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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended January 31, 2000 or
[X] 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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<S> <C>
Delaware No. 86-0619668
(State or Other Jurisdiction of incorporation (IRS Employer Identification number)
organization)
5227 North 7th Street, Phoenix, Arizona 85014
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (602)266-6700
(Former name, former address and former fiscal year, if changed since last report)
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Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No.[ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
The number of shares of the Company's common stock outstanding at
January 31, 2000 was 43,138,055 shares.
Exhibit Index 18
Total pages 19
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TABLE OF CONTENTS
Page no.
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets as of January 31, 2000 and July 31, 1999 3
Condensed consolidated statements of operations for the quarter and six months ended
January 31, 2000 and 1999 4
Condensed consolidated statements of cash flows for the six months ended January 31,
2000 and 1999 5
Notes to condensed consolidated financial statements 6-10
Item 2. Management's discussion and analysis of financial condition and results of operations 11-16
PART II OTHER INFORMATION
Item 1. Legal proceedings 16
Item 5. Other information 17
Item 6. Exhibits and reports on Form 8-K 17-18
SIGNATURES 19
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ZILA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - (UNAUDITED)
<TABLE>
<CAPTION>
January July
31, 2000 31, 1999
----------- -----------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 8,592,888 $ 5,770,970
Trade receivables - net 8,913,587 8,741,283
Inventories - net 10,125,513 11,405,883
Prepaid expenses and other current assets 1,619,848 1,126,773
Deferred income taxes 244,788 3,705,715
----------- -----------
Total current assets 29,496,624 30,750,624
----------- -----------
PROPERTY AND EQUIPMENT - Net 5,639,153 5,680,281
PURCHASED TECHNOLOGY RIGHTS - Net 5,819,195 6,037,415
GOODWILL - Net 13,314,833 15,679,969
TRADEMARKS - Net 10,521,105 10,782,029
CASH HELD BY TRUSTEE 5,027,511 4,834,755
OTHER ASSETS 3,629,047 2,790,860
----------- -----------
TOTAL $73,447,468 $76,555,933
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,190,982 $ 3,680,639
Accrued liabilities 3,421,371 2,760,735
Deferred revenue 27,500 982,037
Short-term borrowings 214,596 116,950
Current portion of long-term debt 185,087 1,164,399
----------- -----------
Total current liabilities 8,039,536 8,704,760
LONG-TERM DEBT - Net of current portion 5,333,593 9,577,755
----------- -----------
Total liabilities 13,373,129 18,282,515
----------- -----------
COMMITMENTS AND CONTINGENCIES
SERIES A CONVERTIBLE REDEEMABLE PREFERRED STOCK:
Issued 30,000; outstanding 500 shares (January 31, 2000) and
7,482 shares (July 31, 1999); liquidation preference value: $1,220 per share 610,001 8,787,191
----------- -----------
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
43,138,055 shares (January 31, 2000) and 40,378,588 shares (July 31, 1999) 43,138 40,379
Capital in excess of par value 77,830,871 69,395,976
Treasury stock, at cost (125,000 shares) (372,413)
Deficit (18,036,833) (19,949,703)
----------- -----------
59,464,763 49,486,652
Less 42,546 common shares held by wholly-owned
subsidiary (at cost) (425) (425)
----------- -----------
Total shareholders' equity 59,464,338 49,486,227
----------- -----------
TOTAL $73,447,468 $76,555,933
=========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
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ZILA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
QUARTERS AND SIX MONTHS ENDED JANUARY 31, 2000 AND 1999
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<CAPTION>
Quarters ended Six months ended
-------------------------------- -------------------------------
January 31, January 31, January 31, January 31,
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
