<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended April 30, 2000 or
Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
Commission file number 0-17521
ZILA, INC
(Exact Name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<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)
</TABLE>
Indicate by check mark whether the Registrant: (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No.
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
The number of shares of the Company's common stock outstanding at April
30, 2000 was 43,329,544 shares.
Exhibit Index 18
Total pages 19
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TABLE OF CONTENTS
Page no.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets as of
April 30, 2000 and July 31, 1999 3
Condensed consolidated statements of operations
for the quarters and nine months ended
April 30, 2000 and 1999 4
Condensed consolidated statements of cash flows
for the nine months ended April 30, 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
SIGNATURES 18
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ZILA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS - (Unaudited)
<TABLE>
<CAPTION>
April July
ASSETS 30, 2000 31, 1999
-------- --------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents .................................................. $ 4,334,707 $ 5,770,970
Trade receivables - net .................................................... 10,904,728 8,741,283
Inventories - net .......................................................... 11,790,091 11,405,883
Prepaid expenses and other current assets .................................. 2,519,039 1,126,773
Deferred income taxes ...................................................... 244,788 3,705,715
------------ ------------
Total current assets ................................................ 29,793,353 30,750,624
------------ ------------
PROPERTY AND EQUIPMENT - Net ................................................. 6,561,757 5,680,281
PURCHASED TECHNOLOGY RIGHTS - Net ............................................ 5,710,086 6,037,415
GOODWILL - Net ............................................................... 13,020,405 15,679,969
TRADEMARKS - Net ............................................................. 10,367,365 10,782,029
CASH HELD BY TRUSTEE ......................................................... 4,488,182 4,834,755
OTHER ASSETS ................................................................. 3,867,126 2,790,860
------------ ------------
TOTAL ........................................................................ $ 73,808,274 $ 76,555,933
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ........................................................... $ 4,708,533 $ 3,680,639
Accrued liabilities ........................................................ 3,281,797 2,760,735
Deferred revenue ........................................................... 13,750 982,037
Short-term borrowings ...................................................... 53,065 116,950
Current portion of long-term debt .......................................... 481,841 1,164,399
------------ ------------
Total current liabilities ........................................... 8,538,986 8,704,760
LONG-TERM DEBT - Net of current portion ...................................... 4,977,046 9,577,755
------------ ------------
Total liabilities .................................................. 13,516,032 18,282,515
------------ ------------
COMMITMENTS AND CONTINGENCIES
SERIES A CONVERTIBLE REDEEMABLE PREFERRED STOCK:
Issued 30,000; zero outstanding (April 30, 2000) and
7,482 shares (July 31, 1999); liquidation preference value: $1,220 per share 0 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
43,329,544 shares (April 30,2000) and 40,378,588 shares (July 31, 1999) .... 43,330 40,379
Capital in excess of par value ............................................. 78,642,170 69,395,976
Treasury stock, at cost (125,000 shares) ................................... (372,413)
Deficit .................................................................... (18,020,420) (19,949,703)
------------ ------------
60,292,667 49,486,652
Less 42,546 common shares held by wholly-owned
subsidiary (at cost) ..................................................... (425) (425)
------------ ------------
Total shareholders' equity ........................................... 60,292,242 49,486,227
------------ ------------
TOTAL ........................................................................ $ 73,808,274 $ 76,555,933
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
3
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ZILA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
QUARTERS AND NINE MONTHS ENDED APRIL 30, 2000 AND 1999
<TABLE>
<CAPTION>
Quarters ended Nine months ended
-------------- -----------------
April 30, April 30, April 30, April 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET REVENUES ........................ $ 19,422,777 $ 16,916,658 $ 58,811,167 $ 51,541,085
------------ ------------ ------------ ------------
OPERATING COSTS AND EXPENSES:
Cost of products sold ............. 10,020,367 8,435,501 29,678,102 24,919,199
