1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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, 2001 or
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
---------------------- -------------------------
Commission file number 0-17521
--------------------------------------------------------
ZILA, INC
- -------------------------------------------------------------------------------
(Exact Name of Registrant as Specified In Its Charter)
Delaware 86-0619668
- ---------------------------- ------------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
5227 North 7th Street, Phoenix, Arizona 85014
- -----------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (602) 266-6700
-------------------
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days Yes X No___
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
At January 31, 2001, the number of shares of common stock outstanding
was 43,446,150.
Exhibit Index 18
Total pages 19
1
2
TABLE OF CONTENTS
Page no.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets as of January 31, 2001 and July 31, 2000 3
Condensed consolidated statements of operations and comprehensive income (loss) for
the three months and six months ended January 31, 2001 and 2000 4
Condensed consolidated statements of cash flows for the six months ended January 31,
2001 and 2000 5
Notes to condensed consolidated financial statements 6-10
Item 2. Management's discussion and analysis of financial condition and results of operations 11-17
Item 3. Quantitative and qualitative disclosures about market risk 17
PART II. OTHER INFORMATION
Item 1. Legal proceedings 17
Item 4. Submission of matters to a vote of security holders 18
SIGNATURES 19
2
3
ZILA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
- -------------------------------------------------------------------------------
ASSETS January 31, 2001 July 31, 2000
--------------- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 536,988 $ 5,558,487
Trade receivables - net 10,433,138 9,893,587
Inventories - net 17,143,037 13,204,137
Prepaid expenses and other current assets 2,579,564 2,479,072
Deferred income taxes 244,788 244,788
------------ ------------
Total current assets 30,937,515 31,380,071
------------ ------------
PROPERTY AND EQUIPMENT - net 10,897,469 9,442,278
PURCHASED TECHNOLOGY RIGHTS - net 5,382,755 5,600,975
GOODWILL - net 12,137,122 12,725,978
TRADEMARKS and OTHER INTANGIBLE ASSETS - net 12,531,541 12,423,632
CASH HELD BY TRUSTEE 1,377,282 2,928,001
OTHER ASSETS 3,765,284 3,210,524
------------ ------------
TOTAL $ 77,028,968 $ 77,711,459
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 6,510,361 $ 6,599,702
Accrued liabilities 2,851,805 3,622,330
Short-term borrowings 1,920,049 51,770
Current portion of long-term debt 751,247 776,866
------------ ------------
Total current liabilities 12,033,462 11,050,668
LONG-TERM DEBT - net of current portion 4,316,115 4,548,953
------------ ------------
Total liabilities 16,349,577 15,599,621
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 9)
SHAREHOLDERS' EQUITY:
Preferred stock, $.001 par value - authorized 2,500,000 shares, none issued
Common stock, $.001 par value - authorized, 65,000,000 shares, issued
43,641,150 shares (January 31, 2001) and 43,362,658 shares (July 31, 2000) 43,641 43,363
Capital in excess of par value 79,876,566 79,424,235
Accumulated other comprehensive income 100,966 71,666
Deficit (18,806,662) (17,017,676)
Less: 195,000 shares (January 31, 2001) and 135,000 shares (July 31, 2000)
of common stock in treasury, at cost (535,120) (409,750)
------------ ------------
Total shareholders' equity 60,679,391 62,111,838
------------ ------------
TOTAL $ 77,028,968 $ 77,711,459
============ ============
See notes to condensed consolidated financial statements.
3
4
ZILA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
- -------------------------------------------------------------------------------
Three months ended January 31, Six months ended January 31,
------------------------------ -------------------------------
2001 2000 2001 2000
---- ---- ---- ----
NET REVENUES $ 18,557,361 $ 20,216,797 $ 37,393,596 $ 39,388,390
------------ ------------ ------------ ------------
OPERATING COSTS AND EXPENSES:
Cost of products sold 10,279,699 10,366,090 20,395,362 19,868,323
Selling, general and administrative 8,212,250 8,144,042 15,551,527 16,819,326
Research and development 1,108,676 372,771 1,472,543 1,102,898
Depreciation and amortization 880,509 849,080 1,721,898 1,807,396
Impairment charge 310,000
------------ ------------ ------------ ------------
20,481,134 19,731,983 39,451,330 39,597,943
------------ ------------ ------------ ------------
(LOSS) INCOME FROM OPERATIONS (1,923,773) 484,814 (2,057,734) (209,553)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSES):
Interest income 96,106 97,238 155,172 175,005
Interest expense (143,540) (44,712) (166,517) (173,831)
Other income (expense) 9,776 (9,063) (54,907) (23,938)
Gain on sale of assets 4,519,915 4,659,127
------------ ------------ ------------ ------------
(37,658) 4,563,378 (66,252) 4,636,363
------------ ------------ ------------ ------------
(LOSS) INCOME BEFORE INCOME TAXES (1,961,431) 5,048,192 (2,123,986) 4,426,810
INCOME TAX BENEFIT (EXPENSE) 335,000 (3,083,940) 335,000 (2,513,940)
------------ ------------ ------------ ------------
NET (LOSS) INCOME $ (1,626,431) $ 1,964,252 $ (1,788,986) $ 1,912,870
============ ============ ============ ============
NET (LOSS) INCOME PER SHARE:
BASIC $ (0.04) $ 0.05 $ (0.04) $ 0.05
------------ ------------ ------------ ------------
DILUTED $ (0.04) $ 0.05 $ (0.04) $ 0.05
------------ ------------ ------------ ------------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
BASIC 43,423,899 41,961,935 43,388,570 41,636,741
DILUTED 43,423,899 42,343,965 43,388,570 42,025,649
NET LOSS $ (1,626,431) $ (1,788,986)
Other comprehensive (loss) income, net of tax
Foreign currency translation adjustment (14,558) 31,170
Net unrealized loss on available-for-sale-securities (620) (1,870)
------------ ------------
Other comprehensive (loss) income (15,178) 29,300
------------ ------------
COMPREHENSIVE LOSS $ (1,641,609) $ (1,759,686)
============ ============
See notes to condensed consolidated financial statements.
