion 4,432,633 4,548,953
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Total liabilities 15,823,567 15,599,621
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COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, $.001 par value - authorized 2,500,000
shares, none issued
Common stock, $.001 par value - authorized, 65,000,000
shares, issued 43,512,528 shares (October 31, 2000) and
43,362,658 shares (July 31, 2000) 43,513 43,363
Capital in excess of par value 79,873,694 79,424,235
Accumulated other comprehensive income 116,144 71,666
Deficit (17,180,231) (17,017,676)
Less: 135,000 shares of common stock in treasury, at cost (409,750) (409,750)
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Total shareholders' equity 62,443,370 62,111,838
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TOTAL $ 78,266,937 $ 77,711,459
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</TABLE>
See notes to condensed consolidated financial statements.
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ZILA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(UNAUDITED)
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<TABLE>
<CAPTION>
Three months ended October 31,
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2000 1999
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<S> <C> <C>
NET REVENUES $ 18,836,235 $ 19,171,593
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OPERATING COSTS AND EXPENSES:
Cost of products sold 10,115,663 9,502,231
Selling, general and administrative 7,339,277 8,675,284
Research and development 363,867 730,127
Depreciation and amortization 841,389 958,316
Impairment Charge 310,000
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18,970,196 19,865,958
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LOSS FROM OPERATIONS (133,961) (694,365)
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OTHER INCOME (EXPENSES):
Interest income 59,066 77,766
Interest expense (22,977) (129,120)
Other expense (64,683) (14,875)
Gain on sale of assets 139,212
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(28,594) 72,983
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LOSS BEFORE INCOME TAXES (162,555) (621,382)
INCOME TAX BENEFIT 570,000
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NET LOSS $ (162,555) $ (51,382)
============ ============
NET LOSS PER SHARE:
BASIC $ (0.00) $ (0.00)
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DILUTED $ (0.00) $ (0.00)
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WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
BASIC 43,335,050 40,867,566
DILUTED 43,335,050 40,867,566
NET LOSS $ (162,555)
Other comprehensive income (loss), net of tax
Foreign currency translation adjustment 45,728
Net unrealized loss on available-for-sale-
securities (1,250)
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Other comprehensive income 44,478
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COMPREHENSIVE LOSS $ (118,077)
============
</TABLE>
See notes to condensed consolidated financial statements.
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ZILA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
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<TABLE>
<CAPTION>
Three months ended October 31,
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2000 1999
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<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (162,555) $ (51,382)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 841,389 916,882
Gain on sale of assets (139,212)
Impairment of asset 310,000
Deferred income taxes and other 44,370 (554,777)
Change in assets and liabilities:
Receivables - net (1,230,058) (1,322,982)
Inventories (2,961,083) (88,524)
Prepaid expenses and other assets (160,005) (416,187)
Accounts payable and accrued expenses (1,901,655) 364,963
Deferred revenue 41,250 115,570
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Net cash used in operating activities (5,178,347) (1,175,649)
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INVESTING ACTIVITIES:
Net purchases of property and equipment (1,704,646) (319,625)
Purchases of intangible assets (261,394) (5,430)
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Net cash used in investing activities (1,966,040) (325,055)
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FINANCING ACTIVITIES:
Net proceeds from short-term borrowings 2,217,857 248,187
Net proceeds from issuance of common stock 449,609
Cash released by trustee 507,489
Principal payments on long-term debt (133,506) (1,023,940)
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Net cash provided by (used in) financing activities 3,041,449 (775,753)
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NET DECREASE IN CASH AND CASH EQUIVALENTS (4,102,938) (2,276,457)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,558,487 5,770,970
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CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,455,549 $ 3,494,513
=========== ===========
CASH PAID FOR INTEREST $ 25,019 $ 102,574
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CASH PAID FOR INCOME TAXES $ 32,068 $ -
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SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND
FINANCING ACTIVITIES FOR 2000 AND 1999:
Income tax benefit attributable to exercise of common stock
options $ 250,000
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Conversion of Series A Convertible Redeemable Preferred stock $ 1,944,341
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</TABLE>
See notes to condensed consolidated financial statements.