Selling, general and administrative 8,351,277 8,912,238 25,383,126 24,345,960
Research and development .......... 379,535 1,057,527 1,482,434 3,012,534
Depreciation and amortization ..... 841,893 897,050 2,649,290 2,638,923
------------ ------------ ------------ ------------
19,593,072 19,302,316 59,192,952 54,916,616
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS ................ (170,295) (2,385,658) (381,785) (3,375,531)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES):
Interest income ................... 118,317 41,160 293,322 174,337
Interest expense .................. (20,400) (79,107) (192,274) (210,087)
Other (expense) income ............ (6,979) 2,621 (30,937) 2,507
Realized gain on sale of assets ... 4,659,127
------------ ------------ ------------ ------------
90,938 (35,326) 4,729,238 (33,243)
------------ ------------ ------------ ------------
(LOSS) INCOME BEFORE INCOME TAXES ... (79,357) (2,420,984) 4,347,453 (3,408,774)
INCOME TAX (EXPENSE) BENEFIT ........ 95,770 -- (2,418,170) 596,000
------------ ------------ ------------ ------------
NET INCOME (LOSS) ................... $ 16,413 $ (2,420,984) $ 1,929,283 $ (2,812,774)
============ ============ ============ ============
NET INCOME (LOSS) PER SHARE - BASIC $ 0.00 $ (0.06) $ 0.05 $ (0.08)
============ ============ ============ ============
NET INCOME (LOSS) PER SHARE - DILUTED $ 0.00 $ (0.06) $ 0.05 $ (0.08)
============ ============ ============ ============
BASIC SHARES OUTSTANDING ............ 43,271,080 39,068,984 42,175,534 37,358,081
EQUIVALENT SHARES ................... 548,915 -- 313,685 --
------------ ------------ ------------ ------------
BASIC AND DILUTED SHARES OUTSTANDING 43,819,995 39,068,984 42,489,219 37,358,081
============ ============ ============ ============
</TABLE>
See notes to condensed consolidated financial statements.
4
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ZILA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED APRIL 30, 2000 AND 1999
<TABLE>
<CAPTION>
2000 1999
------------ ------------
OPERATING ACTIVITIES:
<S> <C> <C>
Net income (loss) $ 1,929,283 $ (2,812,774)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization 2,649,290 2,638,923
Gain on sale of assets (4,659,127)
Deferred income taxes 2,334,127 (662,419)
Other 21,411 93,060
Change in operating assets and liabilities excluding
the effects of dispositions:
Receivables - net (2,994,671) (462,321)
Inventories (1,476,507) 137,384
Prepaid expenses and other assets (1,240,197) (258,346)
Accounts payable and accrued expenses 1,430,728 (1,558,860)
Deferred revenue 97,031 285,227
------------ ------------
Net cash used in operating activities (1,908,632) (2,600,126)
------------ ------------
INVESTING ACTIVITIES:
Net purchases of property and equipment (2,030,067) (1,417,046)
Net proceeds from sale of assets 7,749,927
Purchases of intangible assets (45,938) (525,901)
------------ ------------
Net cash provided by (used in) investing activities 5,673,922 (1,942,947)
------------ ------------
FINANCING ACTIVITIES:
Net proceeds (repayments) of short-term borrowings (63,885) 148,721
Net proceeds from issuance of common stock 196,028 247,498
Cash released (held) by trustee 346,573 (4,841,352)
Acquisition of treasury stock (372,413)
Net proceeds from long-term debt 9,209,486
Principal payments on debt (5,307,856) (871,182)
------------ ------------
Net cash (used in) provided by financing activities (5,201,553) 3,893,171
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,436,263) (649,902)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD $ 5,770,970 $ 5,241,201
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 4,334,707 $ 4,591,299
============ ============
CASH PAID FOR INTEREST $ 167,685 $ 117,026
============ ============
CASH PAID FOR INCOME TAXES $ 86,650 $ --
============ ============
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 $ 8,787,191 $ 21,872,331
------------ ------------
</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 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:
<TABLE>
<CAPTION>
For the three months ended For the nine months
April 30, ended April 30,
2000 1999 2000 1999
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) $ 16,413 $ (2,420,984) $ 1,929,283 $ (2,812,774)
Average outstanding common shares 43,271,080 39,068,984 42,175,534 37,358,081
Basic net income (loss) per share $ 0.00 $ (0.06) $ 0.05 $ (0.08)
Diluted net income (loss) per share:
Net income (loss) available for diluted
earnings $ 16,413 $ (2,420,984) $ 1,929,283 $ (2,812,774)
Average outstanding common shares
from above 43,271,080 39,068,984 42,175,534 37,358,081
Additional dilutive shares related to stock
options and warrants 548,915 313,685
Average outstanding and potentially dilutive
common shares 43,819,995 42,489,219
Dilutive net income (loss) per share $ 0.00 $ (0.06) $ 0.05 $ (0.08)
</TABLE>
Since a loss was incurred for the three months and nine months ended April 30,
1999, options and warrants to purchase shares of common stock and shares related
to convertible preferred stock were not included in the computation of dilutive
net income per share because their effect would be antidilutive.
