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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended JULY 31, 1996
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 Identification No.)
incorporation or organization)
5227 North 7th Street, Phoenix, Arizona 85014-2800
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (602) 266-6700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None N/A
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of class)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
At September 30, 1996, the aggregate market value of common stock held
by non-affiliates of the Registrant was approximately $155,373,018
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No [ ] N/A
APPLICABLE ONLY TO CORPORATE REGISTRANTS
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
At September 30, 1996, the number of shares of common stock outstanding
was 25,852,045.
DOCUMENTS INCORPORATED BY REFERENCE
Materials from the Registrant's 1996 Proxy Statement have been
incorporated by reference into Part III, Items 10, 11, 12 and 13.
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TABLE OF CONTENTS
Page
PART I ----
Item 1. Business 1
Item 2. Properties 15
Item 3. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Executive Officers of the Registrant
PART II
Item 5. Market for the Company's Common 19
Stock and Related Stockholder Matters
Item 6. Selected Financial Data 20
Item 7. Management's Discussion and Analysis of Financial 20
Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data 27
Item 9. Changes in and Disagreements with Accountants on 27
Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Company 27
Item 11. Executive Compensation 27
Item 12. Security Ownership of Certain 27
Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions 27
PART IV
Item 14. Exhibits, Financial Statement 28
Schedules and Reports on Form 8-K
SIGNATURES 32
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PART I
ITEM 1. BUSINESS
GENERAL
Zila, Inc., a Delaware corporation, is a pharmaceutical company that,
through its wholly owned subsidiaries, markets and sells over-the-counter,
non-prescription oral and dermatological products in the United States and
abroad. Zila Pharmaceuticals, Inc., a Nevada corporation ("Zila"), was organized
on September 12, 1980. On September 1, 1988, Zila Pharmaceuticals, Inc., a
Delaware corporation and a wholly owned subsidiary of Zila, Inc., was merged
with and into Zila. The surviving corporation was Zila, which became, by virtue
of such merger, a wholly owned subsidiary of Zila, Inc. Zila, Inc. has three
other wholly owned subsidiaries: Zila International Inc., an Arizona
corporation, Zila Ltd., a corporation incorporated under the laws of the United
Kingdom (the "UK") and Zila Merger Corporation, a corporation formed in
connection with the proposed Bio-Dental merger. Unless the context otherwise
indicates, the term "Company" as used herein refers to Zila, Inc. and each of
its subsidiaries.
The Company has entered into a Merger Agreement dated August 8, 1996
with Bio-Dental Technologies Corporation ("Bio-Dental") pursuant to which
Bio-Dental would merge into a specially-created, wholly owned subsidiary of Zila
(the "Merger"). Bio-Dental is a dental supply company which, through its wholly
owned subsidiaries, markets and distributes a broad range of professional dental
supplies and computer-based dental technology systems. In the discussions that
led to the signing of the Merger Agreement, the Board of Directors of Zila
identified a number of potential benefits accruing to Zila as a result of the
Merger, including: (i) the opportunity to utilize Bio-Dental's existing
marketing and distribution resources; (ii) the opportunity to increase the sales
of Zila products to dental health care professionals served by Bio-Dental; (iii)
diversification of Zila's businesses and product offerings; and (iv) cost
savings through increased vertical integration of Zila's business. It is the
intention of the parties that the Merger be treated as a "pooling of interests"
transaction. See "Business - Merger with Bio-Dental Technologies Corporation."
PRODUCTS
ZILACTIN(R) FAMILY OF PRODUCTS. The Company's primary emphasis has been
focused on the marketing of four over-the-counter, non-prescription products:
ZILACTIN(R), ZILACTIN(R)-L (formerly ZILACTOL(R)), ZILACTIN(R)-B and
ZILACTIN(R)-LIP. The Company's products are used topically for the purposes
described below:
ZILACTIN(R)- a protective film for canker sores, cold sores
and fever blisters
ZILACTIN(R)-B- a protective film with benzocaine for maximum
pain relief from mouth sores
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ZILACTIN(R)-L- a liquid for treating developing fever
blisters and cold sores
ZILACTIN(R)-LIP- a lip balm for the prevention of sun blisters
and the treatment of cold sores and dry,
chapped lips.
The ZILACTIN(R) treatment composition is covered by patents owned by the
Company. These patents cover the composition and the film-forming properties of
the product formula. See "Business - Patents and Trademarks." ZILACTIN(R),
ZILACTIN(R)-B, and ZILACTIN(R)-L formulas incorporate these proprietary
treatment compositions. ZILACTIN(R) and ZILACTIN(R)-B are packaged as gels in
.25 ounce plastic tubes. ZILACTIN(R)-L, a liquid, is packaged in a 10 cc plastic
bottle. The products are applied directly to affected areas in quantities large
enough to cover the lesion with the gel or liquid. The gels containing the
active ingredient form a thin, transparent, pliable film that holds the active
ingredient against the affected tissue and keeps the affected area clean. The
film can last up to eight hours inside the mouth, a feature which makes the
formulation suitable for a variety of dental applications.
ZILACTIN(R) is being used by dentists to treat patients with canker sores
and other oral mucosal ulcers or lesions, and has been evaluated in dental
schools at selected major universities. ZILACTIN(R) was originally developed as
a treatment for herpes virus lesions. The most common form is Herpes Simplex
Type I, which is the cause of fever blisters and cold sores. Herpes Simplex Type
II is the cause of genital herpes. Other types of herpes infections include
chicken pox, shingles (herpes zoster), mononucleosis and the Epstein-Barr Virus.
Depending principally on the availability of resources, the Company may explore
the development of new products, including the addition of other medications
into the ZILACTIN(R) vehicle, and/or the approval of existing products as
recognized treatments for such viruses. However, the Company currently does not
market ZILACTIN(R) as a treatment for genital herpes or shingles.
ZILACTIN(R)-B is a medicated gel containing benzocaine with the
film-forming properties of ZILACTIN(R). ZILACTIN(R)-B has been formulated for a
segment of the market which prefers a film-forming application with a topical
anesthetic. ZILACTIN(R)-B quickly controls the pain associated with mouth sores
while shielding them from the environment of the mouth.
In July 1995, the Company began distributing a new lip balm in the Arizona
market. The product, called ZILACTIN(R)-LIP, is positioned to be a
premium-priced, effective alternative to existing lip balms. ZILACTIN(R)-LIP
prevents sun blisters and treats cold sores and dry, chapped lips. Most other
competing products only perform one or two of such applications.
The products comprising the ZILACTIN(R) Family of Products represented 98.6
percent of the Company's gross sales during the 1996 fiscal year.
ORATEST(TM). The Company is currently seeking government approval from the
Food and Drug Administration (the "FDA") and the countries of the European Union
(the "EU") to distribute
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ORATEST(TM) (formerly known as OraScan), in the United States and Europe.
ORATEST(TM), a diagnostic for oral cancer and site delineation device for biopsy
and surgical excision, has been approved for distribution in the United Kingdom,
Canada and Australia.
Published reports indicate that approximately 32,000 new cases of oral
cancer are diagnosed each year in the United States, and that there are over
8,000 oral cancer-related deaths annually. In most people, by the time it is
diagnosed, oral cancer has usually metastasized, resulting in a poor prognosis.
Those who do survive frequently undergo significantly disfiguring surgery. Data
published in 1994 by a major dental publication quotes a Harvard University
public health researcher as stating that the annual cost of treating oral cancer
in the United States is $3.7 billion; far higher than the $665 million
previously estimated. The researcher further states that ORATEST(TM) has the
potential of reducing this cost by approximately 60% because of the product's
ability to identify oral cancer lesions far earlier than they are being found
today. The earlier these lesions are identified, the greater the chances of
reducing morbidity and mortality. The Company's licensee, Block Drug Company,
Inc., is marketing ORATEST(TM) under the name ORASCREEN(TM) in the UK. The
Company has chosen to use the name "ORATEST(TM)" in the United States and other
countries. See also "Business - Government Regulations" and "Business - Patents
and Trademarks" and "Business - Licensing."
Sales of ORATEST(TM) represented less than one percent of the Company's
gross sales during the 1996 fiscal year.
NEW PRODUCTS. At the national American Dental Association meeting in
October 1995, the Company introduced QUIK FLOSS, a unique dental flosser. QUIK
FLOSS is the only clinically proven dental flosser on the market. The patented
Y-shape allows for one-handed flossing and provides superior access to even the
toughest spots, like back teeth. QUIK FLOSS is being marketed in a manner
similar to the successful strategy that is employed by ZILACTIN(R).