5
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ZILA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
Zila, Inc. and its wholly-owned subsidiaries, Zila Pharmaceuticals,
Inc., Zila International Inc., Zila Ltd., Bio-Dental Technologies
Corporation ("Bio-Dental"), Zila Technologies, Inc., formerly Cygnus
Imaging, Inc. ("Cygnus"), and Oxycal Laboratories, Inc. ("Oxycal"). All
significant intercompany balances and transactions are eliminated in
consolidation.
In the opinion of management of Zila, Inc. and its subsidiaries
(collectively referred to herein as "Zila" or the "Company"), all
adjustments, consisting of normal recurring accruals, considered
necessary for a fair presentation have been included in the condensed
consolidated financial statements. The results of operations for the
interim period are not necessarily indicative of the results that may be
expected for the entire year. The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. Certain reclassifications have been made to the prior year
financial statements to conform to the current year presentation.
2. NET LOSS PER SHARE
The following is a reconciliation of the numerator and denominator of
basic and diluted earnings (loss) per share:
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<CAPTION>
For the three months ended October 31,
2000 1999
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<S> <C> <C>
Net loss $ (162,555) $ (51,382)
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Average outstanding common shares 43,335,050 40,867,566
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Basic net loss per share $ (0.00) $ (0.00)
============ ============
Diluted net loss per share:
Net loss available for diluted earnings $ (162,555) $ (51,382)
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Average outstanding and potentially dilutive
common shares 43,335,050 40,867,566
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Diluted net loss per share $ (0.00) $ (0.00)
============ ============
</TABLE>
Since a loss was incurred for the quarters ended October 31, 2000 and
1999, options and warrants to purchase shares of common stock and shares
related to convertible preferred stock that would otherwise qualify as
common stock equivalents were not included in the computation of diluted
net income per share because their effect would be antidilutive.
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3. INVENTORIES
Inventories consist of the following:
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<CAPTION>
October 31, July 31,
2000 1999
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<S> <C> <C>
Finished goods $9,029,695 $9,219,343
Raw materials 7,308,906 4,168,834
Inventory reserves (173,381) (184,040)
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$16,165,220 $13,204,137
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</TABLE>
4. INCOME TAXES
Deferred income taxes reflect the tax effect of temporary differences
between the amounts of assets and liabilities recognized for financial
reporting and tax purposes. At the end of each fiscal quarter, the
Company makes its best estimate of the effective tax rate expected to be
applicable for the full fiscal year. The rate so determined is used in
providing for income taxes on a current year-to-date basis. The rate is
revised, if necessary, as of the end of each quarter during the fiscal
year to the Company's best estimate of its annual effective tax rate. In
the quarter ended October 31, 2000, the Company recorded no tax benefit
or expense, as its effective tax rate for the fiscal year is estimated
to be at or near zero. In the prior year quarter ended October 31, 1999,
the Company recorded an income tax benefit of $820,000 ($250,000 of
which was attributable to the exercise of common stock options in prior
years and therefore was credited to capital in excess of par value).
5. ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
The Company accounts for impairment of long-lived assets in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" which was issued in March 1995. SFAS No. 121
requires that long-lived assets be reviewed for impairment whenever
events or changes in circumstances indicate that the book value of the
asset may not be recoverable. In the quarter ended October 31, 2000, the
Company recorded a non-cash charge of $310,000, in the Nutraceuticals
segment, to write down the carrying amount of the land and buildings
located at 533 Madison Avenue, Prescott, Arizona to an estimated fair
value related to its anticipated sale.