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3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
April 30, July 31,
2000 1999
<S> <C> <C>
Finished goods $ 8,168,980 $ 7,531,175
Raw materials 3,772,111 4,174,321
Inventory reserves (151,000) (299,613)
------------ ------------
11,790,091 $ 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 nine months ended April 30, 2000, the Company recorded income tax
expense of $2,418,170 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).
The Company's effective tax rate for the three month and nine month
period ended April 30, 2000 is significantly higher than the statutory
rate due primarily to amortization of intangible assets that is not
deductible for tax purposes. Additionally, approximately $1.7 million
of goodwill related to the sale of Cygnus was not deductible for tax
purposes.
In the nine months ended April 30, 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 was
convertible into shares of the Company's common stock at a conversion
rate based on the price
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of such common stock at the date of issuance. Additionally, because the
Preferred Stock had conditions for redemption that were not solely
within the control of the Company, it has been classified outside of
permanent equity in the accompanying consolidated balance sheet and had
been accreted to its redemption value. During the first nine months of
fiscal year 2000, the remaining 7,482 of the outstanding 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 nine months ended April 30, 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 that would actually have been reported had the
transactions been consummated at the date mentioned above or which may
be reported in the future.
<TABLE>
<CAPTION>
Unaudited Pro Forma Condensed Statement of Operations Historical
Nine months ended April 30, 2000 --------------------------------
(in thousands except per share data) Zila Pro forma
Consolidated Cygnus IDT Adjustments Pro Forma
------------ ------ --- ----------- ---------
(a) (a) (b)
<S> <C> <C> <C> <C> <C>
Net revenues $58,811 $193 $1,515 $57,103
Cost of products sold 29,678 110 69 29,499
Selling, general and administrative expenses 25,383 491 1,188 23,704
Research and development expenses 1,483 155 120 1,208
Depreciation and amortization 2,649 110 35 2,504
(Loss) income from operations (382) (673) 103 188
Other income (expense) 4,729 (4,659) 70
Income tax (expense) benefit (2,418) (2,761) 343
Net income (loss) 1,929 (673) 103 (1,898) 601
Net income per share (basic) $0.05 $0.01
Basic shares outstanding 42,176 42,176
Net income per share (diluted) $0.05 $0.01
Diluted shares outstanding 42,489 42,489
</TABLE>
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(a) Represents Cygnus and IDT balances for the nine months ended April
30, 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.
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. (See Note 7 regarding the sale of the Cygnus and
PracticeWorks businesses.)