4
5
ZILA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- ------------------------------------------------------------------------------
Six months ended January 31,
-----------------------------
2001 2000
---- ----
OPERATING ACTIVITIES:
Net (loss) income $(1,788,986) $ 1,912,870
Adjustments to reconcile net (loss) income to net cash (used in)
provided by operating activities:
Depreciation and amortization 1,721,898 1,807,396
Gain on sale of assets (4,659,127)
Impairment of asset 310,000
Deferred income taxes and other (309,089) 2,445,375
Change in assets and liabilities:
Receivables - net (539,551) (1,003,528)
Inventories (3,938,900) 188,070
Prepaid expenses and other assets (320,252) (398,264)
Accounts payable and accrued liabilities (887,366) 1,052,751
Deferred revenue 27,500 110,781
----------- -----------
Net cash (used in) provided by operating activities (5,724,746) 1,456,324
----------- -----------
INVESTING ACTIVITIES:
Net purchases of property and equipment (2,335,265) (855,047)
Net proceeds from sale of assets 7,749,927
Purchases of intangible assets (449,268) (21,418)
----------- -----------
Net cash (used in) provided by investing activities (2,784,533) 6,873,462
----------- -----------
FINANCING ACTIVITIES:
Net proceeds from short-term borrowings 1,868,279 97,646
Net proceeds from issuance of common stock 452,609 14,963
Acquisition of treasury stock (125,370) (372,413)
Cash released by trustee 1,550,719
Principal payments on long-term debt (258,457) (5,248,063)
----------- -----------
Net cash provided by (used in) financing activities 3,487,780 (5,507,867)
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (5,021,499) 2,821,918
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 5,558,487 5,770,970
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 536,988 $ 8,592,888
=========== ===========
CASH PAID FOR INTEREST $ 145,452 $ 147,285
=========== ===========
CASH PAID FOR INCOME TAXES $ 89,686 $ --
=========== ===========
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND
FINANCING ACTIVITIES FOR 2001 AND 2000:
Income tax benefit attributable to exercise of common stock options $ 250,000
-----------
Conversion of Series A Convertible Redeemable Preferred stock $ 8,177,190
-----------
See notes to condensed consolidated financial statements.
5
6
ZILA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
Zila, Inc. and its wholly-owned subsidiaries, Zila Pharmaceuticals,
Inc., Zila International Inc., Zila Ltd., Bio-Dental Technologies
Corporation ("Bio-Dental"), Zila Technologies, Inc., formerly Cygnus
Imaging, Inc. ("Cygnus"), and Oxycal Laboratories, Inc. ("Oxycal"). All
significant intercompany balances and transactions are eliminated in
consolidation.
In the opinion of management of Zila, Inc. and its subsidiaries
(collectively referred to herein as "Zila" or the "Company"), all
adjustments, consisting of normal recurring accruals, considered
necessary for a fair presentation have been included in the condensed
consolidated financial statements. The results of operations for the
interim period are not necessarily indicative of the results that may
be expected for the entire year. The preparation of financial
statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates. Certain reclassifications have been made to the
prior year financial statements to conform to the current year
presentation.
2. NET (LOSS) INCOME PER SHARE
The following is a reconciliation of the numerator and denominator of
basic and diluted (loss) earnings per share:
For the three months ended For the six months ended
January 31, January 31,
2001 2000 2001 2000
-----------------------------------------------------------------------
Net (loss) income $ (1,626,431) $ 1,964,252 $ (1,788,986) $ 1,912,870
Average outstanding common shares 43,423,899 41,961,935 43,388,570 41,636,741
Basic net income (loss) per share $ (0.04) $ 0.05 $ (0.04) $ 0.05
Diluted net (loss) income per share:
Net (loss) income available for
diluted earnings $ (1,626,431) $ 1,964,252 $ (1,788,986) $ 1,912,870
Average outstanding common shares
from above 43,423,899 41,961,935 43,388,570 41,636,741
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 (loss) income per share $ (0.04) $ 0.05 $ (0.04) $ 0.05
Since a loss was incurred for the quarter and six months ended January
31, 2001, options and
6
7
warrants to purchase shares of common stock that would otherwise
qualify as common stock equivalents were not included in the
computation of diluted net income per share because their effect would
be antidilutive.