GOVERNMENT REGULATIONS
GENERAL. The development, manufacture and sale of pharmaceutical products
are subject to comprehensive and increasing governmental regulation in the areas
of practice, safety and efficacy, testing, advertising and promotion, labeling
and other matters. To be marketed over-the-counter, a new drug must either be
approved by the FDA in response to a New Drug Application ("NDA") or be the
subject of an applicable FDA monograph designating the product generally
recognized and effective or, if no monograph exists, be "grandfathered" as a
result of the use of the product prior to December 5, 1975. The process of
obtaining approval of an NDA for a new drug usually takes years and involves the
expenditure of substantial resources. This approval process includes laboratory
testing of the product in animals to determine safety, efficacy and potential
toxicity, the filing with the FDA of a Notice of Claimed Investigational
Exemption for use of a New Drug prior to the initiation of a double-blind
clinical testing of new drugs, and testing of the new drug in humans.
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ZILACTIN(R). ZILACTIN(R) is marketed by the Company as a treatment for the
symptomatic relief of canker sores (oral mucosal ulcers and lesions), cold sores
and fever blisters. The Company is not required to file an NDA covering these
uses of ZILACTIN(R); however, the Company may not market ZILACTIN(R) as a
treatment of genital herpes or shingles unless NDAs for such purposes are filed
and approved.
ORATEST(TM). In 1994, the FDA approved an Investigational New Drug
application ("IND") for the ORATEST(TM) product. This approval is the first step
in securing an NDA which will enable the Company to market the ORATEST(TM)
product in the United States. The IND approval also allows the Company to
manufacture the ORATEST(TM) product domestically for use in clinical studies.
See also "Business Manufacturing and Distribution."
All ORATEST(TM) related patents that have been issued, those that will be
issued upon pending applications and those to which the Company has gained
exclusive rights will have their lives extended as a result of the NDA. These
include the patent owned by the National Technical Information Service ("NTIS"),
a patent recently issued covering a more stable formula and two other patents
that are expected to be issued upon pending applications.
The Company received regulatory approval to market the ORATEST(TM) product
in Canada and Australia in 1993. The Medicine Control Agency ("MCA"), which is
the regulatory authority in the UK, has also granted approval for the
ORATEST(TM) product to be marketed in the UK under the name ORASCREEN. The
Company is proceeding with additional regulatory approval by the European Union
("EU"). The EU has developed a procedure to allow more rapid approval of
pharmaceutical products in all member countries. The procedure requires one EU
country to approve a product and then act as the product's advocate to the rest
of the EU. The MCA of the UK will be the Company's advocate to the EU for the
approval of the ORATEST product. Before the EU approval process can begin, MCA
has requested updating and modification of selected segments of the UK product
license which MCA believes will facilitate acceptance in the other countries.
The Company is currently working with MCA to complete these segments.
The Canadian production facility that is currently producing ORATEST(TM) is
regulated and approved by the Canadian government's Health Protection Branch
("HPB"). The HPB has a working agreement with MCA, which permits the ORATEST(TM)
produced in Canada to be distributed in Australia, the UK and other European
countries.
The Company is also working with a manufacturer in the UK who will provide
ORASCREEN for European sales when such sales are approved by the local
regulatory authorities.
Contact has also been made outside of the European Union. Interest has been
expressed in making ORATEST(TM) available in Hungry and Poland. Contact has been
established with the regulatory agencies of both countries and drug approvals
are normally much less time consuming in these countries than in the UK or the
US.
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PATENTS AND TRADEMARKS
Patents. The Company currently holds three US patents and one Canadian
patent for ZILACTIN(R). The ZILACTIN(R) formula was granted a US patent on
August 25, 1981, a US patent covering extended applications of the basic
ZILACTIN(R) formula was granted on April 26, 1983, and a US patent covering the
film-forming properties of the ZILACTIN(R) formula containing an added medicinal
ingredient was issued on January 14, 1992. Such patents were granted for periods
of seventeen years from the grant dates and give the Company the right to
exclude others from making, using or selling the patent-protected products in
the United States. The Canadian patent, which covers the composition and
extended applications, was granted on December 3, 1985. Patent applications are
currently pending in numerous foreign countries and patents are expected to be
issued on these applications in the near future. See "Item 3. Legal Proceedings
- - Colgate-Palmolive."
In 1992, the Company acquired an exclusive license to the rights of the
Department of Commerce's patent regarding a certain method of substantially
eliminating false positive tests when using ORATEST(TM) for the detection of
oral cancer. In 1994, the Company acquired the rights to a second patent which
described a stable form of the liquid used in the oral cancer test. A third and
fourth patent have been applied for in the US and in numerous foreign countries
covering still other applications for the oral cancer test. See also "Business -
Government Regulations - ORATEST(TM)."
Trademarks. The Company registered the trademark ZILACTIN(R) with the
United States Patent and Trademark Office effective July 9, 1985. The Company
has also registered the trademarks "ZILA(R)", ZILACTIN(R)-B, ZILADENT(R) and
ZILACTIN(R)-L in the United States. The Company believes that widespread use of
the "ZILA(R)" trademark as a dominant prefix to several product names will
afford reasonable protection for the "ZILA(R)" trademark as well as other marks
in which "ZILA(R)" is a dominant prefix. The Company is also taking steps under
applicable international treaties to register the "ZILA(R)" trademark. The names
"ZILA(R)" and ZILACTIN(R) are registered in Canada.
The Company is marketing ORATEST(TM) under the name ORASCREEN(TM) in the UK
and as a result has registered ORASCREEN(TM) as a trademark in the EU. The
Company is still evaluating the use of other names for the ORATEST(TM) product
when it is introduced in the United States and other countries. Once a name is
selected, the Company will take the appropriate steps to protect the use of such
name.
MARKETING
The Company employs three strategies to market its Over-The-Counter (OTC)
oral care products. The primary strategy has been to educate several key groups
of health professionals on the uniqueness and effectiveness of each of the
products. Targeted efforts to build awareness of the product line are made by
direct mailings and attending medical conventions. The second method is to
participate in retailer-driven activities designed to make the OTC products
available at more outlets and to offer value to consumers at the retail store
level. The third strategy is to build consumer awareness of the OTC products
through focused efforts like targeted advertising.
During fiscal year 1996, the Company participated in thirty-seven meetings
geared to dental, pharmacy and medical professionals. At these meetings, Company
representatives have an opportunity
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to interact with and distribute information to thousands of interested health
professionals. The Company believes that superior efficacy and targeted
marketing efforts are the reason that three independently conducted pharmacist
research studies reported that ZILACTIN(R) is the number one OTC product
pharmacists recommend for treating canker sores and cold sores.
Throughout 1996, members of management met with key customers to present
two new products to get feedback on the Company's marketing programs. These
meetings resulted in retailer acceptance of the new products and the development
of sales building programs that have been implemented. Clear sales objectives
were agreed to and distributed to the retail broker network at the beginning of
the year. The broker network was improved in a couple underdeveloped markets
poising the Company for continued sales growth. The sales results for the year
are reviewed below.
The Company nationally launched two new products in the second half of
fiscal year 1996. ZILACTIN(R)-LIP BALM expanded out of its test market to
availability to retailers in most parts of the country. Initial feedback has
been positive and a major objective of the next fiscal year is to expand the
number of retailers carrying the item. QUIK FLOSS, a disposable flosser, was
introduced by Zila late in the 1996 fiscal year with initial acceptance among
several large customers. Zila licenses QUIK FLOSS under a comprehensive
marketing and distribution agreement. As with ZILACTIN LIP BALM, a major
objective for QUIK FLOSS is to expand the distribution base in the upcoming
year.
Several effective and efficient programs designed to build consumer
awareness of the product line were implemented in the 1996 fiscal year. Among
the most notable were a heavily-funded trade advertising campaign geared to
various health professionals and a comprehensive couponing program that offered
purchase incentives to consumers. The trade advertising generated thousands of
requests for patient samples and patient pamphlets on the products.
The ORATEST(TM) product was introduced in Canada during the third quarter
of 1993. The demographics of Canada enabled the Company to test various
marketing strategies in connection with the introduction of ORATEST(TM). Through
test marketing, the Company acquired information regarding insurance coverage,
training tapes, advertising, public relations and the perspective of dentists
and other professionals. The Company believes that this knowledge will be
invaluable as the Company prepares for the introduction of the ORATEST(TM)
product in the EU and the United States.