6. NEW ACCOUNTING PRONOUNCEMENTS
In May 2000, the Financial Accounting Standards Board's Emerging Issues
Task Force ("EITF") issued Issue No. 00-14, Accounting for Certain Sales
Incentives. The Issue addresses the recognition, measurement, and income
statement classification for certain sales incentives. The consensus on
EITF 00-14 will be effective in the fourth quarter of fiscal year 2001.
In addition, the EITF has added Issue No. 00-25 Vendor Income Statement
Characterization of Consideration from a Vendor to a Retailer to its
agenda. This issue discusses the income statement classification of
"trade spending" costs. The Company is in the process of analyzing the
requirements of these pronouncements.
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7. SALE OF CYGNUS ASSETS
On October 28, 1999, Cygnus completed the sale of substantially all of
its assets and certain liabilities to Procare Laboratories, Inc.
("Procare"), of Scottsdale, Arizona for approximately $4.0 million.
Procare is controlled by the former owner and President of Cygnus. The
purchase price was paid through the issuance of a $4.0 million note
receivable that was collateralized by the assets of Procare and matured
and was paid in full on November 10, 1999. The net book value of the
assets sold and liabilities assumed was $3.9 million. The sale resulted
in a $139,000 gain.
On December 20, 1999, IDT completed the sale of substantially all of its
assets and liabilities related to its PracticeWorks division located in
Gold River, California to InfoCure Corporation ("InfoCure"), of Atlanta,
Georgia for approximately $4.65 million. InfoCure is a national provider
of healthcare practice management software products and services to
targeted healthcare practice specialties.
The following unaudited pro forma information presents the condensed
consolidated results of operations as if the sales had occurred as of
the beginning of the quarter ended October 31, 1999 and does not purport
to be indicative of what would have occurred had the sale been made as
of that date.
<TABLE>
<CAPTION>
Quarter ended
October 31,
1999
(in thousands)
<S> <C>
Net Revenues $17,861
Operating loss (70)
Loss before income taxes $ (135)
</TABLE>
8. SEGMENT INFORMATION
The Company is organized into five major product groups, all of which
have distinct product lines, brand names and are managed as autonomous
business units. The Company has identified the following segments for
purposes of applying SFAS No. 131: Consumer which includes Zila
Pharmaceuticals, Inc. and the Zilactin(R) line of products, Professional
which includes Peridex(R) and Pro-Ties(TM), OraTest(R) products, Dental
Supply, which includes Bio-Dental Technologies Corporation and Ryker
Dental of Kentucky, Inc. (a subsidiary of Bio-Dental Technologies
Corporation) which does business under the name Zila Dental Supply, and
Nutraceuticals, which includes Oxycal Laboratories, Inc. and its
wholly-owned subsidiary, Inter-Cal, Inc. The Company evaluates
performance and allocates resources to segments based on operating
results. Corporate overhead expenses have been combined with the
OraTest(R) segment. The Dental Imaging and Dental Software businesses,
sold in fiscal year 2000, are combined into the Other segment. Prior to
August 1, 2000 the Consumer and Professional segment were combined and
shown as the Pharmaceutical segment. The Professional segment was
removed from the Pharmaceutical segment as a result of the change in
management reporting structure. Previous segment disclosures have been
restated to reflect this presentation.