3. INVENTORIES
Inventories consist of the following:
January 31, July 31,
2001 2000
------------ ------------
Finished goods $ 9,565,247 $ 9,219,343
Raw materials 7,768,838 4,168,834
Inventory reserves (191,048) (184,040)
------------ ------------
$ 17,143,037 $ 13,204,137
============ ============
4. INCOME TAXES
Deferred income taxes reflect the tax effect of temporary differences
between the amounts of assets and liabilities recognized for financial
reporting and tax purposes. At the end of each fiscal quarter, the
Company makes its best estimate of the effective tax rate expected to
be applicable for the full fiscal year. The rate so determined is used
in providing for income taxes on a current year-to-date basis. The rate
is revised, if necessary, as of the end of each quarter during the
fiscal year to the Company's best estimate of its annual effective tax
rate. In the six months ended January 31, 2001, the Company recorded a
tax benefit of $335,000.
In the prior year quarter ended October 31, 1999, the Company recorded
an income tax benefit of $820,000 ($250,000 of which was attributable
to the exercise of common stock options in prior years and therefore
was credited to capital in excess of par value). 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.
5. ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
The Company accounts for impairment of long-lived assets in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" which was issued in March 1995. SFAS No. 121
requires that long-lived assets be reviewed for impairment whenever
events or changes in circumstances indicate that the book value of the
asset may not be recoverable. In the quarter ended October 31, 2000,
the Company recorded a non-cash charge of $310,000, in the
Nutraceuticals segment, to write down the carrying amount of the land
and buildings located at 533 Madison Avenue, Prescott, Arizona to an
estimated fair value related to its anticipated sale. The building was
sold in March 2001.
7
8
6. NEW ACCOUNTING PRONOUNCEMENTS
In May 2000, the Financial Accounting Standards Board's Emerging Issues
Task Force ("EITF") issued Issue No. 00-14, Accounting for Certain
Sales Incentives. The Issue addresses the recognition, measurement, and
income statement classification for certain sales incentives including
coupons, rebates and free products. The consensus on EITF 00-14 will be
effective for the Company in the fourth quarter of fiscal year 2001.
The implementation of this consensus will require the Company to change
the way it classifies certain sales incentives, which are currently
recorded as selling, general and administrative expenses. The cost of
coupons and rebates will be recorded as a reduction of net sales. The
cost of free product will be recorded as a reduction of products sold.
In addition, the EITF has added Issue No. 00-25 Vendor Income Statement
Characterization of Consideration from a Vendor to a Retailer to its
agenda. This issue discusses the income statement classification of
"trade spending" costs. The Company is in the process of analyzing the
requirements of these pronouncements.
7. SALE 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. The
purchase price was paid through the issuance of a $4.0 million note
receivable that was collateralized by the assets of Procare and matured
and was paid in full on November 10, 1999. The net book value of the
assets sold and liabilities assumed was $3.9 million. The sale resulted
in a $139,000 gain.
On December 20, 1999, the Company, through its wholly-owned subsidiary
Integrated Dental Technologies, Inc. ("IDT"), completed the sale of
substantially all of its assets and liabilities related to its
PracticeWorks division located in Gold River, California to InfoCure
Corporation ("InfoCure"), of Atlanta, Georgia for approximately $4.65
million. InfoCure is a national provider of healthcare practice
management software products and services to targeted healthcare
practice specialties.
The following unaudited pro forma information presents the condensed
consolidated results of operations as if the sales had occurred as of
the beginning of the six month period ended January 31, 2000 and does
not purport to be indicative of what would have occurred had the sale
been made as of that date.
Six months ended
----------------
January 31, 2000
----------------
(in thousands)
Net revenues $37,680
Operating income 360
Income before income taxes 832
8
9
8. SEGMENT INFORMATION
The Company is organized into five major product groups, all of which
have distinct product lines, brand names and are managed as autonomous
business units. The Company has identified the following segments for
purposes of applying SFAS No. 131: Consumer which includes Zila
Pharmaceuticals, Inc. and the Zilactin(R) line of products,
Professional which includes Peridex(R) and Pro-Ties(TM), OraTest(R)
products, Dental Supply, which includes Bio-Dental Technologies
Corporation and Ryker Dental of Kentucky, Inc. (a subsidiary of
Bio-Dental Technologies Corporation) which does business under the name
Zila Dental Supply, and Nutraceuticals, which includes Oxycal
Laboratories, Inc. and its wholly-owned subsidiary, Inter-Cal, Inc. The
Company evaluates performance and allocates resources to segments based
on operating results. Corporate overhead expenses have been combined
with the OraTest(R) segment. The Dental Imaging and Dental Software
businesses, sold in fiscal year 2000, are combined into the Other
segment. Prior to August 1, 2000, the Consumer and Professional segment
were combined and shown as the Pharmaceutical segment. The Professional
segment was removed from the Pharmaceutical segment as a result of the
change in management reporting structure. Previous segment disclosures
have been restated to reflect this presentation.