The marketing effort for ORATEST(TM) in Canada has been a multilevel
strategy designed to educate patients, dentists, specialists and staff on the
accuracy of the ORATEST(TM) product and the strong benefits of the early
detection of oral cancer. Health professionals have become aware of ORATEST(TM)
through a synergistic approach which includes medical conventions, direct mail,
journal advertising and some timely (independently authored) articles on the
impact of oral cancer and the benefits of early intervention. The Company has
also been able to place educational advertisements discussing the ORATEST(TM)
product adjacent to oral cancer articles in leading Canadian dental
publications.
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MANUFACTURING AND DISTRIBUTION
The Company employs outside manufacturers to produce and package all of its
products. Universal Packaging Systems ("Universal") of Chino, California
manufactures ZILACTIN(R), ZILACTIN(R)-L and ZILACTIN(R)-B; Arizona Natural
Resources of Phoenix, Arizona manufactures ZILACTIN(R)-LIP, and Clinipad
Corporation ("Clinipad") of Charlotte, North Carolina manufactures all sample
packets. The Company places orders with each supplier based on its anticipated
needs for the products. Packaging components are supplied to each manufacturer
by the Company.
In March 1993, the Company entered into an agreement with the Germiphene
Corporation ("Germiphene") of Brantford, Ontario, Canada, for the manufacture
and sale of the ORATEST(TM) product. Germiphene produces and packages the
ORATEST(TM) product at its facility and handles the marketing to Canadian
dentists and physicians. Germiphene also produces and packages the ORATEST(TM)
product under the ORASCREEN(TM) name for distribution in the UK by the Company's
licensee, Block Drug, Inc. The Company has also identified a US-based company
with the capacity to manufacture the ORATEST(TM) kits. See "Business -
Licensing"
In order to ensure an available and stable supply of toluidine blue, the
active ingredient in the ORATEST(TM) product, the Company established its own
manufacturing facility. In 1995, the Company leased a facility and hired a
chemist to oversee the project. This manufacturing facility is now operating in
accordance with "Good Manufacturing Practices" and the rules and regulations of
the FDA as confirmed by experienced industry consultants. The FDA has made an
appointment to inspect the facility. The Company is confident that the facility
will pass inspection. Several test batches of toluidine blue have already been
prepared at the Company's manufacturing facility and all have met the
specifications given the FDA with regard to the finished active ingredient.
With respect to the ingredients for the Company's products other than
ORATEST(TM), the Company does not anticipate any difficulty in obtaining the
ingredients necessary for the manufacture of such products because such
ingredients are readily available from numerous sources. In the event that any
vendor is unable to continue the manufacture of the Company's products, the
Company has other qualified manufacturers who are prepared to assist the Company
with its manufacturing needs.
In general, all the Company's products are shipped by the respective
manufacturers to the Company's facilities in Phoenix, Arizona where they are
warehoused and distributed to pharmaceutical wholesalers, drug and food store
chains, dentists and other customers. Because the Company maintains an inventory
of the products from which the Company fills orders, the Company does not have
and has not had a backlog of customer orders.
The Company has engaged the services of twenty-two independent sales
representatives to handle the solicitation of orders for its products primarily
from pharmaceutical wholesalers and chains, food wholesalers and chains, rack
jobbers and convenience stores. These representatives are compensated solely on
a commission basis, receiving a 7 1/2% commission on their sales of the products
as compensation for their sales efforts. Company personnel periodically
accompany these representatives on calls to key accounts. The Company has a
salaried Director of Sales to manage and coordinate the independent sales
representatives.
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Sales to McKesson Corporation ("McKesson"), a wholesale distributor,
accounted for approximately 12.0% of total revenues in fiscal year 1996.
McKesson is a distributor with approximately 36 locations nationwide. If
McKesson were to discontinue the distribution of the Company's products, the
Company believes that other distributors would increase their purchases. No
other customer of the Company accounted for more than 10% of the Company's total
revenues during the 1996 fiscal year.
COMPETITION
The pharmaceutical industry is highly competitive. A number of companies,
almost all of which have greater financial resources, marketing capabilities and
research and development capacities than the Company, are actively engaged in
the development of products that may compete with the Company's products. The
pharmaceutical industry is characterized by extensive and ongoing research
efforts, which may result in development by other companies of products
comparable or superior to any that are now on the market including those sold by
the Company.
The Company is unaware of any products currently on the market that provide
treatment as effective as ZILACTIN(R), ZILACTIN(R)-B and ZILACTIN(R)-L for the
treatment of their indicated uses. Although there can be no assurance in this
regard, management of the Company believes that there is a substantial potential
demand for products that are effective in the treatment of these conditions.
Based upon clinical studies and comments received by the Company from physicians
and dentists, management believes that its products will be able to meet much of
that demand.
Numerous products exist for treatment of HSV I symptoms (i.e., cold sores,
fever blisters), including the following products: Orajel and Tanac by Commerce
Drug Company, Herpicin-L by Campbell Laboratories, Inc., Proxigel by Reed and
Carnrick, and Carmex by Carma Lab, Inc. The Company does not believe that any of
these treatments have achieved a dominant market share. Based upon clinical
studies and clinical observations, the Company believes that ZILACTIN(R),
ZILACTIN(R)-B and ZILACTIN(R)-L will provide more effective symptomatic relief
of HSV I infections than the treatments of the Company's competitors.
ORATEST(TM), which the Company believes to be the world's first commercial
oral cancer diagnostic, was introduced in Canada in May 1993 and in Australia in
August 1993. During the 1995 fiscal year, the Company entered into a license
agreement for the distribution of the ORATEST(TM) product in the United Kingdom
(under the name ORASCREEN(TM)) and in other countries in the EU plus Australia
and New Zealand. The introduction of the ORATEST(TM) product in the United
States will begin as soon as FDA approval is obtained.
The Company relies on outside sources for its research and development
needs in much the same manner as its outside manufacturers. The research takes
one of two forms: clinical or laboratory development. Clinical studies currently
are under way at fourteen facilities on the use of the ORATEST(TM) product as an
oral cancer diagnostic and a site delineation device for biopsy and surgical
excision. These studies are being conducted by universities and public and
Veteran Administration facilities.
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LICENSING
In certain instances the Company has expanded the distribution of its
products by licensing certain of its patents to other companies. In 1990, the
Company licensed Bausch & Lomb to distribute the Company's entire oral care line
(except for ORATEST(TM)) in markets outside of the United States with the right
to use the same names, formulas and packaging used by the Company. ZILACTIN(R)
was introduced by Bausch & Lomb in Canada in January 1991 and, under the terms
of the licensing agreement, the Company receives royalty payments based upon a
percentage of the licensed products' net sales. This agreement terminates upon
the expiration of the Company's patents, unless terminated earlier by the
parties in accordance with the terms of the agreement. Since 1990, the Company
and Bausch & Lomb have amended this agreement in a manner that limits Bausch &
Lomb's distribution rights to Canada. Consequently, the Company now has the
ability to expand the distribution of its products in other international
markets.
In 1991, the Company acquired ownership of certain exclusive rights to the
patents, technology and processes embodying the formulation and the application
of the ORATEST(TM) product. The Company is obligated to pay royalties to the
NTIS based upon certain usages of the ORATEST(TM) product. During the 1995
fiscal year, the Company entered into a licensing agreement with Block Drug
Company, Inc. ("Block") pursuant to which Block was given the right to
manufacture and sell ORATEST(TM) in certain markets not previously pursued by
the Company. The Company will receive from Block royalties equal to a set
percentage of the net sales of ORATEST(TM) by Block.
On January 18, 1996, the Company entered into an agreement in which The
Procter & Gamble Company ("P&G") agreed to market and distribute ORATEST(TM) in
the United States and 55 other countries worldwide, pending needed regulatory
approvals. On April 3, 1996, P&G informed the Company that it was exercising its
rights to terminate such agreement. Such termination was effective on July 1,
1996. P&G informed the Company that its decision to terminate the agreement was
based upon P&G's decision to refocus its resources on its core product line.