NET REVENUES $ 20,216,797 $ 18,121,619 $ 39,388,390 $ 34,624,427
------------ ------------ ------------ ------------
OPERATING COSTS AND EXPENSES:
Cost of products sold 10,266,743 8,625,052 19,743,279 16,483,698
Selling, general and administrative 8,287,478 8,390,430 17,031,849 15,221,291
Research & development 372,772 1,386,347 1,102,899 2,167,438
Depreciation and amortization 804,971 855,555 1,721,853 1,741,873
------------ ------------ ------------ ------------
19,731,964 19,257,384 39,599,880 35,614,300
------------ ------------ ------------ ------------
INCOME (LOSS) FROM OPERATIONS 484,833 (1,135,765) (211,490) (989,873)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES):
Interest income 97,239 56,373 175,005 133,177
Interest expense (44,712) (60,758) (171,874) (130,980)
Other (expense) income (9,083) (7,148) (23,958) (114)
Realized gain on sale of assets 4,519,915 4,659,127
------------ ------------ ------------ ------------
4,563,359 (11,533) 4,638,300 2,083
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 5,048,192 (1,147,298) 4,426,810 (987,790)
INCOME TAX (EXPENSE) BENEFIT (3,083,940) -- (2,513,940) 596,000
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 1,964,252 $ (1,147,298) $ 1,912,870 $ (391,790)
============ ============ ============ ============
NET INCOME (LOSS) PER SHARE - BASIC $ 0.05 $ (0.03) $ 0.05 $ (0.01)
============ ============ ============ ============
NET INCOME (LOSS) PER SHARE - DILUTED $ 0.05 $ (0.03) $ 0.05 $ (0.01)
============ ============ ============ ============
BASIC SHARES OUTSTANDING 41,961,935 37,655,846 41,636,741 36,142,529
EQUIVALENT SHARES 382,030 -- 388,908 --
------------ ------------ ------------ ------------
BASIC AND DILUTED SHARES OUTSTANDING 42,343,965 37,655,846 42,025,649 36,142,529
============ ============ ============ ============
</TABLE>
See notes to condensed consolidated financial statements.
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ZILA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JANUARY 31, 2000 AND 1999
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<CAPTION>
2000 1999
------------ ------------
OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ 1,912,870 $ (391,790)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,721,853 1,741,873
Gain on sale of assets (4,659,127) --
Deferred income taxes 2,478,367 (631,600)
Other 20,089 69,666
Change in operating assets and liabilities excluding the effects of dispositions:
Receivables - net (1,003,529) (967,581)
Inventories 188,071 (620,452)
Prepaid expenses and other assets (398,264) (728,760)
Accounts payable and accrued expenses 1,052,751 (673,342)
Deferred revenue 110,781 220,027
------------ ------------
Net cash provided by (used in) operating activities 1,423,862 (1,981,959)
------------ ------------
INVESTING ACTIVITIES:
Net purchases of property and equipment (822,586) (1,149,723)
Net proceeds from sale of assets 7,749,927
Purchases of intangible assets (21,418) (349,468)
------------ ------------
Net cash provided by (used in) investing activities 6,905,923 (1,499,191)
------------ ------------
FINANCING ACTIVITIES:
Net proceeds (payments) from short-term borrowings 97,646 (18,695)
Net proceeds from issuance of common stock 14,963 234,474
Acquisition of treasury stock (372,413) --
Net proceeds from long-term debt 1,200,000
Reduction of debt (5,248,063) (1,051,208)
------------ ------------
Net cash (used in) provided by financing activities (5,507,867) 364,571
------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,821,918 (3,116,579)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD $ 5,770,970 $ 5,241,201
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 8,592,888 $ 2,124,622
============ ============
CASH PAID FOR INTEREST $ 147,285 $ 61,314
============ ============
CASH PAID FOR INCOME TAXES $ -- $ --
============ ============
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 $ 250,000
------------ ------------
Conversion of Series A Convertible Redeemable Preferred stock $ 8,177,190 $ 18,938,810
------------ ------------
</TABLE>
See notes to condensed consolidated financial statements.