The table below presents information about reported segments as of and
for the six months ended January 31 (in thousands):
Dental
Consumer Professional Supply OraTest Nutraceuticals Other Total
Net revenues:
2001 $6,621 $2,644 $20,343 $ 73 $ 7,713 $ 0 $37,394
2000 5,685 2,643 19,670 62 9,620 1,708 39,388
(Loss) income before Income taxes:
2001 3,145 (112) 35 (5,216) 24 $ 0 (2,124)
2000 2,027 392 287 (5,045) 2,675 4,091 4,427
Depreciation and
amortization:
2001 40 541 139 449 553 $ 0 1,722
2000 21 483 149 504 505 145 1,807
Total assets:
2001 3,430 12,482 11,594 13,239 36,284 $0 77,029
2000 3,343 10,462 11,760 18,225 29,233 424 73,447
9. COMMITMENTS AND CONTINGENCIES
The Company and certain officers of the Company have been named as
defendants in a consolidated First Amended Class Action Complaint filed
July 6, 1999 in the United States District Court for the District of
Arizona under the caption In re Zila Securities Litigation, No. CIV 99
0115 PHX EHC. The First Amended Class Action Complaint seeks damages in
an unspecified amount on behalf of a class consisting of purchasers of
the Company's securities from November 14, 1996 through January 13,
1999 for alleged violations of the federal securities laws.
Specifically, the plaintiffs allege that in certain public statements
and filings with the Securities and Exchange Commission the defendants
made false or misleading statements and concealed material adverse
information related to OraTest(R) that artificially inflated the price
of the Company's common stock in violation of the federal securities
laws. In February 2001, the parties entered into a settlement
agreement. The settlement agreement is subject to court approval. If
approved, Zila's insurers will pay the entire $5.75 million settlement
amount and
9
10
the litigation will be dismissed.
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. SUBSEQUENT EVENT
On February 5, 2001, the Company announced it had acquired the patent
rights and Antioch, Illinois manufacturing operations for swab products
from National Healthcare Manufacturing Corporation, headquartered in
Winnipeg, Canada. Intellectual property, inventory, plus molding,
labeling, filling and sealing equipment were included in the
acquisition. The business unit will be known as Innovative Swab
Technologies, Inc. Zila paid approximately $2.4 million in a
combination of stock and cash for the unit.
10
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ZILA, INC. AND SUBSIDIARIES
FORWARD LOOKING INFORMATION
This Report contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. The words "believe," "expect," "anticipate," "intend," "estimate" and
other expressions that are predictions of or indicate future events and trends
and which do not relate to historical matters identify forward-looking
statements. These forward-looking statements are based largely on the Company's
expectations or forecasts of future events, can be affected by inaccurate
assumptions and are subject to various business risks and known and unknown
uncertainties, a number of which are beyond the Company's control. Therefore,
actual results could differ materially from the forward-looking statements
contained in this document, and readers are cautioned not to place undue
reliance on such forward-looking statements. The Company undertakes no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise. A wide variety of
factors could cause or contribute to such differences and could adversely impact
revenues, profitability, cash flows and capital needs. Included among the
factors affecting OraTest(R) are the FDA's ultimate decision regarding
OraTest(R); the length and expense of the new clinical study and the FDA
review process; the limitations on indicated uses for which OraTest(R) may be
marketed; and, if approved, the market reception to OraTest(R) and any
post-marketing reports or surveillance programs to monitor usage or side effects
of OraTest(R). There can be no assurance that the forward-looking statements
contained in this document will, in fact, transpire or prove to be accurate. For
a more detailed description of these and other cautionary factors that may
affect the Company's future results, please refer to the Company's Annual Report
on Form 10-K for its fiscal year ended July 31, 2000 filed with the Securities
and Exchange Commission.
COMPANY OVERVIEW:
Zila is a worldwide manufacturer and marketer of pharmaceutical,
biomedical, dental and nutritional products. The Company has five major
operating groups: Consumer Pharmaceuticals, Professional Pharmaceuticals,
OraTest(R) Products, Dental Supplies and Nutraceuticals. The Consumer
Pharmaceuticals group consists of over-the-counter products, including the
Zilactin(R) family of over-the-counter products. The Professional
Pharmaceuticals group includes Peridex(R) prescription mouth rinse, and
Pro-Ties(TM), a bundling system for instrument sterilization. The OraTest(R)
Products group includes OraTest(R), an oral cancer detection system, and the
Dental Supply group includes Zila Dental Supply, a national distributor of
professional dental supplies. The Nutraceuticals group is comprised of Oxycal
Laboratories, Inc. ("Oxycal") and its Inter-Cal ("Inter-Cal") subsidiary, a
manufacturer and distributor of mineral and botanical products including a
patented and unique form of Vitamin C under the trademark Ester-C(R) and the
Palmettx(R) botanical line of products.