The table below presents information about reported segments as of and
for the three months ended October 31 (in thousands):
<TABLE>
<CAPTION>
Dental
Consumer Professional Supply OraTest Nutraceuticals Other Total
Net revenues:
<S> <C> <C> <C> <C> <C> <C> <C>
2000 $ 3,721 $ 1,137 $ 10,174 $ 40 $ 3,764 $ 0 $ 18,836
1999 2,411 1,302 9,571 34 4,543 1,311 19,172
Income (loss) before
income taxes:
2000 1,975 54 41 (2,409) 176 $ 0 (163)
1999 691 (14) 118 (2,158) 1,228 (486) (621)
Depreciation and
amortization:
2000 19 241 69 248 264 $ 0 841
1999 11 241 75 243 252 136 958
Total assets:
2000 3,381 10,136 11,655 15,930 37,165 $ 0 78,267
1999 2,466 10,776 10,970 17,764 29,645 4,896 76,517
</TABLE>
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9. COMMITMENTS AND CONTINGENCIES
The Company and certain officers of the Company have been named as
defendants in a consolidated First Amended Class Action Complaint filed
July 6, 1999 in the United States District Court for the District of
Arizona under the caption In re Zila Securities Litigation, No. CIV 99
0115 PHX EHC. The First Amended Class Action Complaint seeks damages in
an unspecified amount on behalf of a class consisting of purchasers of
the Company's securities from November 14, 1996 through January 13, 1999
for alleged violations of the federal securities laws. Specifically, the
plaintiffs allege that in certain public statements and filings with the
Securities and Exchange Commission the defendants made false or
misleading statements and concealed material adverse information related
to OraTest(R) that artificially inflated the price of the Company's
common stock in violation of the federal securities laws. The Company
and the individual defendants deny all allegations of wrongdoing and are
defending themselves vigorously. In September 2000, the Court denied the
defendants' motion to dismiss the First Amended Class Action Complaint
and ordered that the matter proceed to trial on the issue of liability
commencing on February 26, 2001.
On September 8, 1999, the Securities and Exchange Commission (the
"Commission") entered an order directing an investigation entitled "In
the Matter of Zila, Inc." The Commission is investigating whether (i)
there were purchases or sales of securities of the Company by persons
while in possession of material non-public information concerning the
prospects that the Oncologic Drugs Advisory Committee for the FDA would
recommend approval of the OraTest(R) NDA and whether the FDA would
subsequently approve the NDA; (ii) such persons conveyed information
regarding these matters to other persons who effected transactions in
securities of the Company without disclosing the information; and (iii)
there were false and misleading statements in press releases, filings
with the Commission, or elsewhere concerning these matters. The Company
does not believe it has violated any of the federal securities laws and
is cooperating fully with the Commission in its investigation.
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 other actions
will not materially affect the financial position or results of
operations of the Company.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ZILA, INC. AND SUBSIDIARIES
FORWARD LOOKING INFORMATION
This Report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. The words "believe," "expect," "anticipate," "intend," "estimate" and
other expressions that are predictions of or indicate future events and trends
and which do not relate to historical matters identify forward-looking
statements. These forward-looking statements are based largely on the Company's
expectations or forecasts of future events, can be affected by inaccurate
assumptions and are subject to various business risks and known and unknown
uncertainties, a number of which are beyond the Company's control. Therefore,
actual results could differ materially from the forward-looking statements
contained in this document, and readers are cautioned not to place undue
reliance on such forward-looking statements. The Company undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise. A wide variety of
factors could cause or contribute to such differences and could adversely impact
revenues, profitability, cash flows and capital needs. Included among the
factors affecting OraTest(R) are the FDA's ultimate decision regarding
OraTest(R); the length and expense of the new clinical study and the FDA
review process; the limitations on indicated uses for which OraTest(R) may be
marketed; and, if approved, the market reception to OraTest(R) and any
post-marketing reports or surveillance programs to monitor usage or side effects
of OraTest(R). There can be no assurance that the forward-looking statements
contained in this document will, in fact, transpire or prove to be accurate. For
a more detailed description of these and other cautionary factors that may
affect the Company's future results, please refer to the Company's Annual Report
on Form 10-K for its fiscal year ended July 31, 2000 filed with the Securities
and Exchange Commission.