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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 generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
2. NET INCOME (LOSS) PER SHARE
The following is a reconciliation of the numerator and denominator of
basic and diluted earnings per share:
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<CAPTION>
For the three months ended For the six months ended
January 31, January 31,
2000 1999 2000 1999
------------ ------------ ------------ --------------
<S> <C> <C> <C> <C>
Net income (loss) $ 1,964,252 $ (1,147,298) $ 1,912,870 $ (391,790)
Average outstanding common shares 41,961,935 37,655,846 41,636,741 36,142,529
Basic net income (loss) per share $ 0.05 $ (0.03) $ 0.05 $ (0.01)
Diluted net income (loss) per share:
Net income (loss) available for diluted earnings $ 1,964,252 $ (1,147,298) $ 1,912,870 $ (391,790)
Average outstanding common shares from above 41,961,935 37,655,846 41,636,741 36,142,529
Additional dilutive shares related to stock
options and warrants 189,856 196,734
Additional dilutive shares related to
convertible preferred stock 192,174 192,174
Average outstanding and potentially dilutive
common shares 42,343,965 42,025,649
Dilutive net income (loss) per share $ 0.05 $ (0.03) $ 0.05 $ (0.01)
</TABLE>
Since a loss was incurred for the quarter and six months ended January
31, 1999, options and warrants to purchase shares of common stock and
shares related to convertible preferred stock were
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not included in the computation of dilutive net income per share
because their effect would be antidilutive.
3. INVENTORIES
Inventories consist of the following:
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<CAPTION>
January 31, July 31,
2000 1999
----------- --------
<S> <C> <C>
Finished goods $ 7,379,740 $ 7,531,175
Raw materials 2,896,773 4,174,321
Inventory reserves (151,000) (299,613)
------------ -----------
$10,125,513 $11,405,883
============ ===========
</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. 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. During the quarter ended October
31, 1999, the Company reduced its valuation allowance by $820,000. In
the six months ended January 31, 2000, the Company recorded income tax
expense of $2,513,940 which is net of the income tax benefit of
$820,000 recorded in the first quarter of fiscal year 2000 ($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). In
the six months ended January 31, 1999, the Company reduced its
valuation allowance resulting in an income tax benefit of $910,000
($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), which was partially offset by an income tax expense of
$64,000 related to the first quarter of fiscal year 1999.
5. NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No.
133 requires that an enterprise recognize all derivatives as either
assets or liabilities in the statement of financial position and
measure those instruments at fair value. The statement is effective for
the Company's fiscal quarters and fiscal years beginning after June 15,
2000. The Company has not completed evaluating the impact of
implementing the provisions of SFAS No. 133.
6. 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. 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.
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
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accreted to its redemption value. During the first six months of fiscal
year 2000, 6,982 shares of the Preferred Stock were converted into
common stock.
7. DISPOSITION OF 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,
Egidio Cianciosi. The sale resulted in a $139,000 gain during the first
quarter of fiscal year 2000.
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.
The following unaudited pro forma condensed statement of operations
data for the six months ended January 31, 2000, present historical
statement of operations data for the Company, Cygnus and IDT as if the
Cygnus and IDT transactions had occurred as of August 1, 1999. The pro
forma data are not necessarily indicative of the financial position or
results of operations which would actually have been reported had the
transactions been consummated at the date mentioned above or which may
be reported in the future.
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<CAPTION>
Unaudited Pro Forma Condensed Statement of Operations
Six months ended January 31, 2000
(in thousands except per share data) Historical
-------------------------------------
Zila Pro forma
Consolidated Cygnus IDT Adjustments Pro Forma
------------ ---------- ---------- --------------- ---------
(a) (a) (b)
--- --- ---
<S> <C> <C> <C> <C> <C>
Net revenues $ 39,388 $ 193 $ 1,515 $ 37,680
Cost of products sold 19,743 110 69 19,564
Selling, general & administrative expenses 17,032 491 1,188 15,353
Research & development expenses 1,103 155 120 828
Depreciation & amortization 1,722 110 35 1,577
(Loss) income from operations (211) (673) 103 359
Other income (expense) 4,638 (4,659) (21)
Income tax (expense) benefit (2,514) (2,761) 247
Net income (loss) 1,913 (673) 103 (1,898) 585
Net income per share (basic) $ 0.05 $ 0.01
Basic shares outstanding 41,637 41,637
Net income per share (diluted) $ 0.05 $ 0.01
Diluted shares outstanding 42,026 42,026
</TABLE>
(a) Represents Cygnus and IDT balances for the six months ended
January 31, 2000. These amounts are removed to reflect the sale of
assets and the corresponding revenue and expenses thereby reducing
the consolidated balances for pro forma purposes.