Under the terms of its agreement with Zila, P&G had the right to terminate
such agreement upon 90-days written notice. Notwithstanding such termination,
P&G was required to pay certain nonrefundable licensing fees to Zila during the
90-day termination period. Based upon the decision of P&G to terminate its
agreement with Zila, Zila began to consider other alternatives to market the
ORATEST(TM) product. In this regard, Zila entered into a merger agreement with
Bio-Dental. See "Business - Merger with Bio-Dental Technologies Corporation."
EMPLOYEES
The Company currently employs twenty-one persons on a full-time basis: four
executive officers; three persons in accounting; two persons in purchasing,
product distribution and inventory control; three clerical persons; four persons
in manufacturing and product development, and five persons in marketing and
sales.
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MERGER WITH BIO-DENTAL TECHNOLOGIES CORPORATION
Summary. The Company has entered into a Merger Agreement dated August 8,
1996 with Bio-Dental Technologies Corporation ("Bio-Dental") pursuant to which
Bio-Dental would merge (the "Merger") into a specially-created, wholly owned
subsidiary of Zila (the "Merger Sub"). Bio-Dental is a dental supply company
which, through its wholly owned subsidiaries, markets and distributes a broad
range of professional dental supplies and computer-based dental technology
systems.
Upon the Effective Date (defined below) of the Merger: (i) Bio-Dental
will become a wholly-owned subsidiary of Zila; (ii) the stockholders of
Bio-Dental, by such merger, will become stockholders of Zila, as each presently
outstanding share of common stock, $.01 par value, of Bio-Dental (the
"Bio-Dental Common Stock") will be converted into 0.825 shares of the common
stock, $.001 par value, of Zila (the "Common Stock"); provided that if the
average closing bid price for Common Stock as reported by The Nasdaq SmallCap
Market during the ten trading days ending on the trading day that is five
trading days prior to the closing date of the Merger (the "Calculation Period")
is less than $6.00 per share, each share of Bio-Dental Common Stock will be
converted into a number of shares of Common Stock that is equivalent in value to
$4.95 as calculated based on the average closing bid price for Common Stock as
reported by The Nasdaq SmallCap Market during the Calculation Period, and
provided further that if the average closing bid price for Common Stock as
reported by The Nasdaq SmallCap Market during the Calculation Period is greater
than $7.75 per share, each share of Bio-Dental Common Stock will be converted
into the greater of (A) 0.75 shares of Common Stock, or (B) a number of shares
of Common Stock that is equivalent in value to $6.39 as calculated based on the
average closing bid price for Common Stock as reported by The Nasdaq SmallCap
Market during the calculation period; (iii) each outstanding option to purchase
Bio-Dental Common Stock will be converted into an option to purchase a number of
shares of Common Stock equal to the number of shares of Common Stock which the
holder of such option would have received in the Merger in exchange for the
shares of Bio-Dental Common Stock subject to such option if such option had been
exercised immediately prior to the Effective Date, at an exercise price per
share determined by dividing the exercise price per share of Bio-Dental Common
Stock subject to such option, as in effect immediately prior to the Effective
Date, by a fraction the numerator of which is the number of shares of Common
Stock subject to such option immediately after the Effective Date and the
denominator of which is the number of shares of Bio-Dental Common Stock subject
to such option immediately prior to the Effective Date and rounding the
resulting per-share exercise price up to the nearest whole cent; and (iv) the
separate existence of the Merger Sub (except as may be continued by operation of
law) shall cease, and Bio-Dental shall continue as the surviving corporation.
The "Effective Date" shall be the date that the Articles of Merger are filed
with and approved by the Delaware Secretary of State and the California
Secretary of State.
Following the Merger, Zila will continue the present operations of
Bio-Dental under the name "Bio-Dental Technologies Corporation" or such other
name as may be determined.
Reasons for the Merger. In the discussions that led to the signing of the
Merger Agreement, Zila and Bio-Dental identified a number of potential joint
benefits resulting from the Merger, as well as a number of benefits to Zila and
Bio-Dental individually. The potential benefits of the Merger accruing to both
Zila
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<PAGE> 14
and Bio-Dental include: (i) improved sales performance as a result of greater
financial strength and stability; (ii) mutual benefits resulting from the
distribution of Zila's oral cancer diagnostic, ORATEST(TM), if FDA approval is
received; (iii) the combination of complementary businesses and resources; (iv)
improved competitive position through increased revenues and resources; (v)
enhanced ability to attract and retain skilled employees; (vi) cost savings
through economies of scale resulting from a combined company with greater
revenues and resources; and (vii) the elimination of redundancies which result
from the separate existence of two public companies and the achievement of cost
savings as a result.
In addition to the potential benefits described above, the Board of
Directors of Zila identified a number of potential benefits accruing to Zila
individually as a result of the Merger, including: (i) the opportunity to
utilize Bio-Dental's existing marketing and distribution resources; (ii) the
opportunity to increase the sales of Zila products to dental health care
professionals served by Bio-Dental; (iii) diversification of Zila's businesses
and product offerings; and (iv) cost savings through increased vertical
integration of Zila's business. The Board of Directors of Zila also considered a
number of other factors in its deliberations concerning the Merger.
The potential benefits of the Merger to Zila and Bio-Dental depend to a
substantial degree upon the ability of Zila and Bio-Dental to market and
distribute ORATEST(TM) in the United States. Zila has not yet received FDA
approval for the sale of ORATEST(TM) in the United States, and there can be no
assurance that such approval will be received. If the FDA does not approve
ORATEST(TM) for sale in the United States, it may be difficult or impossible for
Zila and Bio-Dental to realize many of the potential benefits of the Merger.
Potential Adverse Consequences of Merger. Notwithstanding the belief of the
Boards of Directors of Zila and Bio-Dental regarding the potential benefits of
the Merger, stockholders should realize that there may be certain negative
consequences of the Merger. The integration of the businesses of Bio-Dental and
Zila will require substantial attention of the companies' management, and the
diversion of the attention of management from other aspects of the companies'
businesses, and any difficulties encountered in the implementation process,
could have an adverse impact on the businesses of Zila and Bio-Dental. In
addition, the issuance of Common Stock in connection with the Merger will have a
dilutive effect on existing Common Stock, and there is no assurance that the
Merger will result in sufficient revenue growth or other business synergies to
offset such dilutive effect.
Stockholder Approval. The affirmative vote of the holders of a majority of
the outstanding shares of Bio-Dental Common Stock is required for adoption of
the Merger Agreement. The close of business on September 6, 1996 has been fixed
by Bio-Dental's Board of Directors as the record date for determination of the
holders of Bio-Dental Common Stock entitled to notice of and to vote. On such
date, there were 6,444,400 shares of Bio-Dental Common Stock outstanding.
Bio-Dental's present directors and officers (and their affiliates) control
approximately 5.3 percent of the outstanding Bio-Dental Common Stock and have
agreed to vote such stock FOR approval of the Merger Agreement and the Merger.
The Zila stockholders are not required to approve the Merger.
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<PAGE> 15
Conditions to the Merger. In addition to the requirement that the approval
of the stockholders of Bio-Dental be received, consummation of the Merger is
subject to a number of other conditions that, if not satisfied or waived, may
cause the Merger not to be consummated and the Merger Agreement to be
terminated. Each party's obligation to consummate the Merger is conditioned
upon, among other things, the accuracy of the other party's representations, the
other party's performance of its covenants, the absence of a material adverse
change with respect to the other party, favorable legal opinions (including
opinions to the effect that the Merger will be treated for federal income tax
purposes as a tax-free reorganization), and the absence of legal action
preventing consummation of the Merger.
Zila's obligation to consummate the Merger will be further conditioned upon
(i) the Merger being accounted for as a "pooling of interests," and (ii) holders
of no more than five percent (5%) of the Bio-Dental Common Stock being eligible
to exercise dissenters' rights of appraisal under California law. See
"Accounting Treatment."
Options. Upon consummation of the Merger, each outstanding option to
purchase Bio-Dental Common Stock will be converted into an option to purchase a
number of shares of Common Stock, at an exercise price per share, determined
pursuant to an established formula.
Termination and Break-up Fees. The Merger Agreement may be terminated by
mutual agreement of both parties or by either party (i) as a result of a
material breach by the other party of any covenant or agreement set forth in the
Merger Agreement; (ii) if the timely satisfaction of any of its conditions for
closing the Merger has become impossible; (iii) if any of its closing conditions
have not been satisfied at the "Scheduled Closing Time" (as defined below); or
(iv) if the Closing has not taken place on or before the "Final Date" (as
defined below).