The table below presents information about reported segments as of and
for the nine months ended April 30 (in thousands):
<TABLE>
<CAPTION>
Dental Dental Dental
Pharmaceuticals OraTest Supply Software Imaging Nutraceuticals Total
Net revenues:
<S> <C> <C> <C> <C> <C> <C> <C>
2000 $12,326 $104 $29,817 $1,515 $193 $14,856 $58,811
1999 12,504 278 23,093 3,410 1,522 10,734 51,541
Income (loss) before
income taxes:
2000 3,605 (7,858) 319 4,830 (734) 4,185 4,347
1999 3,889 (6,674) 418 382 (2763) 1,339 (3,409)
Depreciation and
amortization:
2000 756 763 227 35 110 758 2,649
1999 758 678 221 71 288 623 2,639
Total assets:
2000 13,444 16,928 11,987 470 0 30,979 73,808
1999 13,289 17,327 9,211 1,195 3,979 29,854 74,855
</TABLE>
9. COMMITMENTS AND CONTINGENCIES
In November 1999, the Company contracted with ILEX(TM) Oncology
Services, Inc. ("ILEX"), 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. In March 2000, the Company paid approximately
$792,000 to ILEX as a deposit on estimated expenses related to an
FDA-required clinical study associated with the Company's ongoing
efforts to obtain FDA approval of OraTest(R). Current commitments under
the ILEX agreement include fourth quarter professional fees and
expenses of approximately $150,000 plus clinical and patient-related
costs as they occur during the course of the study. The contract or any
workplan may be terminated at any time by Zila upon not less than
ninety (90) days prior written
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notice of termination to ILEX. If the agreement is so terminated, Zila
shall pay ILEX any amount owed, but not yet paid, for work performed
prior to the date of termination.
The Company and certain of its officers 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 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 filed with the court a
response to the motion to dismiss and the 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.
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.
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. As of April 30, 2000, the Company has purchased 125,000 shares
of common stock 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 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, 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 made against the Company in
the future arising out of Cygnus's former operations. In management's
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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 APRIL 30, 2000 AND 1999
Total net revenues grew 14.8% to $19.4 million for the quarter
ended April 30, 2000, compared to revenues of $16.9 million during the third
quarter of the prior fiscal year.
Net revenues for Zila Dental Supply increased 24.2% to $10.1
million for the quarter ended April 30, 2000 compared to $8.2 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 $4.0 million for the quarter
ended April 30, 2000, a 3.5% increase over the $3.9 million recorded during the
corresponding quarter last year. The increase was due primarily to a 42.7%
increase in over the counter product sales, specifically Zilactin Toothache
Swabs and Zilactin-L product lines, when compared to the corresponding quarter
last year and offset by a decline in sales of Peridex(R) of 37.0% due to
increased pricing pressures from generic equivalents. In addition, the OraTest
product was launched in the United Kingdom, Bahrain and Greece during the
current quarter.
Net revenues for Oxycal for the quarter ended April 30, 2000,
were $5.2 million, a 64.3% increase when compared to the $3.2 million for the
corresponding 1999 fiscal quarter. Oxycal's international sales increased
approximately 96% during the current quarter as compared to the previous year
quarter due to improved economic conditions in foreign markets primarily in the
Pacific Rim region. In addition, Oxycal had increases in all of its domestic
product lines when compared to the fiscal 1999 quarter.
For the quarter ended April 30, 2000, cost of products sold
was $10.0 million, an 18.8% increase from $8.4 million for the quarter ended
April 30, 1999. Cost of products sold as a percentage of net revenues increased
to 51.6% in the quarter ended April 30, 2000 from 49.9% in the quarter ended
April 30, 1999. The increase for the quarter reflects the growth of Zila Dental
Supply as a percentage of total revenues, 52.2% for the quarter ended April 30,
2000 compared to 48.3% 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 $8.4 million, or 43.0% of net revenues during the third quarter of
fiscal year 2000 compared to $8.9 million, or 52.7% of net revenue in the same
period in fiscal 1999. The decrease is attributable to a reduction in costs
related to
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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 marketing and selling costs related to the OraTest(R)
product introductions in the United Kingdom and Greece, increased marketing and
selling expenses at Oxycal and increased corporate legal, professional and
insurance expenses.