On October 28, 1999, Cygnus completed the sale of substantially all of
its assets and certain liabilities to Procare Laboratories, Inc. ("Procare"), of
Scottsdale, Arizona for approximately $4.0 million. Procare is controlled by the
former owner and President of Cygnus. The purchase price was paid through the
issuance of a note receivable, which was collateralized by the assets of Procare
and was paid in full on November 10, 1999. The sale resulted in a $139,000 gain.
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
11
12
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 was held in escrow for one year in order to
secure the representations, warranties, and covenants made by the Company to
InfoCure. The trustee released approximately $422,000 in January 2001.
On February 5, 2001, the Company announced it had acquired the patent
rights and Antioch, Illinois manufacturing operations for swab products from
National Healthcare Manufacturing Corporation, headquartered in Winnipeg,
Canada. Intellectual property, inventory, plus molding, labeling, filling and
sealing equipment were included in the acquisition. The business unit will be
known as Innovative Swab Technologies, Inc. Zila paid approximately $2.4 million
in a combination of stock and cash for the unit.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JANUARY 31, 2001 AND 2000
Total net revenues declined 8.2% to $18.6 million for the quarter ended
January 31, 2001, compared to revenues of $20.2 million during the second
quarter of the prior fiscal year. Excluding the second quarter revenues in the
prior fiscal year for the PracticeWorks division of $398,000, which was sold in
the prior fiscal year, net revenues decreased 6.4%.
Net revenues for Zila Dental Supply increased slightly to $10.2 million
for the quarter ended January 31, 2001, compared to $10.1 million for the
corresponding fiscal quarter in 2000. This increase was primarily due to an
increase in sales of full service supplies and internet sales. Consumer
Pharmaceuticals had net revenues of $2.9 million for the quarter ended January
31, 2001, an 11.4% decline over the $3.3 million recorded during the
corresponding quarter last year. The decrease was due primarily to a higher than
normal level of sales for all of the Zilactin products in the prior year
quarter. Also effecting sales for the second quarter of fiscal year 2001 were
increased sales in the first quarter of fiscal year 2001 of $3.7 million, a
54.3% over the prior year quarter.
Net revenues for Professional Pharmaceuticals were $1.5 million, an
increase of 11.3% from $1.4 million during the prior year quarter. The increase
was due primarily to approximately $483,000 of revenue generated from an
agreement executed during the quarter, whereby the Company granted a customer
the right to use it's technology related to Chlorhexidine Gluconate to produce a
generic form of the product for distribution. Under the agreement, fees will be
paid over four years. Sales of Peridex(R) declined 24.6% during the quarter
caused by decreased demand due to pricing pressures and substitutions made by
pharmacists with generic brands. During the quarter, Professional
Pharmaceuticals began to ship Pro-Ties(TM), a bundling system for instrument
sterilization.
Net revenues for Inter-Cal for the quarter ended January 31, 2001, were
$3.9 million, a 22.2% decrease when compared to $5.1 million for the
corresponding 2000 fiscal quarter. The decrease is largely attributable to an
overall slowdown in the domestic vitamin and food supplement markets and the
affects of aggressive discounting programs in prior periods. Inter-Cal's
international sales during the quarter were approximately equal to the previous
year's quarter amount. OraTest(R) products had net revenue of $18,000 for the
quarter ended January 31, 2001. No revenue was derived from OraTest(R) products
in the corresponding quarter last year. Sales of OraTest(R) were made in the
United Kingdom and China during the current quarter.
12
13
For the quarter ended January 31, 2001, cost of products sold was $10.3
million, a slight decrease from the $10.4 million recorded in the quarter ended
January 31, 2000. Cost of products sold as a percentage of net revenues
increased to 55.4% in the quarter ended January 31, 2001 from 51.3% in the
quarter ended January 31, 2000. The increase for the quarter reflects primarily
the growth of Zila Dental Supply as a percentage of total revenues, 54.8% for
the quarter ended January 31, 2001, compared to 50.0% for the previous year
quarter. Margins for Zila Dental Supply are lower as compared to the other
operating groups resulting in a higher cost of products sold as a percentage of
revenues.
Cost of products sold as a percentage of net revenues for Zila Dental
Supply decreased slightly to 73.6% for the quarter ended January 31, 2001 when
compared to the 74.8% recorded in the prior year quarter, primarily due to a
decrease in vendor rebates. Cost of products sold as a percentage of net
revenues for Consumer Pharmaceuticals increased to 24.5% in the quarter ended
January 31, 2001, from 20.9% in the quarter ended January 31, 2000. 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 product sales for Professional
Pharmaceuticals increased to 32.8% for the quarter ended January 31, 2001 from
27.6% in the quarter ended January 31, 2000. The increase is due primarily to a
reduction in the average sales price of Peridex(R) sold during the quarter
related to increased pricing pressures from generic equivalents.