COMPANY OVERVIEW:
Zila is a worldwide manufacturer and marketer of pharmaceutical,
biomedical, dental and nutritional products. The Company has five major
operating groups: Consumer Pharmaceuticals, Professional Pharmaceuticals,
OraTest(R) Products, Dental Supplies and Nutraceuticals. The Consumer
Pharmaceuticals group consists of over-the-counter and prescription products,
including the Zilactin(R) family of over-the-counter products. The
Professional Pharmaceuticals group includes Peridex(R) prescription mouth
rinse, and Pro-Ties(TM), a bundling system for instrument sterilization. The
OraTest(R) Products group includes OraTest(R), an oral cancer detection
system, and the Dental Supply group includes Zila Dental Supply, a national
distributor of professional dental supplies. The Nutraceuticals group is
comprised of Oxycal Laboratories, Inc. ("Oxycal") and its Inter-Cal
("Inter-Cal") subsidiary, a manufacturer and distributor of mineral and
botanical products including a patented and unique form of Vitamin C under the
trademark Ester-C(R) and the Palmettx(R) botanical line of products.
On October 28, 1999, Cygnus completed the sale of substantially all of
its assets and certain liabilities to Procare Laboratories, Inc. ("Procare"), of
Scottsdale, Arizona for approximately $4.0 million. Procare is controlled by the
former owner and President of Cygnus. The purchase price was paid through the
issuance of a note receivable, which was collateralized by the assets of Procare
and was paid in full on November 10, 1999. The sale resulted in a $139,000 gain.
Cygnus had revenue of approximately $193,000 and a net loss of $720,000 for the
quarter ended October 31, 1999.
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<PAGE> 11
On December 20, 1999, the Company, through its wholly-owned subsidiary,
Integrated Dental Technologies, Inc. ("IDT"), completed the sale of
substantially all of IDT's assets and liabilities related to its PracticeWorks
division located in Gold River, California to InfoCure Corporation ("InfoCure"),
of Atlanta, Georgia for approximately $4.65 million. InfoCure is a national
provider of healthcare practice management software products and services to
targeted healthcare practice specialties and is listed on the NASDAQ under the
symbol INCX. Under the terms of the agreement, ten percent (10%) of the sales
price will be held in escrow for one year in order to secure the
representations, warranties, and covenants made by the Company to InfoCure.
RESULTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 31, 2000 AND 1999
Total net revenues declined 1.7% to $18.8 million for the quarter ended
October 31, 2000, compared to revenues of $19.2 million during the first quarter
of the prior fiscal year. Excluding the first quarter revenues in the prior
fiscal year for the Cygnus and the PracticeWorks divisions, both of which were
sold in the prior fiscal year, net revenues increased 5.5%.
Net revenues for Zila Dental Supply increased 6.3% to $10.2 million for
the quarter ended October 31, 2000, compared to $9.6 million for the
corresponding fiscal quarter in 1999. This increase was primarily due to an
increase in internet sales and sales of full service supplies. Consumer
Pharmaceuticals had net revenues of $3.7 million for the quarter ended October
31, 2000, a 54.3% increase over the $2.4 million recorded during the
corresponding quarter last year. The increase was due primarily to an increase
in sales of all of the Zilactin products. Net revenues for Professional
Pharmaceuticals was $1.1 million, a decrease of 12.7% from $1.3 million during
the prior year quarter. The decrease is related to a decline in sales of
Peridex(R) caused by pricing pressures and substitutions made by pharmacists to
generic brands. OraTest(R) products had net revenue of $40,000 for the
quarter ended October 31, 2000, a 17.7% increase over the $34,000 recorded
during the corresponding quarter last year. Sales of OraTest(R) increased in
the United Kingdom during the current quarter. Net revenues for Inter-Cal for
the quarter ended October 31, 2000, were $3.8 million, a 17.2 % decrease when
compared to the $4.5 million for the corresponding 1999 fiscal quarter. The
decrease is attributable to an overall slowdown in the domestic vitamin market.
Inter-Cal's international sales increased 27% during the quarter ended October
31, 2000, as compared to the previous year's quarter due to improved economic
conditions in their foreign markets.