Research and development expenses decreased $678,000 or 64.1%,
from $1.1 million in the third quarter of fiscal year 1999 to $380,000 for the
same period in fiscal year 2000. The decrease was primarily due to reduced
expenses related to research and clinical activities associated with OraTest(R),
a reduction of costs related to the Cygnus and PracticeWorks businesses, and
reduced expenses related to seeking international approval of the OraTest(R)
product.
Depreciation and amortization expenses decreased $55,000 from
$897,000 in the third quarter of fiscal year 1999 to $842,000 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 $20,000 for the
quarter ended April 30, 2000 compared to $79,000 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.
Interest income rose to $118,000 during the current quarter compared to $41,000
in the same period last year. The increase was attributable to increased cash
and investment balances, which included the cash held by trustee.
For the quarter ended April 30, 2000, the Company recorded an
income tax benefit of $96,000 related to the net loss before income taxes
incurred during the quarter. The Company's effective tax rate for the three
month period ended April 30, 2000 is significantly higher than the statutory
rate due primarily to amortization of intangible assets that is not deductible
for tax purposes. In the prior year quarter ended April 30, 1999, the Company
recorded no income tax benefit or expense.
The Company had net income of $16,413 for the quarter ended
April 30, 2000, compared to a net loss of $2.4 million for the quarter ended
April 30, 1999. The decrease in loss is due primarily to the elimination of
losses associated with the Cygnus business and increased profitability in the
Nutraceuticals Group.
NINE MONTHS ENDED APRIL 30, 2000 AND 1999
Total net revenues grew 14.1% to $58.8 million for the nine
months ended April 30, 2000, compared to revenues of $51.5 million for the nine
months ended April 30, 1999.
Net revenues for Zila Dental Supply increased 29.1% to $29.8
million for the nine months ended April 30, 2000, compared to $23.1 million for
the corresponding nine 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 $12.3 million for the nine months ended
April 30, 2000, a 1.4% decrease from the $12.5 million recorded during the
corresponding period last year. The decrease was due primarily to a 38.0%
decline in sales of Peridex(R) due to increased pricing pressures from generic
equivalents. Over the counter product sales increased 34.4% when compared to the
corresponding period last year primarily due to increased sales of the Toothache
Swab and Zilactin-L product lines.
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<PAGE> 14
Net revenues for Oxycal for the nine months ended April 30,
2000, were $14.9 million, a 38.4% increase when compared to the $10.7 million
for the corresponding period in fiscal year 1999. Oxycal's international sales
increased 108.1% to $4.1 million during the first nine months of the current
fiscal year as compared to the previous year amount due to improved economic
conditions in foreign markets primarily in the Pacific Rim region. In addition,
Oxycal had increases in all of its domestic product lines in the first nine
months of fiscal 2000 when compared to the fiscal 1999 period.
For the nine months ended April 30, 2000, cost of products
sold was $29.7 million, a 19.1% increase from $24.9 million for the nine months
ended April 30, 1999. Cost of products sold as a percentage of net revenues
increased to 50.5% in the nine months ended April 30, 2000 from 48.3% in the
corresponding 1999 period. The increase for the period reflects the growth of
Zila Dental Supply as a percentage of total revenues, 50.7% for the nine months
ended April 30, 2000 compared to 44.8% 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 74.5% for the nine months ended April 30,
2000 from 75.0% for the nine months ended April 30, 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 20.2% in the nine months ended April 30, 2000, compared to 17.2% for the
corresponding period in fiscal 1999. The increase for the period is a result of
a change in the mix of products sold. Cost of products sold as a percentage of
net revenues for Oxycal decreased slightly to 27.2% in the nine months ended
April 30, 2000 from 27.4% in the nine months ended April 30, 1999.
The Company incurred selling, general and administrative
expenses of $25.4 million, or 43.2% of net revenues during the first nine months
of fiscal year 2000 compared to $24.3 million, or 47.2% 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 $1.5 million or
50.8%, from $3.0 million incurred in the nine months of fiscal year 1999 to $1.5
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 seeking international approval of
the OraTest(R) product.