Cost of products sold as a percentage of net revenues for Inter-Cal
increased to 39.6% in the quarter ended January 31, 2001 from 28.9% in the
quarter ended January 31, 2000. The increase was caused by a change in the mix
of products sold including the new Palmettx(TM) botanical line of products as
well as an increase in costs related to the validation of the manufacturing
equipment in the new facility during the quarter.
The Company incurred selling, general and administrative expenses of
$8.2 million consistent with the $8.1 million in the same period in fiscal 2000.
Selling, general and administrative expenses as a percentage of net sales
increased to 44.3% in the current fiscal quarter from 40.2% in the quarter ended
January 31, 2000 due to the decrease in sales volume.
Research and development expenses increased $736,000, or approximately
200%, from $373,000 in the second quarter of fiscal year 2000 to $1.1 million
for the same period in fiscal year 2001. The increase is primarily due to
increased costs related to the FDA-required clinical study associated with the
Company's ongoing efforts to obtain FDA approval of OraTest(R).
Depreciation and amortization expenses increased slightly to $881,000
in the second quarter of fiscal year 2001 from $849,000 for the same period in
fiscal year 2000. The increase is due primarily to the increased depreciation of
assets associated with Inter-Cal's new manufacturing facility.
The Company recorded interest expense of $143,000 for the quarter ended
January 31, 2001 compared to $45,000 in the same period of the previous year.
The increase was attributable to increased bank borrowings and debt obligations
incurred during the second quarter of fiscal year 2001 as compared to the
previous year period.
At the end of each fiscal quarter, the Company makes its best estimate
of the effective tax rate expected to be applicable for the full fiscal year.
The rate so determined is used in providing for income taxes on a current
year-to-date basis. The rate is revised, if necessary, as of the end of each
quarter during the fiscal year to the Company's best current estimate of its
effective rate. The effective tax rate could change significantly in future
interim periods if there is a change in the Company's estimates because of (i)
the proportion of non-deductible amortization of intangible assets in relation
to pre-tax income (loss) for financial reporting purposes and (ii) the
non-deductibility of foreign operating losses.
13
14
In the three months ended January 31, 2001, the Company recorded an
income tax benefit of $335,000 as compared to an income tax expense of $3.1
million recorded in the same period of the prior year.
For the quarter ended January 31, 2001, the Company had a net loss of
$1.6 million compared to net income of $2.0 million for the prior year quarter.
The decrease in profitability is primarily attributable to the decrease in sales
at Inter-Cal and increased research and development expenses during the current
quarter and the gain due to the sale of PracticeWorks assets in the prior year
quarter.
SIX MONTHS ENDED JANUARY 31, 2001 AND 2000
Total net revenues declined 5.1% to $37.4 million for the six months
ended January 31, 2001, compared to revenues of $39.4 million for the six months
ended January 31, 2000. Excluding the year-to-date revenues in the prior fiscal
year for the PracticeWorks and Cygnus divisions of $1.7 million, which were sold
in the prior fiscal year, net revenues decreased less than 1%.
Net revenues for Zila Dental Supply increased 3.4% to $20.3 million for
the six months ended January 31, 2001, compared to $19.7 million for the
corresponding six months in 2000. This increase was primarily attributable to an
increase in full-service operations and increases in internet sales. Consumer
Pharmaceuticals had net revenues of $6.6 million for the six months ended
January 31, 2001, a 16.5% increase over the $5.7 million recorded during the
corresponding period last year. The increase was due primarily to increased
sales of all of the Zilactin products due to the use of discount programs. Net
revenues for Professional Pharmaceuticals stayed consistent at $2.7 million for
the six months ended January 31, 2001 as compared to the prior year period. The
current year period includes $483,000 of revenue generated from an agreement
executed during the quarter, whereby the Company granted a customer the right to
use it's technology related to Chlorhexidine Gluconate to produce a generic form
of the product for distribution. Under the agreement, fees will be paid over
four years.
Net revenues for Inter-Cal for the six months ended January 31, 2001,
were $7.7 million, a 19.8% decrease when compared to the $9.6 million for the
corresponding period in fiscal year 2000. The decrease is attributable to an
overall slowdown in the domestic vitamin market and promotional discounting in
prior year periods. Inter-Cal's international sales decreased 7.2% to $2.7
million during the first six months of the current fiscal year as compared to
the previous year amount as international customers have excess inventory
levels.