The term "Scheduled Closing Time" is defined in the Merger Agreement as
a date to be mutually agreed upon by Zila and Bio-Dental which shall be no later
than the third business day following the BioDental shareholder meeting. The
term "Final Date" is defined in the Merger Agreement as March 15, 1997, except
that if a temporary, preliminary or permanent injunction or other order by any
federal or state court that would prohibit or otherwise restrain consummation of
the Merger is issued and in effect on such date, and such injunction has not
become final and nonappealable, either Bio-Dental or Zila may, by giving the
other written notice there of on or prior to March 15, 1997, extend the time for
consummation of the Merger up to and including the earlier of the date such
injunction becomes final and nonappealable or May 15, 1997, so long as
Bio-Dental or Zila shall, at its own expense, use its best efforts to have such
injunction dissolved.
In the event of a termination by Bio-Dental of the Merger Agreement due
to the failure of certain closing conditions deemed by the parties to be within
Zila's reasonable control, Zila would be required to pay Bio-Dental the greater
of (i) the amount of Bio-Dental's documented out of pocket costs and expenses
incurred through the date of termination in connection with the Merger Agreement
and the transactions contemplated thereby, or (ii) $100,000. In the event of a
termination by Zila, due to the failure of any of certain conditions deemed by
the parties to be within Bio-Dental's reasonable control,
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<PAGE> 16
Bio-Dental would be required to pay Zila the greater of (i) the amount of Zila's
documented out of pocket costs and expenses incurred through the date of
termination in connection with the Merger Agreement and the transactions
contemplated thereby, or (ii) $100,000. In addition, Bio-Dental would be
required to pay Zila the amount set forth in the preceding sentence if
Bio-Dental's stockholders fail to approve the Merger by sufficient votes to
preclude the possibility of more than five percent (5%) of the shares of
Bio-Dental Common Stock becoming dissenting shares and (i) Bio-Dental's Board of
Directors failed to recommend the Merger or withdrew its recommendation or (ii)
a third party announced its intention to acquire Bio-Dental prior to the
Bio-Dental stockholders' vote on the Merger.
Accounting Treatment. The Merger is intended to be treated as a pooling of
interests for accounting purposes. In connection with the Merger, Zila is to
receive an opinion from Deloitte & Touche LLP, the independent accountants for
Zila, that the Merger should be accounted for as a pooling of interests. Zila's
obligation to consummate the Merger is conditioned upon, among other things,
this accounting treatment. The Company is seeking preclearance approval from the
Securities and Exchange Commission that certain transactions by Bio-Dental will
not preclude accounting for the merger as a pooling of interests. The Securities
and Exchange Commission is reviewing information supplied by the Company and
Bio-Dental, but has not yet rendered a final determination.
RISKS AND UNCERTAINTIES
No Assurance of Profitable Operations. For the fiscal years ended July 31,
1996, 1995 and 1994, Zila had net losses of $827,337, $862,920 and $995,205,
respectively, compared with net income of $369 949 for the fiscal year ended
July 31, 1993. Zila has had profitable operations ln only one of its last four
fiscal years. There can be no assurance that Zila, or the combined companies (if
the Merger is consummated) will, in the future, return to profitability or that
Zila's plan for expanded operations of the combined entities will be successful.
Competition; Research and Development. The pharmaceutical industry is
highly competitive. A number of companies, many of which have greater financial
resources, marketing capabilities and research and development capacity than
Zila, are actively engaged in the development of products similar to those
products produced and marketed by Zila. Zila relies on outside sources for its
on-going research and development needs in much the same manner as Zila relies
on outside sources for manufacturing. The pharmaceutical industry is
characterized by extensive and on-going research efforts. Other companies may
succeed in developing products superior to those marketed by Zila. Such
companies may even succeed in developing a cure for the herpes simplex virus,
which would substantially reduce the potential market for symptomatic treatments
such as Zila's product ZILACTIN(R).
ORATEST(TM) Approval. Zila has not yet received FDA approval for
ORATEST(TM), and management is unable at this time to determine whether such FDA
approval may be forthcoming or, if so, when ORATEST(TM) may begin to be marketed
in the United States. If the FDA does not approve ORATEST(TM) for the United
States market, it could have a material adverse effect on the business of Zila
and, following the Merger (if the Merger is consummated), Bio-Dental, and the
market price for Common Stock would likely be materially adversely affected as
well. In addition, Zila has made a significant financial
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<PAGE> 17
investment to secure FDA approval of ORATEST(TM) and to prepare for the
introduction of ORATEST(TM) to the United States market, and failure of the FDA
to approve ORATEST(TM) would make it impossible fOR Zila to recoup this
investment through sales of ORATEST(TM) in the United States. If FDA approval OF
ORATEST(TM) is not received, it would also make it difficult or impossible for
Zila and Bio-Dental To achieve many of the benefits of the Merger.
Combination of the Companies. If the Merger is consummated, the combination
of the businesses of Zila and Bio-Dental will require substantial dedication of
management resources, which will temporarily distract attention from the
day-to-day businesses of the combined company. There can be no assurance that
the combination will be completed without disrupting Zila's and Bio-Dental's
businesses. Should Zila and Bio-Dental not be able to combine their businesses
in a timely and coordinated fashion, it could have a material adverse impact on
operating results. Moreover, the ability of the combined company to retain key
management, technical, sales and marketing personnel will be critical to the
combined company's future operations. In addition, the anticipated combination
of the two companies may cause uncertainties, hesitation and possible
dissatisfaction among customers and potential customers of Zila or Bio-Dental.
Dependence on Proprietary Rights. Zila relies on a combination of patent,
copyright trademark and trade secret protection, nondisclosure agreements and
licensing arrangements to establish and protect its proprietary rights. Zila
owns and has exclusive licenses to a number of United States and foreign patents
and patent applications and intends to seek additional patent applications as it
deems appropriate. There can be no assurance that patents will issue from any of
these pending applications or, if patents do issue, that any claims allowed will
be sufficiently broad to cover Zila's products or to effectively limit
competition against Zila. In addition, there can be no assurance that any
patents that may be issued to Zila will not be challenged, invalidated or
circumvented, or that any rights granted thereunder would provide proprietary
protection to, or effectively limit competition against, Zila. Zila also has a
number of trademarks. There can be no assurance that litigation with respect to
trademarks will not result from the use of registered or common law marks, or
that, if litigation against Zila were successful, any resulting loss of the
right to use a trademark would not reduce sales of Zila's products in addition
to the possibility of a significant damages award. Although Zila intends to
defend the proprietary rights, policing unauthorized use of proprietary
technology and products is difficult, and there can be no assurance that Zila's
efforts will be successful. In addition, the laws of certain foreign countries
may not protect the proprietary rights of Zila to the same extent as do the laws
of the United States.
Possible Claims Relating to Products. Zila could be exposed to possible
claims for personal injury resulting from allegedly defective products
manufactured by third parties with which it has entered into manufacturing
agreements. Zila maintains product liability insurance coverage for claims
arising from the use of all its products. However, there can be no assurance
that Zila will not be subject to product liability claims in excess of its
insurance coverage. Any significant product liability claims not within the
scope of Zila's insurance coverage could have a material adverse effect on Zila.
Possible Volatility of Common Stock Price. The market price for Common
Stock has fluctuated significantly in the past. Management of Zila believes that
such fluctuations may have been caused by
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<PAGE> 18
announcements of new products, quarterly fluctuations in the results of
operations and other factors, including changes in conditions of the
pharmaceutical industry in general. Stock markets have experienced extreme price
volatility in recent years. This volatility has had a substantial effect on the
market prices of securities issued by Zila and other pharmaceutical and health
care companies, often for reasons unrelated to the operating performance of the
specific companies. Zila anticipates that the market price for Common Stock may
continue to be volatile.
ADDITIONAL INFORMATION
On December 27, 1993, the Company announced that it had signed a letter of
intent to acquire Oxycal Laboratories, Inc., a privately held company located in
Prescott, Arizona. The Company expected to finalize the terms of the acquisition
during the fourth fiscal quarter of 1994; however, due to certain events outside
of the Company's control, the acquisition has not been consummated. This
acquisition has been put on hold due to the Company's potential merger with
Bio-Dental. There can be no assurances that discussion regarding the Oxycal
Laboratories acquisition will resume or that it will be successfully
consummated.