(b) The Company believes that no pro forma adjustments are required to
the transactions other than the elimination of the gain on the
sale of the assets and the resulting income tax effect recorded in
the consolidated statement of operations.
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8. SEGMENT INFORMATION
The Company is organized into three major product groups and further
organized into six segments, all of which have distinct product lines,
brand names and are managed as autonomous business units. The Company
has identified the following segments: Pharmaceuticals, which includes
Zila Pharmaceuticals, Inc.; OraTest products; Dental Supply, which
includes Bio-Dental and Ryker Dental of Kentucky, Inc. (a subsidiary of
Bio-Dental) which does business under the name Zila Dental Supply;
Dental Software, which includes IDT, (a subsidiary of Bio-Dental) the
distributor for PracticeWorks; Dental Imaging, which includes Cygnus
and Nutraceuticals, which includes Oxycal. The Company evaluates
performance and allocates resources to segments based on operating
results. Corporate overhead expenses have been combined with the
OraTest segment.
The table below presents information about reported segments as of and
for the six months ended January 31 (in thousands):
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<CAPTION>
Dental Dental Dental
Pharmaceuticals OraTest Supply Software Imaging Nutraceuticals Total
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
2000 $8,328 $62 $19,670 $1,515 $193 $9,620 $39,388
1999 8,642 243 14,924 2,249 1,018 7,548 34,624
Income (loss) before
income taxes:
2000 2,419 (5,045) 287 4,825 (734) 2,675 4,427
1999 2,898 (4,382) 356 254 (1,413) 1,299 (988)
Depreciation and
amortization:
2000 504 503 149 35 111 420 1,722
1999 505 436 147 49 191 414 1,742
Total assets:
2000 13,805 18,225 11,760 470 (46) 29,233 73,447
1999 14,068 14,772 8,730 1,080 4,981 26,072 69,703
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
On November 2, 1999, the Company contracted with ILEX(TM) Oncology
Services, Inc., a wholly owned subsidiary of ILEX(TM) Oncology, Inc. of
San Antonio, Texas, for management of clinical research and liaison
with the U.S. Food and Drug Administration related to the Company's
pursuit of regulatory approval for the OraTest(R) oral cancer detection
product. Current commitments under the agreement include estimated
professional fees and related expenses of approximately $300,000. In
addition, the Company expects to incur costs of approximately $500,000
in the current fiscal year, related to studies associated with the
Company's ongoing efforts to obtain FDA approval of OraTest(R).
The Company and certain of its officers have been named as defendants
in a consolidated First Amended Class Action Compliant 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 Compliant 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 securities.
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The Company and the individual defendants deny all allegations of
wrongdoing and are defending themselves vigorously. On September 10,
1999, the Company and the individual defendants filed with the Court a
motion to dismiss the First Amended Class Action Complaint in its
entirety. On or about October 29, 1999, the plaintiffs filed with the
court a response to the motion to dismiss. It is not possible to
predict with any degree of certainty when the Court will rule on the
defendants' motion to dismiss.
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.
10. STOCKHOLDERS' EQUITY
During the quarter ended January 31, 2000, the Company began acquiring
shares of its common stock in conjunction with a stock repurchase
program announced in November 1999. That program authorized the
repurchase of up to one million shares of Zila common stock from time
to time on the open market depending on market conditions and other
factors. The Company purchased 125,000 of common stock during the
current quarter at an aggregate cost of $372,413.