For the six months ended January 31, 2001, cost of products sold was
$20.4 million, a 2.7% increase from $19.9 million for the six months ended
January 31, 2000. Cost of products sold as a percentage of net revenues
increased to 54.5% in the six months ended January 31, 2001 from 50.4% in the
corresponding 2000 period. The increase for the period reflects primarily the
growth of Zila Dental Supply as a percentage of total revenues, 54.4% for the
six months ended January 31, 2001 compared to 49.9% 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 73.7% for the six months ended January 31, 2001
from 74.3% for the six months ended January 31, 2000 primarily due to an
increase in vendor rebate programs in the first quarter of fiscal 2001. Cost of
products sold as a percentage of net revenues for Consumer Pharmaceuticals
increased to 23.1% in the six months ended January 31, 2001, compared to 21.6%
for the corresponding period in fiscal 2000. The increase for the quarter is a
result of a change in the mix of products sold. Cost of products sold as a
14
15
percentage of net product sales for Professional Pharmaceuticals increased to
28.6% in the six months ended January 31, 2001, compared to 24.3% for the
corresponding period in fiscal 2000. The increase is due primarily to a
reduction in the average sales price per case of Peridex(R) sold during the
period related to increased pricing pressures from generic equivalents.
Cost of products sold as a percentage of net revenues for Inter-Cal
increased to 36.6% in the six months ended January 31, 2001 from 27.9% in the
six months ended January 31, 2000. The increase was caused by costs associated
with the manufacturing of the new Palmettx(TM) botanical line of products as
well as the duplicate overhead, moving and equipment validation costs related to
the relocation of the manufacturing equipment to the new facility during the
period.
The Company incurred selling, general and administrative expenses of
$15.6 million, or 41.6% of net revenues during the first six months of fiscal
year 2001 compared to $16.8 million, or 42.7% of net revenue in the same period
in fiscal 2000. 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 Inter-Cal and increased corporate legal, professional
and insurance expenses.
Research and development expenses increased $370,000 or 33.5%, from the
$1.1 million incurred in the first six months of fiscal year 2000 to $1.5
million for the same period in fiscal year 2001. The increase was primarily due
to an increase in expenses related to research and clinical activities
associated with OraTest(R), partially offset by a reduction of costs incurred in
the Cygnus and PracticeWorks businesses.
Depreciation and amortization expenses decreased $85,000 from $1.8
million in the six months of fiscal year 2000 to $1.7 million for the same
period in fiscal year 2001. 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 Inter-Cal's new
manufacturing facility that were placed in service during the current six month
period.
In October 2000, the Company recorded a non-cash impairment charge of
$310,000 to write down the carrying value of the land and buildings located at
533 Madison Avenue, Prescott, Arizona to an estimated fair value related to its
anticipated sale. The building was sold in March 2001.
The Company recorded interest expense of $167,000 for the six months
ended January 31, 2001 compared to $174,000 in the same period of the previous
year. The decrease was attributable to decreases in debt obligations incurred
during the current year period as compared to the previous year period.
In the six months ended January 31, 2001, the Company recorded an
income tax benefit of $335,000. The Company's effective tax rate for the
six-month period is significantly lower than the statutory rate due primarily to
the non-deductibility of foreign operating losses and non-deductible
amortization of intangible assets. 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).
15
16
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 2001, the Company's primary sources of liquidity
included cash and cash equivalents of $537,000 and the bank line of credit
discussed below. Working capital decreased slightly to $18.9 million at January
31, 2001 from $20.3 million at July 31, 2000, and the current ratio decreased to
2.6 at January 31, 2001 from 2.8 at July 31, 2000.
On December 1, 2000, the Company renewed its $9 million line of credit
with Bank One for an additional 12 months under similar terms and conditions,
including a variable interest rate equal to the prime rate ("the Index"), which
was 8.5% at January 31, 2001. In the event the Company does not achieve certain
operating results for any cumulative financial quarters, 0.25% will be added to
the Index for the next fiscal quarter, however, in no event will the interest
rate be greater than the Index plus 0.25%. In the event the Company's
year-to-date operating results improve, the interest rate will be adjusted to be
equal to the Index for the next fiscal quarter. As of January 31, 2001, the
Company did not achieve the required operating results so the interest rate will
be raised by 0.25%. Under the line of credit, the Company is required to comply
with financial covenants based on certain financial ratios. At January 31, 2001,
the Company was in compliance with such covenants. At January 31, 2001, the
Company had borrowings of $1.75 million against the line of credit. Subsequent
to January 31, 2001, the Company borrowed an additional $1.75 million to fund
the acquisition of National Healthcare Manufacturing Corporation made in
February. (See Note 10 to the Condensed Consolidated Financial Statements).
Net cash used in operating activities was $5.7 million during the six
months ended January 31, 2001, attributable to the net loss of $1.8 million plus
changes in operating assets and liabilities totaling $5.6 million partially
offset by non-cash items of $1.7 million. Significant changes in operating
assets and liabilities were primarily comprised of (i) an increase in accounts
receivable of $540,000 related to certain legal fees which were paid by the
Company but are expected to be reimbursed by an insurance company, (ii) an
increase in inventory of $3.9 million related to the new Palmettx(TM) botanical
line of products and other raw materials at Inter-Cal, and (iii) a decrease in
accounts payable and accrued expenses of $887,000 primarily due to vendor
payments made during the period for inventory purchases.
Net cash used in investing activities was $2.8 million related to
manufacturing additions for the new Inter-Cal facility, the purchase of the
patent and other rights related to the Pro-Ties(TM) bundling system and patent
filings for Inter-Cal.