For the quarter ended October 31, 2000, cost of products sold was $10.1
million, a 6.5% increase from $9.5 million for the quarter ended October 31,
1999. Cost of products sold as a percentage of net revenues increased to 53.7%
in the quarter ended October 31, 2000 from 49.6% in the quarter ended October
31, 1999. The increase for the quarter reflects primarily the growth of Zila
Dental Supply as a percentage of total revenues, 54.0% for the quarter ended
October 31, 2000, compared to 50.0% for the previous year quarter. Margins for
Zila Dental Supply are lower as compared to the other operating groups resulting
in a higher cost of products sold as a percentage of revenues.
Cost of products sold as a percentage of net revenues for Zila Dental
Supply stayed constant at 73.8% for the quarter ended October 31, 2000 when
compared to the quarter ended October 31, 1999. Cost of products sold as a
percentage of net revenues for Consumer Pharmaceuticals decreased slightly to
22.1% in the quarter ended October 31, 2000, from 22.6% in the quarter ended
October 31, 1999. The decrease for the quarter is a result of a change in the
mix of products sold. Cost of products sold as a percentage of net revenues for
Professional Pharmaceuticals increased to 23.3% for the quarter ended October
31, 2000 from 21.0% in the quarter ended October 31, 1999. The increase is due
primarily to a
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<PAGE> 12
reduction in the average sales price per case of Peridex(R) sold during the
quarter related to increased pricing pressures from generic equivalents.
Cost of products sold as a percentage of net revenues for Inter-Cal
increased to 33.4% in the quarter ended October 31, 2000 from 26.7% in the
quarter ended October 31, 1999. The increase was caused by the costs associated
with the manufacturing of the new Palmettx(TM) botanical line of products as
well as the duplicate overhead costs related to the move to the new
manufacturing facility in Prescott, AZ during the quarter.
The Company incurred selling, general and administrative expenses of
$7.3 million, or 39.0% of net revenues during the first quarter of fiscal year
2001 compared to $8.7 million, or 45.3% of net revenue in the same period in
fiscal 2000. The decrease for the quarter ended October 31, 2000, is
attributable to a reduction in costs related to the Cygnus and PracticeWorks
businesses partially offset by increased marketing and selling costs related to
the OraTest(R) product introductions in the United Kingdom and China,
increased costs related to the expansion of the sales force and the service
department at Zila Dental Supply, and increased selling expenses at Inter-Cal.
Research and development expenses decreased $366,000, or 50.2%, from
$730,000 in the first quarter of fiscal year 2000 to $364,000 for the same
period in fiscal year 2001. The decrease was primarily due to a reduction in
costs related to the Cygnus and PracticeWorks businesses and reduced expenses
related to research at Inter-Cal.
In the quarter ended October 31, 2000, the Company recorded a non-cash
impairment charge of $310,000 to write down the carrying value of the land and
buildings located at 533 Madison Avenue, Prescott, Arizona to an estimated fair
value related to its anticipated sale.
The Company recorded interest expense of $23,000 for the quarter ended
October 31, 2000 compared to $129,000 in the same period of the previous year.
The decrease was attributable to a reduction in debt obligations incurred during
fiscal year 2001 as compared to the previous year period.
Depreciation and amortization expenses decreased $117,000 from $958,000
in the first quarter of fiscal year 2000 to $841,000 for the same period in
fiscal year 2001. The decrease is due primarily to the reduced costs associated
with the sale of Cygnus and PracticeWorks businesses.
In the three months ended October 31, 2000, the Company recorded no
income tax benefit or expense, as its effective tax rate for the fiscal year is
estimated to be at or near zero. At the end of each fiscal quarter, the Company
makes its best estimate of the effective tax rate expected to be applicable for
the full fiscal year. The rate so determined is used in providing for income
taxes on a current year-to-date basis. The rate is revised, if necessary, as of
the end of each quarter during the fiscal year to the Company's best current
estimate of its effective rate. The effective tax rate could change
significantly in future interim periods if there is a change in the Company's
estimates because of (i) the proportion of non-deductible amortization of
intangible assets in relation to pre-tax income (loss) for financial reporting
purposes and (ii) the non-deductibility of foreign operating losses. In the
quarter ended October 31, 1999, the Company recorded an income tax benefit of
$820,000 ($250,000 of which was attributable to the exercise of common stock
options in prior years and therefore was credited to capital in excess of par
value).