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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, which 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 FDA review process; the possibility
that the FDA will not accept an amendment to its New Drug Application ("NDA")
and will require the filing of a new NDA; 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, 1999
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 three major product
groups: Pharmaceuticals, Professional Products and Nutraceuticals. The
Pharmaceuticals 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 the OraTest(R) oral cancer detection system. The
Professional Products Group includes Zila Dental Supply, a national distributor
of professional dental supplies, Zila Technologies, Inc., formerly Cygnus
Imaging ("Cygnus"), a manufacturer and marketer of digital x-ray systems and
intraoral cameras, and Integrated Dental Technologies, Inc. ("IDT") which
distributed PracticeWorks, a dental practice management software product. The
Nutraceuticals Group is comprised of Oxycal Laboratories, Inc. ("Oxycal") and
its Inter-Cal subsidiary, which are manufacturers and distributors of a patented
and unique form of vitamin C under the trademark Ester-C(R) and of the
Palmettex(TM) botanical product.
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, Egidio Cianciosi. The sale resulted in a
$139,000 gain during the first quarter of fiscal year 2000. The sale did not
include the assumption by Procare of all of Cygnus's liabilities, and therefore,
no assurances can be given that claims will not be
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made against the Company in the future arising out of Cygnus's former
operations. In management's opinion, such claims would not have a material
adverse effect on the Company's financial condition and results of operations.
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 JANUARY 31, 2000 AND 1999
Total net revenues grew 11.6% to $20.2 million for the quarter
ended January 31, 2000, compared to revenues of $18.1 million during the second
quarter of the prior fiscal year.
Net revenues for Zila Dental Supply increased 32.3% to $10.1
million for the quarter ended January 31, 2000 compared to $7.6 million for the
corresponding fiscal quarter in 1999. This increase was primarily attributable
to improved results in its full-service operations and an increase in internet
sales . Zila Pharmaceuticals had net revenues of $4.6 million for the quarter
ended January 31, 2000, a 7.9% increase over the $4.3 million recorded during
the corresponding quarter last year. The increase was due primarily to a 60%
increase in over the counter product sales, specifically Zilactin Toothache
Swabs and Zilactin-L product lines, when compared to the corresponding quarter
last year offset by a decline in sales of Peridex(R) of 40% due to increased
pricing pressures from generic equivalents.
Net revenues for Oxycal for the quarter ended January 31,
2000, were $5.1 million, a 9.1% increase when compared to the $4.7 million for
the corresponding 1999 fiscal quarter. Oxycal's international sales increased
approximately 95% during the current quarter as compared to the previous year
quarter due to improved economic conditions in the foreign markets. In addition,
Oxycal had increases in all of its domestic product lines when compared to the
fiscal 1999 quarter.
For the quarter ended January 31, 2000, cost of products sold
was $10.3 million, a 19.0% increase from $8.6 million for the quarter ended
January 31, 1999. Cost of products sold as a percentage of net revenues
increased to 50.8% in the quarter ended January 31, 2000 from 47.6% in the
quarter ended January 31, 1999. The increase for the quarter reflects the growth
of Zila Dental Supply as a percentage of total revenues, 50.0% for the quarter
ended January 31, 2000 compared to 42.1% for the previous year quarter. Gross
profit 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. Overall changes in cost of product sold as a percentage of net
revenues for each business unit were not significantly different from the
previous year quarter.
The Company incurred selling, general and administrative
expenses of $8.3 million, or 41.0% of net revenues during the second quarter of
fiscal year 2000 compared to $8.4 million, or 46.3% of net revenue in the same
period in fiscal 1999. The decrease is attributable to a reduction in costs
related to the Cygnus and PracticeWorks businesses partially offset by increased
costs related to the expansion of the sales force and service department at Zila
Dental Supply, increased administrative costs related to
12
<PAGE> 13
OraTest(R), increased marketing and selling expenses at Oxycal and increased
corporate legal, professional and insurance expenses.
Research and development expenses decreased $1.0 million or
73.1%, from $1.4 million in the second quarter of fiscal year 1999 to $373,000
for the same period in fiscal year 2000. The decrease was primarily due to a
reduction of costs related to the Cygnus and PracticeWorks businesses, reduced
expenses related to research and clinical activities associated with OraTest(R),
and reduced expenses related to the international approval of the OraTest(R)
product.