Net cash provided by financing activities of $3.5 million was comprised
of bank borrowings of $1.7 million, net borrowings of approximately $217,000
related to the financing of insurance policies, proceeds received from the
exercise of warrants and stock options of $453,000 and $1.5 million of bond
proceeds received from the trustee related to the construction of the new
Inter-Cal facility (as discussed further below). In addition, $125,000 was used
to repurchase 60,000 shares of Zila common stock on the open market.
At January 31, 2001, the Company had income tax net operating loss
carryforwards of approximately $10.1 million, which expire in years 2007 through
2019.
During October 2000, Inter-Cal moved into its new manufacturing and
laboratory facility in Prescott, AZ. The facility was financed through a
transaction with The Industrial Development Authority of the County of Yavapai
(the "Authority") in which the Authority issued $5.0 million in Industrial
Development Revenue Bonds (the "Bonds"), the proceeds of which were loaned to
Oxycal for the construction of the facility. The Bond proceeds are being held by
the trustee, Bank One, Arizona
16
17
until such time as the remaining invoices for building construction and new
equipment are submitted for payment. The Bonds consist of $3.9 million Series A
and $1.1 million Taxable Series B which, as of January 31, 2001, carried
interest rates of 4.75% and 5.90%, 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.
The Company believes that cash generated from its operations, its
investing activities and the availability of cash under its line of credit are
sufficient to finance its level of operations and anticipated capital
expenditures. The Company will 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
assurance that such funds will be available on terms acceptable to the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk refers to the potential effects of unfavorable changes in
certain prices and rates on the Company's financial results and conditions,
primarily foreign currency exchange rates and interest rates on debt
obligations. The Company transacts business in various foreign countries.
Foreign currency exposures are primarily, but not limited to, vendor and
customer payments and inter-company balances in currencies other than the
functional currency. Fluctuations in foreign currencies could have a material
adverse effect on the Company's results of operations.
The Company is exposed to interest rate fluctuations on its Industrial
Development Revenue Bonds and the line of credit with Bank One Corporation as
the interest charged is based on variable rates. The Bonds bear interest based
on a floating rate and adjusted weekly by Banc One Capital Markets. Interest on
the outstanding balance of the line of credit is charged at the prime rate of
Bank One. The Company does not trade in derivative financial instruments. The
Company does not believe that near-term changes in foreign currency exchange
rates or interest rates will have a material effect on its future earnings, fair
values or cash flows.
PART II - OTHER INFORMATION
ITEM 1.- Legal Proceedings
The Company and certain officers of the Company have been named as
defendants in a consolidated First Amended Class Action Complaint filed July 6,
1999 in the United States District Court for the District of Arizona under the
caption In re Zila Securities Litigation, No. CIV 99 0115 PHX EHC. The First
Amended Class Action Complaint seeks damages in an unspecified amount on behalf
of a class consisting of purchasers of the Company's securities from November
14, 1996 through January 13, 1999 for alleged violations of the federal
securities laws. Specifically, the plaintiffs allege that in certain public
statements and filings with the Securities and Exchange Commission the
defendants made false or misleading statements and concealed material adverse
information related to OraTest(R) that artificially inflated the price of the
Company's common stock in violation of the federal securities laws. In February
2001, the parties entered into a settlement agreement. The settlement agreement
is subject to court approval. If approved, Zila's insurers will pay the entire
$5.75 million settlement amount and the litigation will be dismissed.
On September 8, 1999, the Securities and Exchange Commission (the
"Commission") entered an
17
18
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.
(a) The Company held its annual meeting of stockholders in
Phoenix, Arizona on December 7, 2000. A total of 40,233,762
shares of Common Stock, 92.46% of the outstanding shares,
were represented in person or by proxy.
(b) The following six directors were each elected to a one-year
term expiring in 2001:
NUMBER OF SHARES
NAME FOR WITHHELD
Joseph Hines 39,311,876 921,886
Carl A. Schroeder 39,406,935 826,827
Michael S. Lesser 39,340,919 892,843
Curtis M. Rocca, III 38,587,416 1,646,346
Christopher D. Johnson 39,487,351 746,411
Kevin J. Tourek 39,396,175 837,587
(c) The Company's stockholders approved the selection of Deloitte
& Touche LLP as auditors for the Company for its 2001 fiscal
year as follows: 39,777,658 shares voted in favor; 277,933
shares voted against; and 228,171 shares abstained (including
broker non-votes).
(d) The Company's stockholders approved the amendment of the 1997
Stock Option Award Plan to increase the number of authorized
shares under the Plan from 1,000,000 to 3,000,000 as follows:
11,845,732 shares voted in favor; 3,705,089 shares voted
against; and 24,682,941 shares abstained (including broker
non-votes).
(e) The Company's stockholders approved the adoption of the
Employee Stock Purchase Plan as follows: 13,708,745 shares
voted in favor; 1,812,867 shares voted against; and
18
19
24,712,150 shares abstained (including broker non-votes).
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: March 19, 2001 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