The Company recorded interest expense of $192,000 for the nine
months ended April 30, 2000 compared to $210,000 in the same period of the
previous year. The decrease was attributable to decreases in debt obligations
incurred during fiscal year 2000 as compared to the previous year period.
In the nine months ended April 30, 2000, the Company recorded
income tax expense of $2.4 million 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). The Company's
effective tax rate for the nine month period ended April 30, 2000 is
significantly higher than the statutory rate due primarily to amortization of
intangible assets that is not deductible for tax purposes. Additionally,
approximately $1.7 million of goodwill related to the sale of Cygnus was not
deductible for tax purposes. In the nine
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months ended April 30, 1999, the Company recorded 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), partially offset by an income tax expense of $64,000 related to the
first quarter of fiscal year 1999.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 2000, the Company had cash and cash equivalents of $4.3
million and working capital of $21.3 million. The Company's current ratio
remained the same at 3.5 at April 30, 2000, from 3.5 at July 31, 1999. Cash and
cash equivalents are invested primarily in money market accounts.
During the nine months ended April 30, 2000, the Company used $1.9
million of cash in operating activities primarily related to net income of $1.9
million plus non-cash depreciation and amortization of $2.6 million, reduced by
the net gain on sale of assets of $1.9 million, deferred income taxes of $0.3
million and changes in operating assets and liabilities of $4.2 million.
Significant changes in operating assets and liabilities were primarily comprised
of an increase in accounts receivable of $3.0 million as the sales in the
current quarter were higher than sales in the July 1999 quarter, an increase in
inventories of $1.5 million primarily because of new product introductions at
Oxycal and large purchases during the third quarter to qualify for rebates and
lower prices at Zila Dental Supply, an increase in prepaid expenses and other
assets of $1.3 million primarily related to the deposit paid to ILEX and renewal
of general insurance, partially offset by an increase in accounts payable and
accrued expenses of $1.4 million.
The Company generated cash from investing activities of $5.7 million
during the nine months ended April 30, 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 $2.0 million, consisting of manufacturing
additions for Oxycal and OraTest(R) businesses. In addition, $5.2 million of the
proceeds were used in financing activities for the nine months ended April 30,
2000. The Company retired outstanding debt of $5.3 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 repurchase
125,000 shares of Zila common stock on the open market.
At April 30, 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 to $9 million and extended the commitment period to December 1, 2000.
Additionally, the interest rate was reduced to the prime rate (9.0% at April 30,
2000) plus .25%. At April 30, 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 April 30, 2000, the
Company was in compliance with such covenants.
During the current quarter, Oxycal began construction of a new
manufacturing and laboratory facility that is expected to be completed by
mid-2000. 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
the facility. The trustee, Bank One, Arizona, is holding the Bond proceeds but
released $346,573 during the quarter to pay for construction costs. The Bonds
consist of $3.9 million Series A and $1.1 million Taxable Series B which, as of
April 30, 2000,
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carried interest rates of 5.20% and 6.20%, 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.
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.
In November 1999, the Company contracted with ILEX(TM) Oncology
Services, Inc. ("ILEX"), 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. In March 2000, the
Company paid approximately $792,000 to ILEX as a deposit on estimated expenses
related to an FDA-required clinical study associated with the Company's ongoing
efforts to obtain FDA approval of OraTest(R). Current commitments under the ILEX
agreement include fourth quarter professional fees and expenses of approximately
$150,000 plus clinical and patient-related costs as they occur during the course
of the study. The contract or any workplan may be terminated at any time by Zila
upon not less than ninety (90) days prior written notice of termination to ILEX.
If the agreement is so terminated, Zila shall pay ILEX any amount owed, but not
yet paid, for work performed prior to the date of termination.
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 nine months ended April 30, 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 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 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
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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 the
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.
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 AND USE OF PROCEEDS
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: June 14, 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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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
27 Financial Data Schedule
</TABLE>