ITEM 2. PROPERTIES
On January 4, 1991, the Company purchased a 16,000 square foot building
located at 5227 North Seventh Street, Phoenix, Arizona 85014-2800. The Company
moved its corporate headquarters to this location on February 8, 1991. The
purchase price of the building was approximately $600,000. The Company paid 25%
of the purchase price in cash and obtained a loan for the balance of the
purchase price. The Company has refinanced the mortgage which matured April 1,
1996 with Bank One, Arizona (the "Bank"). The terms of the refinancing include
interest to be payable monthly on the unpaid balance at the Bank's prime rate
plus two and one quarter percent (2.25%), to move with prime on a daily basis.
Within the first twelve months of refinancing, the Company has the option to
convert to a fixed rate of four and one quarter percent (4.25%) over the
Treasury rate. The refinanced mortgage loan is amortized over 20 years and is
due on April 1, 2001.
The Company also leases 3,502 square feet for a manufacturing facility in
Phoenix, Arizona. This facility will produce toluidine blue which will be used
in the manufacture of ORATEST(TM). The facility is leased under a three year
agreement which expires April 30, 1999, and is located in an area with property
available for expansion. The agreement has an option to renew for an additional
five years. Monthly lease payments are $1,922. The Company does not currently
intend to invest in any other plants or manufacturing facilities. The Company's
products are currently manufactured by Universal, Clinipad, Arizona Natural
Resources and Germiphene. Together with the Company's laboratory facilities, the
Company believes that these manufacturers are capable of performing all
necessary production functions. See "Item 1. Business-Manufacturing and
Distribution."
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<PAGE> 19
ITEM 3. LEGAL PROCEEDINGS
Colgate-Palmolive. On April 13, 1994, Zila filed a complaint in the United
States District Court for the District of Arizona, titled Zila Pharmaceuticals,
Inc. v. Colgate-Palmolive Company ("Colgate"), CIV No. 94-0756 PHX-EHC. The
complaint was served on Colgate on May 10, 1994. The complaint alleges that
Colgate's Orabase Gel product infringes the Company's U.S. Patent No. 5,081,158
(the "'158 Patent") which covers Zila's non-prescription, film-forming,
bioadhesive medications sold in food and drug stores nationwide. The complaint
seeks to enjoin Colgate's manufacture and distribution of Orabase Gel and
requests an award of damages in an appropriate amount. On May 27, 1994, Colgate
filed its answer to Zila's complaint, denying infringement and asserting that
the '158 Patent is invalid and unenforceable. The Company has received an
opinion of its patent counsel that the '158 Patent was duly and validly issued,
that the Patent is valid and enforceable and that Colgate is infringing the '158
Patent by its manufacture and distribution of the Orabase Gel product. The
Company is vigorously prosecuting its claims for injunctive relief and damages
against Colgate. The Court has denied Colgate's Motions for Summary Judgment
that the Patent is invalid. The parties are completing pretrial procedures. The
Court has scheduled a Pretrial Conference for November 4, 1996. It is expected
that the Court will schedule the case for trial in early 1997.
CTM. On March 7, 1996, the Company purchased one-third of the
outstanding common stock of CTM Associates ("CTM") from Raymond J. Tucci
("Tucci"), one of the three directors and shareholders of CTM. On June 3, 1996,
the Company announced that it acquired the remaining two-thirds of the
outstanding shares of CTM. The only significant asset of CTM was its right to
receive certain royalties from sales of ORATEST(TM) (formerly known as OraScan).
Accordingly, the acquisition of CTM eliminates the Company's obligation to pay
royalties to CTM equal to 7.5% of the revenues generated from sales of
ORATEST(TM), as well as the elimination of monthly consulting fees and expenses
of approximately $10,000 per month. The acquisition also results in a complete
settlement of the litigation between CTM and the Company. As consideration for
the acquisition of all of the CTM common stock, the Company issued a total of
869,118 shares of the Company's common stock, paid $125,000, and assumed certain
liabilities of approximately $70,000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matter to a vote of its security holders
during the fourth quarter of the fiscal year covered by this report.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth the information regarding the executive
officers of the Company.
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<PAGE> 20
<TABLE>
<CAPTION>
Name Age Position
-----------------------------------------------
<S> <C> <C>
Joseph Hines 68 President, Chief Executive Officer
and Director
Clarence J. Baudhuin 67 Executive Vice President of Finance and
Administration, Treasurer and Director
Edwin Pomerantz 66 Vice President - Regulatory & Technical
Affairs
Janice L. Backus 47 Vice President and Secretary
Rocco Anselmo 47 Vice President and General Manager of
Zila Pharmaceuticals.
</TABLE>
Joseph Hines has served as President and Chief Executive Officer of the
Company since 1983. From 1976 until 1983, Mr. Hines owned and operated Desert
Valley Companies, Inc., a management consulting firm headquartered in Phoenix,
Arizona. From 1966 until 1976, Mr. Hines served as chief executive officer of
several subsidiaries of Dart Industries, formerly Rexall Drug and Chemical
Company.
Clarence J. Baudhuin has served the Company in his present capacity since
1983. Mr. Baudhuin also served as Secretary of the Company until April 1989.
From May 1981 until July 1983, Mr. Baudhuin acted as Senior Vice President of
Finance for Mattel Toy Company. Prior to that time, Mr. Baudhuin was Senior Vice
President of the Chemical-Plastics Group of Dart Industries. Mr. Baudhuin is a
certified public accountant.
Edwin Pomerantz joined the Company in March 1984 as Vice President of
Marketing, in 1995 his title was changed to Vice President - Regulatory &
Technical Affairs in order to better describe the duties performed by Mr.
Pomerantz. From 1982 until 1984, Mr. Pomerantz was a partner and half-owner of
Golden Memories, Inc., a company engaged in the photographic business. From 1975
to 1982, Mr. Pomerantz was Vice President for Family Record Plan, Inc., a
photography business. Prior to 1975, Mr. Pomerantz held senior marketing
management positions at Viviane Woodward Cosmetics, Chas. Pfizer & Company,
Inc., Avon Products, Inc., and Rexall Drug and Chemical Company.
Janice L. Backus has served as Secretary of the Company since April 1989
and in 1993 she was named a Vice President of the Company. From 1983 until April
1989, Ms. Backus served as Assistant Secretary of the Company. Ms. Backus has
also served as the Assistant to the President since 1983. Prior to joining the
Company, Ms. Backus held administrative and secretarial positions with the
American Heart Association, Arizona Division, BX International and Century
Capital Corporation.
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<PAGE> 21
Rocco Anselmo has served as the Executive Vice President and General
Manager of Zila Pharmaceuticals, Inc. a wholly owned subsidiary of the Zila
since 1993. From 1983 to 1993, Mr. Anselmo held various positions with Oral-B
Laboratories, Inc., most recently as General manager of Oral-B Labs
International from 1991 to 1993. From 1972 to 1983, Mr. Anselmo held various
sales and marketing positions with S.C. Johnson and Sterling Drug Company.
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<PAGE> 22
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Information regarding the market for Zila, Inc.'s common stock (the "Common
Stock") and related stockholder matters is set forth below. The following table
sets forth, for the fiscal periods shown, the high and low quotations in dollars
per share for the Common Stock as reported by the National Association of
Securities Dealers Automated Quotation System ("NASDAQ").
<TABLE>
<CAPTION>
Fiscal Year Ended July 31, 1996 High Low
- ------------------------------- ---- ---
<S> <C> <C>
First Quarter 4 1/2 3 3/4
Second Quarter 5 7/8 3 3/4
Third Quarter 10 1/4 3 5/8
Fourth Quarter 9 1/8 6 3/8
Fiscal Year Ended July 31, 1995
First Quarter $ 4 1/4 3 7/16
Second Quarter 3 5/8 2 7/8
Third Quarter 3 11/16 2 13/16
Fourth Quarter 4 3/8 3
</TABLE>
The number of stockholders of record of the Common Stock as of July 31,
1996 and September 30, 1996 were approximately 3,022 and 2,977, respectively.
There are no shares of the Company's preferred stock outstanding.
The Company has not paid dividends on the Common Stock. It is the present
policy of the Company's Board of Directors to retain future earnings to finance
the growth and development of the Company's business. Any future dividends will
be at the discretion of the Company's Board of Directors and will depend upon
the financial condition, capital requirements, earnings and liquidity of the
Company as well as other factors the Company's Board of Directors may deem
relevant.