For the quarter ended October 31, 2000, the Company had a net loss of
$163,000 compared to a net loss of $51,000 for the quarter ended October 31,
1999. The decrease in profitability is primarily attributable to the recording
of an income tax benefit in the prior year quarter with no corresponding benefit
recorded in the current year quarter and because of the $310,000 impairment
charge related to
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the writedown of the property.
LIQUIDITY AND CAPITAL RESOURCES
At October 31, 2000, the Company's primary sources of liquidity included
cash and cash equivalents of $1.5 million and the bank line of credit discussed
below. Working capital decreased slightly to $20.2 million at October 31, 2000
from $20.3 million at July 31, 2000, and the current ratio remained the same at
2.8.
In February 1999, the Company increased its line of credit with Bank One
Corporation to $9 million and extended the commitment period to December 1,
2000. Additionally, the interest rate was reduced to the prime rate (9.5% at
October 31, 2000) plus .25%. At October 31, 2000, the Company had borrowings of
$2.0 million against the line of credit. On December 1, 2000, the Company
renewed its $9 million line of credit with Bank One for an additional 12 months
under similar terms and conditions, including an interest rate equal to the
prime rate (9.5% at December 1, 2000). Under the line of credit, the Company is
required to comply with financial covenants based on certain financial ratios.
At October 31, 2000, the Company was in compliance with such covenants.
Net cash used in operating activities was $5.2 million during the
quarter ended October 31, 2000, attributable to the net loss of $163,000 plus
non-cash items of $1.2 million and changes in operating assets and liabilities
totaling $6.2 million. Significant changes in operating assets and liabilities
were primarily comprised of (i) an increase in accounts receivable of $1.2
million due to increased sales at Consumer Pharmaceuticals and extended payment
terms offered by Inter-Cal during the quarter, (ii) an increase in inventory of
$3.0 million related to the new Palmettx(TM) botanical line of products at
Inter-Cal, and (iii) a decrease in accounts payable and accrued expenses of $1.9
million primarily due to vendor payments made during the quarter for inventory
purchases.
Net cash used in investing activities was $2.0 million due to
manufacturing additions for the new Inter-Cal facility and the purchase of the
patent and rights related to the Pro-Ties(TM) bundling system.
The net cash provided by financing activities of $3.0 million was
comprised of bank borrowings of $2.0 million, net borrowings of approximately
$217,000 related to the financing of insurance policies, proceeds received from
the exercise of warrants of $450,000 and $507,000 of bond proceeds received from
the trustee related to the construction of the new Inter-Cal facility.
At October 31, 2000, the Company had income tax net operating loss
carryforwards of approximately $9.8 million, which expire in years 2007 through
2019.
During the quarter ended October 31, 2000, Inter-Cal moved into its new
manufacturing and laboratory facility in Prescott, AZ. The facility was financed
through a transaction with The Industrial Development Authority of the County of
Yavapai (the "Authority") in which the Authority issued $5.0 million in
Industrial Development Revenue Bonds (the "Bonds"), the proceeds of which were
loaned to Oxycal for the construction of the facility. The Bond proceeds are
being held by the trustee, Bank One, Arizona until such time as the remaining
invoices for building construction and new equipment are submitted for payment.
The Bonds consist of $3.9 million Series A and $1.1 million Taxable Series B
which, as of October 31, 2000, carried interest rates of 4.65% and 6.70%,
respectively. The Bonds were marketed and sold by Banc One Capital Markets and
carry a maturity of 20 years. In connection with the issuance of the Bonds, the
Authority required that Oxycal obtain, for the benefit of the Bondholders, an
irrevocable direct-pay letter of credit to secure payment of principal and
interest. The letter of credit is guaranteed by Zila.