Depreciation and amortization expenses decreased $51,000 from
$856,000 in the second quarter of fiscal year 1999 to $805,000 for the same
period in fiscal year 2000. The decrease is due primarily to a reduction in
costs associated with the Cygnus and PracticeWorks businesses partially offset
by the depreciation of assets related to the Company's Tolonium Chloride
manufacturing facility that were placed in service August 1, 1999.
The Company recorded interest expense of $45,000 for the
quarter ended January 31, 2000 compared to $61,000 in the same period of the
previous year. The decrease was attributable to a reduction of debt obligations
during the fiscal year 2000 quarter as compared to the previous year quarter.
For the quarter ended January 31, 2000, the Company recorded income tax
expense of $3.1 million. In the prior year quarter ended January 31, 1999, the
Company recorded no income tax benefit or expense.
For the quarter ended January 31, 2000, the Company had net
income of $2.0 million compared to a net loss of $1.1 million for the quarter
ended January 31, 1999. The increase is attributable to the gain on the sale of
the PracticeWorks assets and increased profitability in all of the Company's
operating groups.
SIX MONTHS ENDED JANUARY 31, 2000 AND 1999
Total net revenues grew 13.8% to $39.4 million for the six
months ended January 31, 2000, compared to revenues of $34.6 million for the
six months ended January 31, 1999.
Net revenues for Zila Dental Supply increased 31.8% to $19.7
million for the six months ended January 31, 2000, compared to $14.9 million for
the corresponding six months in 1999. This increase was primarily attributable
to an increase in full-service operations and increases in internet sales. Zila
Pharmaceuticals had net revenues of $8.3 million for the six months ended
January 31, 2000, a 3.6% decrease over the $8.6 million recorded during the
corresponding period last year. The decrease was due primarily to a 38.4%
decline in sales of Peridex(R) due to increased pricing pressures from generic
equivalents. Over the counter product sales increased 30.6% when compared to the
corresponding period last year primarily due to increased sales of the Toothache
Swab and Zilactin-L product lines.
Net revenues for Oxycal for the six months ended January 31,
2000, were $9.6 million, a 27.5% increase when compared to the $7.5 million for
the corresponding period in fiscal year 1999. Oxycal's international sales
increased 106.6% to $2.7 million during the first six months of the current
fiscal year as compared to the previous year amount due to improved economic
conditions in the foreign markets. In addition, Oxycal had increases in all of
its domestic product lines in the first six months of fiscal 2000 when compared
to the fiscal 1999 period.
13
<PAGE> 14
For the six months ended January 31, 2000, cost of products
sold was $19.7 million, a 19.8% increase from $16.4 million for the six months
ended January 31, 1999. Cost of products sold as a percentage of net revenues
increased to 50.1% in the six months ended January 31, 2000 from 47.6% in the
corresponding 1999 period. The increase for the period reflects the growth of
Zila Dental Supply as a percentage total revenues, 49.9% for the six months
ended January 31, 2000 compared to 43.1% for same period of the previous fiscal
year. Gross profit 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 decreased slightly to 74.3% for the six months ended January 31,
2000 from 74.9% for the six months ended January 31, 1999 primarily due to an
increase in vendor rebate programs in the first quarter of fiscal 2000. Cost of
products sold as a percentage of net revenues for Zila Pharmaceuticals increased
to 19.7% in the six months ended January 31, 2000, compared to 16.8% for the
corresponding period in fiscal 1999. The increase 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 Oxycal increased slightly to 28.8% in the six months ended
January 31, 2000 from 28.3% in the six months ended January 31, 1999. The
increase is a result of higher costs for raw materials for the current six
months as compared to the corresponding period last year.
The Company incurred selling, general and administrative
expenses of $17.0 million, or 43.2% of net revenues during the first six months
of fiscal year 2000 compared to $15.2 million, or 44.0% of net revenue in the
same period in fiscal 1999. The decrease in selling, general and administrative
expenses as a percentage of revenue is attributable to a reduction in costs
related to the Cygnus and PracticeWorks businesses partially offset by increased
costs related to the expansion of the sales force and service department at Zila
Dental Supply's full service branches, increased selling and administrative
costs related to the OraTest(R) international product launches, increased
marketing and selling expenses at Oxycal and increased corporate legal,
professional and insurance expenses.