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<PAGE> 23
ITEM 6. SELECTED FINANCIAL DATA (NOT COVERED BY INDEPENDENT AUDITORS'
REPORTS)
The following tables summarize selected financial data from the Company's
financial statements and should be read in conjunction with the Company's
Consolidated Financial Statements and related Notes and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere herein. The financial statements for the fiscal years ended
July 31, 1994 through 1996 were audited by Deloitte & Touche LLP, independent
certified public accountants . The consolidated balance sheets as of July 31,
1996 and 1995, and the consolidated statements of operations for each of the
three years in the period ended July 31, 1996 and the independent auditor's
report of Deloitte & Touche LLP thereon, are included in Item 8 of this Form
10-K. The selected financial data for the fiscal years ended July 31, 1992
and 1993 was derived from audited financial statements.
<TABLE>
<CAPTION>
Fiscal Year Ended July 31
Statement of Operations Data 1996 1995 1994 1993 1992
- ---------------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Sales $ 5,978,131 $ 5,147,667 $ 4,123,297 $ 4,977,714 $ 3,518,610
Licensing fees and royalty revenue 865,415 290,955 66,613 63,643 83,254
Net Income (Loss) $ (827,337) $ (862,920) $ (995,205) $ 369,949 (239,345)
Net Income (Loss) Per Share (0.03) (0.04) (0.04) 0.02 (0.01)
At July 31
Balance Sheet Data 1996 1995 1994 1993 1992
- ------------------ ---- ---- ---- ---- ----
Current Assets $ 2,300,036 $ 2,484,312 $ 2,555,766 $ 3,212,503 $ 2,172,418
Current Liabilities (1,252,654) (643,775) (592,841) (370,940) (340,851)
Total Assets 12,030,306 4,179,740 4,150,866 4,555,378 3,331,133
Long-term Debt* (382,006) (412,502) (421,275) (429,069) (435,993)
Total Liabilities (1,634,660) (1,056,277) (1,014,116) (800,009) (776,844)
Shareholders' Equity (10,395,646) (3,123,463) (3,136,750) (3,755,369) (2,554,289)
</TABLE>
* Long-term debt consists of a mortgage note bearing interest at the Bank's
prime rate plus two and one quarter percent (2.25%), to move with prime on a
daily basis. Within the first twelve months of refinancing, the Company has the
option to convert to a fixed rate of four and one quarter percent (4.25%) over
the Treasury rate. The note is collateralized by the Company's land and
building. The refinanced mortgage loan is amortized over 20 years and is due on
April 1, 2001.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Forward Looking Statements. The following discussion contains
forward-looking statements which involve risks and uncertainties. The Company's
actual results may differ materially from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to those items described below and those described in Item 1
of this
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<PAGE> 24
Annual Report on Form 10-K under the heading "Risks and Uncertainties" and
"Merger with BioDental Technologies Corporation" and in Item 3 "Legal
Proceedings."
OPERATING RESULTS
Fiscal year ended July 31, 1996. For the fiscal year ended July 31, 1996,
the Company had a net loss of $827,337 compared to a net loss of $862,920 for
1995.
Net sales during the 1996 fiscal year totaled $5,978,131 compared to net
sales of $5,147,667 for the prior fiscal year, an increase of approximately
16.1%. This increase in net sales was primarily due to sales of ZILACTIN-B which
have continued to increase since its introduction in the first quarter of fiscal
year 1995. Cost of sales were $918,296 for the fiscal year ended July 31, 1996,
a 9.3% increase from $840,377 for the fiscal year ended July 31, 1995. This
increase is primarily due to increased sales volume during fiscal year 1996 as
compared to fiscal year 1995. Cost of sales as a percentage of net sales
decreased 0.9% to 15.4% during fiscal year 1996 as compared to 16.3% in fiscal
year 1995. The decrease is attributable to the Company's continued efforts to
control costs through volume price breaks and competitive purchases of packaging
and other components.
The Company incurred $6,381,784 of selling, general and administrative
expenses during the fiscal year ended July 31, 1996, an increase of $1,203,864
over the fiscal year ended July 31, 1995. Administrative expenses during the
fiscal year ended July 31, 1996 increased approximately $541,997 primarily due
to travel and business expense, legal, shareholder expense, and amortization of
the investment in CTM. Internal funding of product development increased by
$528,232 from $1,259,441 for the fiscal year ended July 31, 1995 to $1,787,673
for the fiscal year ended July 31, 1996. This increase resulted from start-up
manufacturing costs related to ORATEST(TM), and staffing and legal expenses
arising out of the Company's efforts to prevent infringement of the ZILACTIN
patents. For the 1996 fiscal year, marketing and sales expenses were $1,721,165
an increase of approximately $136,775 over the prior fiscal year. This increase
is attributable primarily to advertising and promotional expenses. Expenses
attributable to sales commissions, and freight charges increased by
approximately $22,827 during the fiscal year ended July 31, 1996 as compared to
the prior fiscal year primarily as a result of the Company's increased sales
volume. Royalty expense for the fiscal year ended July 31, 1996 was $368,697 as
compared to $287,984 for the prior fiscal year. The increase in royalty expense
was due to increased sales volume.
Investments in patents and licenses in the 1996 fiscal year were $226,117,
an increase of $39,475 over the prior fiscal year. Investments in patents and
licenses were primarily associated with the expenditures made by the Company in
connection with seeking the necessary FDA approvals of the ORATEST(TM) product.
Interest income for the fiscal year ended July 31, 1996 increased $5,893
from $49,542 in the prior fiscal year due primarily to stronger performance from
the Company's investments. The Company's cash management program consists of
investing funds in highly liquid United States government, corporate, and
foreign government debt securities. The decrease in interest expense
21
<PAGE> 25
from $84,359 for the fiscal year ended July 31, 1995 to $55,873 for the 1996
fiscal year, was due to lower interest obligations on borrowings against the
Company's line of credit and borrowings on short-term investments.
Licensing fees and royalty revenues were $865,415 for fiscal year 1996
compared to $290,955 for the prior fiscal year. This increase was attributable
to licensing of ORATEST(TM) in the United States by The Procter & Gamble Company
("P&G"). Included in such amounts for the fiscal year ended July 31, 1996, are
$750,000 of non-refundable licensing fees that the Company received from P&G in
connection with a licensing agreement between P&G and the Company, which
agreement was terminated on April 3, 1996.
Licensing expenses for the 1996 and 1995 fiscal years were $58,061 and
$84,028, respectively. The decrease in licensing expenses was primarily
attributable to lower royalty obligations payable by the Company.
Fiscal year ended July 31, 1995. For the fiscal year ended July 31, 1995,
the Company had a net loss of $862,920 compared to a net loss of $995,205 for
1994.
Net sales during the 1995 fiscal year totaled $5,147,667 compared to net
sales of $4,123,297 for the prior fiscal year. Net sales for fiscal year 1995
increased approximately 24.8% as compared to gross sales in fiscal 1994
primarily due to increases in distribution in food outlets and in market share
in the drug stores of new ZILACTIN(R) products. Cost of sales were $840,377
(16.3% of sales) for the fiscal year ended July 31, 1995, a decrease from 16.5%
in fiscal 1994. This decrease is primarily due to changes in product mix.
Licensing fees and royalty revenues were $290,955 for fiscal year 1995
compared to $66,613 for the prior fiscal year. Licensing expenses for such
fiscal years were $84,028 and $5,648, respectively. The increased licensing
fees, royalty revenue and related expenses were primarily attributable to the
negotiation of an agreement with Stafford-Miller, a subsidiary of Block Drug
Company, Inc., to market the ORATEST(TM) product in the United Kingdom.
The Company incurred $5,177,920 of selling, general and administrative
expenses during the fiscal year ended July 31, 1995, an increase of $931,366
over the fiscal year ended July 31, 1994. Administrative expenses during the
fiscal year ended July 31, 1995 increased approximately $161,877 primarily due
to licensing expenses, travel and business expense, legal and shareholder
expenses. Internal funding of product development increased $632,584 as compared
to the prior year. This increase resulted from staffing, product evaluation
expense, patent protection, and funding of ORATEST(TM) research. For the 1995
fiscal year, marketing and sales expenses increased approximately $117,934
primarily as a result of advertising and promotional expenses. Expenses
attributable to sales commissions, and freight charges increased by
approximately $18,971 during the fiscal year ended July 31, 1995 as compared to
the prior fiscal year primarily as a result of the Company's increased sales
volume. Royalty expense for the fiscal year ended July 31, 1995 was $287,984 as
compared to $214,091 for the prior fiscal year. The increase in royalty expense
was due to increased sales volume.