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The Company believes that cash generated from its operations, its
investing activities and the availability of cash under its line of credit are
sufficient to finance its level of operations and anticipated capital
expenditures. The Company may require additional financing to support the
production and future OraTest(R) clinical, regulatory, manufacturing and
marketing costs or to make any significant acquisitions. There can be no
assurances that such funds will be available on terms acceptable to the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk refers to the potential effects of unfavorable changes in
certain prices and rates on the Company's financial results and conditions,
primarily foreign currency exchange rates and interest rates on debt
obligations. The Company transacts business in various foreign countries.
Foreign currency exposures are primarily, but not limited to, vendor and
customer payments and inter-company balances in currencies other than the
functional currency. Fluctuations in foreign currencies could have a material
adverse effect on the Company's results of operations.
The Company is exposed to interest rate fluctuations on its Industrial
Development Revenue Bonds and the line of credit with Bank One Corporation as
the interest charged is based on variable rates. The Bonds bear interest based
on a floating rate and adjusted weekly by Banc One Capital Markets. Interest on
the outstanding balance of the line of credit is charged at the prime rate of
Bank One. The Company does not trade in derivative financial instruments. The
Company does not believe that near-term changes in foreign currency exchange
rates or interest rates will have a material effect on its future earnings, fair
values or cash flows.
PART II - OTHER INFORMATION
ITEM 1.- Legal Proceedings
The Company and certain officers of the Company have been named as
defendants in a consolidated First Amended Class Action Complaint filed July 6,
1999 in the United States District Court for the District of Arizona under the
caption In re Zila Securities Litigation, No. CIV 99 0115 PHX EHC. The First
Amended Class Action Complaint seeks damages in an unspecified amount on behalf
of a class consisting of purchasers of the Company's securities from November
14, 1996 through January 13, 1999 for alleged violations of the federal
securities laws. Specifically, the plaintiffs allege that in certain public
statements and filings with the Securities and Exchange Commission the
defendants made false or misleading statements and concealed material adverse
information related to OraTest(R) that artificially inflated the price of the
Company's common stock in violation of the federal securities laws. The Company
and the individual defendants deny all allegations of wrongdoing and are
defending themselves vigorously. In September 2000, the Court denied the
defendants' motion to dismiss the First Amended Class Action Complaint and
ordered that the matter proceed to trial on the issue of liability commencing on
February 26, 2001.
On September 8, 1999, the Securities and Exchange Commission (the
"Commission") entered an order directing an investigation entitled "In the
Matter of Zila, Inc." The Commission is investigating whether (i) there were
purchases or sales of securities of the Company by persons while in possession
of material non-public information concerning the prospects that the Oncologic
Drugs Advisory Committee for the FDA would recommend approval of the OraTest(R)
NDA and whether the FDA would subsequently approve the NDA; (ii) such persons
conveyed information regarding these matters to other persons who effected
transactions in securities of the Company without disclosing the information;
and
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(iii) there were false and misleading statements in press releases, filings with
the Commission, or elsewhere concerning these matters. The Company does not
believe it has violated any of the federal securities laws and is cooperating
fully with the Commission in its investigation.
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 other actions will not
materially affect the financial position or results of operations of the
Company.
ITEM 2 CHANGES IN SECURITIES
---------------------
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
-------------------------------
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
---------------------------------------------------
Not Applicable.
ITEM 5. OTHER INFORMATION
-------------------
Not Applicable.
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ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description
27 Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: December 12, 2000 By /s/Joseph Hines
------------------- ---------------
Joseph Hines
President, Chairman of the Board
(Principal Executive Officer)
By /s/Bradley C. Anderson
----------------------
Bradley C. Anderson
Vice President and Chief
Financial Officer (Principal
Financial & Accounting Officer)
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