Research and development expenses decreased $1.1 million or
49.1%, from $2.2 million incurred in the six months of fiscal year 1999 to $1.1
million for the same period in fiscal year 2000. The decrease was primarily due
to a reduction of costs incurred in the Cygnus and PracticeWorks businesses,
reduced expenses related to research and clinical activities associated with
OraTest(R), and reduced expenses related to the international approval of the
OraTest(R) product.
Depreciation and amortization expenses decreased $20,000 from
$1,742,000 in the six months of fiscal year 1999 to $1,722,000 for the same
period in fiscal year 2000. The decrease is due primarily to the reduction in
costs related to the Cygnus and PracticeWorks businesses partially offset by the
increase in the depreciation of assets associated with the Company's Tolonium
Chloride manufacturing facility that were placed in service August 1, 1999.
The Company recorded interest expense of $172,000 for the six
months ended January 31, 2000 compared to $131,000 in the same period of the
previous year. The increase was attributable to increases in debt obligations
incurred during the first quarter of fiscal year 2000 as compared to the
previous year period.
In the six months ended January 31, 2000, the Company recorded
income tax expense of $2,513,940 which is net of the income tax benefit of
$820,000 recorded in the first quarter of fiscal year 2000 ($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). In the six months
ended January 31, 1999, the Company recorded an income tax benefit of $910,000
($250,000 of which was attributable to the
14
<PAGE> 15
exercise of common stock options in prior years and therefore was credited to
capital in excess of par value), partially offset by an income tax expense of
$64,000 related to the first quarter of fiscal year 1999.
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 2000, the Company had cash and cash equivalents of $8.6
million and working capital of $21.5 million. The Company's current ratio
increased to 3.7 at January 31, 2000, from 3.5 at July 31, 1999. Cash and cash
equivalents are invested primarily in money market accounts.
During the six months ended January 31, 2000, the Company generated
$1.4 million of cash from operating activities primarily from net income of $1.9
million plus non-cash items of $1.4 million, reduced by the net gain on sale of
assets of $1.9 million. Significant changes in operating assets and liabilities
were primarily comprised of an increase in accounts receivable of $1.0 million
as the sales in the current quarter were higher than sales in the July 1999
quarter, an increase in prepaid expenses and other assets of $398,000 related
to the establishment of an escrow account related to the sale of PracticeWorks,
partially offset by an increase in accounts payable and accrued expenses of $1.1
million.
The Company generated cash from investing activities of $6.9 million
during the six months ended January 31, 2000, including $7.7 million net
proceeds from the sale of the Cygnus and PracticeWorks assets. These proceeds
were used to purchase property and equipment of $823,000, consisting of
manufacturing additions for Oxycal and OraTest(R) businesses. In addition, $5.5
million of the proceeds were used in financing activities for the six months
ended January 31, 2000. The Company retired outstanding debt of $5.2 million,
comprised of the final payment of $1.0 million made to The Procter & Gamble
Company related to the acquisition of the Peridex product line and $4.2 million
to repay in full its line of credit with Bank One. In addition, $372,000 was
used to repurchased 125,000 shares of Zila common stock on the open market.
At January 31, 2000, the Company had federal income tax net operating
loss carryforwards of approximately $17.8 million, which expire in years 2000
through 2015.
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 (8.25% at
January 31, 2000) plus .25%. At January 31, 2000, the Company had no borrowings
against the line of credit. Under the line of credit, the Company is required to
comply with financial covenants based on certain financial ratios. At January
31, 2000, the Company was in compliance with such covenants.
In April 1999, Oxycal entered into 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 a
new manufacturing and laboratory facility. The Bond proceeds are being held by
the trustee, Bank One, Arizona until such time as construction costs are
incurred. The Bonds consist of $3.9 million Series A and $1.1 million Taxable
Series B which, as of January 31, 2000, carried interest rates of 3.50% and
5.94%, 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 Bond
holders, an irrevocable direct-pay letter of credit to secure payment of
principal and interest. The letter of credit is guaranteed by Zila. During the
current quarter, Oxycal signed a $4 million contract with Joe E. Woods the
General Contractor for construction of the new facility which is expected
to be completed by mid-2000.
15
<PAGE> 16
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 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.
On November 2, 1999, the Company contracted with ILEX(TM) Oncology
Services, Inc., a wholly owned subsidiary of ILEX(TM) Oncology, Inc. of San
Antonio, Texas, for management of clinical research and liaison with the U.S.
Food and Drug Administration related to the Company's pursuit of regulatory
approval for the OraTest(R) oral cancer detection product. Current commitments
under the agreement include estimated professional fees and related expenses of
approximately $300,000. In addition, the Company expects to incur costs of
approximately $500,000 in the current fiscal year, related to studies associated
with the Company's ongoing efforts to obtain FDA approval of OraTest(R).
On November 10, 1999, the Company announced that the Company's Board of
Directors authorized the repurchase of up to one million shares of Zila common
stock. Purchases will be made on the open market depending on market conditions
and other factors. During the quarter ended January 31, 2000, 125,000 shares
were repurchased.
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, anticipated capital
expenditures and stock repurchase program. 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 would be available on terms acceptable to
the Company.
PART II - OTHER INFORMATION
ITEM 1.- Legal Proceedings
The Company and certain of its officers have been named as defendants in
a consolidated First Amended Class Action Compliant 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 Compliant 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 securities. The
Company and the individual defendants deny all allegations of wrongdoing and are
defending themselves vigorously. On September 10, 1999, the Company and the
individual defendants filed with the Court a motion to dismiss the First Amended
Class Action Complaint in its entirety. The plaintiffs have filed a response to
the motion to dismiss, and defendant has filed their reply memorandum in support
of the motion. It is not possible to predict with any degree of certainty when
the Court will rule on the defendants' motion to dismiss.
16
<PAGE> 17
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.
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.
(a) The Company held its Annual Meeting on December 9, 1999.
(b) Joseph Hines, Carl A. Schroeder, Patrick M. Lonergan, Michael
Lesser, Curtis M. Rocca III, Christopher Johnson and Kevin
Tourek were elected directors of the Company at the Annual
Meeting.
(c) At the Annual Meeting, the Company's stockholders ratified
Deloitte & Touche LLP as auditors for the Company for its 2000
fiscal year. The vote was as follows:
<TABLE>
<CAPTION>
Votes for Votes withheld Votes against
--------- -------------- -------------
<S> <C> <C>
37,534,845 174,091 293,551
</TABLE>
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) Exhibits
<S> <C>
Exhibit Number Description
27 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
17
<PAGE> 18
On January 3, 2000, the Company filed a Current Report on Form
8-K to report that it had 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.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: March 15, 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)
19
<PAGE> 20
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-1-1999
<PERIOD-END> JAN-31-2000
<CASH> 8,592,888
<SECURITIES> 0
<RECEIVABLES> 9,252,747
<ALLOWANCES> (339,160)
<INVENTORY> 10,125,513
<CURRENT-ASSETS> 29,496,624
<PP&E> 9,659,210
<DEPRECIATION> (4,020,057)
<TOTAL-ASSETS> 73,447,468
<CURRENT-LIABILITIES> 8,039,536
<BONDS> 5,333,593
610,001
0
<COMMON> 43,138
<OTHER-SE> 59,421,200
<TOTAL-LIABILITY-AND-EQUITY> 73,447,468
<SALES> 39,326,723
<TOTAL-REVENUES> 39,388,390
<CGS> 19,743,279
<TOTAL-COSTS> 19,856,601
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 171,874
<INCOME-PRETAX> 4,426,810
<INCOME-TAX> (2,513,940)
<INCOME-CONTINUING> 1,912,870
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,912,870
<EPS-BASIC> 0.05
<EPS-DILUTED> 0.05
</TABLE>