In addition, during the 1995 fiscal year approximately $10,500 of marketing
expenses that would have otherwise been funded by the Company, were funded or
accrued by DZ Partners II pursuant to an agreement between the Company and DZ
Partners II. This is a significant decrease from the prior fiscal year when DZ
Partners II funded or accrued approximately $810,000 of marketing expenses.
These marketing funds were used primarily for the introduction of certain
22
<PAGE> 26
new products of the Company. Accordingly, the Company believes that it was more
important to use the majority of these limited funds for the introduction of the
new products during the 1993 and 1994 fiscal years.
Investments in patents and licenses in the 1995 fiscal year were $186,642,
a decrease of $72,648 over the prior fiscal year. Investments in patents and
licenses were primarily associated with the expenditures made by the Company in
connection with seeking the necessary FDA approvals of the ORATEST(TM) product.
Interest income for the fiscal year ended July 31, 1995 decreased to
$49,542 from $58,173 in the prior fiscal year due primarily to smaller
investment balances. The Company's cash management program consists of investing
funds in highly liquid United States government, corporate, and foreign
government debt securities. The increase in interest expense from $54,536 for
the fiscal year ended July 31, 1994 to $84,359 for the 1995 fiscal year, was due
to additional interest obligations on borrowings against the Company's line of
credit and borrowings on short-term investments.
Fiscal year ended July 31, 1994. For the fiscal year ended July 31, 1994,
the Company had a net loss of $995,205 compared to net income of $369,949 for
1993.
Net sales during the 1994 fiscal year totaled $4,123,297 compared to net
sales of $4,977,714 for the 1993 fiscal year. Domestic net sales for fiscal year
1994 decreased approximately 6.8% as compared to domestic net sales in fiscal
1993. Overall net sales for fiscal year 1994 were lower as compared to fiscal
year 1993 primarily as a result of non-recurring sales to overseas customers,
diverter problems attributable to such overseas sales, and a non-recurring sale
of discontinued product during fiscal year 1993. The non-recurring sales
accounted for approximately 65.7% of the decrease in sales during fiscal year
1994. The balance of the decrease is due primarily to a reduction of product
sales. Cost of sales were $678,530 (16.5% of sales) during the year. The
decrease in cost of sales, from 17.0% in fiscal 1993, is primarily due to
changes in product mix. Also affecting the cost of sales percentage for fiscal
year ended July 31, 1993, were overseas sales of product at introductory
discounts and the sale of discontinued product at a discount in exchange for
prepaid advertising.
The Company incurred $4,246,554 of selling, general and administrative
expenses during the fiscal year ended July 31, 1994, an increase of $716,802
over the fiscal year ended July 31, 1993. Administrative expenses during the
fiscal year ended July 31, 1994 increased approximately $193,284 primarily due
to staffing, higher personnel costs, insurance and staff relocation. Internal
funding of product development also increased $395,973 as compared to the 1993
fiscal
23
<PAGE> 27
year. This increase resulted from staffing, product evaluation expense, patent
protection, and funding of the ORATEST(TM) research. For the 1994 fiscal year,
marketing and sales expenses increased approximately $140,348, primarily as a
result of staffing, promotional expenses, and marketing expenses for support of
ORATEST(TM) sales in Canada. Expenses attributable to sales commissions and
freight charges decreased by approximately $12,803 during the fiscal year ended
July 31, 1994 as compared to the 1993 fiscal year primarily as a result of the
Company's decreased sales volume.
In addition, during the 1994 fiscal year, approximately $810,000 of
marketing expenses related to the introduction of PERIGEL(R), DERMAFLEX(TM) and
ORATEST(TM), that would have otherwise been funded by the Company, were funded
or accrued by DZ Partners II pursuant to an agreement between the Company and DZ
Partners II.
Investments in patents and licenses in the 1994 fiscal year were $259,290,
an increase of $52,389 over the 1993 fiscal year. Investments in patents and
licenses were primarily associated with the expenditures made by the Company in
connection with seeking the necessary FDA approvals of the ORATEST(TM) product.
Interest income increased to $58,173 from $38,558 in the 1993 fiscal year
due primarily to the Company's cash management program of investing funds into
highly liquid United States government, corporate, and foreign government debt
securities. The Company's investments in debt securities experienced an
unrealized loss on investments of approximately $30,000, as a result of
increasing interest rates. The increase in interest expense from $52,544 to
$54,536 during the 1994 fiscal year, was due to additional interest obligations
from the Company's line of credit. Royalty revenues from Bausch & Lomb and MGI
Pharma, Inc. were $66,613 for fiscal year 1994 compared to $63,643 for the 1993
fiscal year. Licensing expenses for such fiscal years were $5,648 and $6,459,
respectively. The increased royalty revenues were primarily attributable to an
increase in the minimum royalties for fiscal year 1994 from Bausch & Lomb.
Licensing expenses during fiscal year 1994 decreased as compared to the 1993
fiscal year due to legal expenses relating to amending the MGI Pharma agreement
in fiscal year 1993.
INFLATION
Inflation has had no material effect on the Company's operations or
financial condition.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1996, the Company had net working capital of $1,047,382, and
its current ratio (the ratio of current assets to current liabilities) was 1.8
to 1. At July 31, 1995, the Company had net working capital of $1,840,537 and
its current ratio was 3.9 to 1. This decrease in the current ratio was due
primarily to the additional obligations incurred to fund ORATEST(TM) development
and clinical studies and the legal expenses associated with patent infringement
actions by the Company. (See Notes to the Company's Consolidated Financial
Statements set forth in Item 8).
24
<PAGE> 28
Accounts receivable at July 31, 1996 were $824,591, consisting of $35,000
in licensing fee and royalty receivables, $129,319 in receivables related to the
termination of the licensing agreement with the Procter & Gamble Company and
$660,272 in trade accounts receivable as compared to accounts receivable at July
31, 1995 of $839,307 which consisted of $135,000 in licensing fee and royalty
receivables and $704,307 in trade accounts receivable. Trade accounts
receivable as a percentage of quarterly net sales of $1,594,236 were 41.4% at
July 31, 1996 as compared to 52.8% at July 31, 1995 which had quarterly net
sales of $1,334,493. There continues to be an emphasis on strong credit
management.
At July 31, 1996, the Company had inventories of $398,976, an increase of
$195,329 from inventories at July 31, 1995. The increase is primarily due to a
build up of components and finished goods for new products and depleted
inventory levels at July 31, 1995 due to sales exceeding forecasted demand. The
Company believes current inventories are at levels necessary to support market
expansion and to maintain adequate liquidity.
As of July 31, 1996, the Company had no material commitments for capital
expenditures. However, the Company will continue to seek FDA approval of
ORATEST(TM) and in connection therewith the Company believes that approximately
$100,000 of additional capital will be necessary to receive such approval.
Other than the funds necessary for FDA approval of the ORATEST(TM) product and
for litigation expenses for the Colgate-Palmolive litigation, the Company does
not believe there are any known trends, demands, commitments, events or
uncertainties which are likely to significantly affect the Company's liquidity.
(See Note 6 to the Notes to the Consolidated Financial Statements set forth in
Item 8.)
On January 4, 1991, the Company purchased a 16,000 square foot building
located at 5227 North Seventh Street, Phoenix, Arizona 85014-2800. The purchase
price of the building was approximately $600,000. The Company paid 25% of the
purchase price in cash and obtained a loan for the balance of the purchase
price. The Company has refinanced the mortgage which matured April 1, 1996 with
Bank One, Arizona (the "Bank"). The terms of the refinancing include interest to
be payable monthly on the unpaid balance at the Bank's prime rate plus two and
one quarter percent (2.25%), to move with prime on a daily basis. Within the
first twelve months of refinancing, the Company has the option to convert to a
fixed rate of four and one quarter percent (4.25%) over the Treasury rate. The
refinanced mortgage loan is amortized over 20 years and is due on April 1, 2001.
The Company also leases 3,502 square feet for a manufacturing facility in
Phoenix, Arizona. This facility will produce toluidine blue which will be used
in the manufacture of ORATEST(TM). The facility is leased under a three year
agreement which expires April 30, 1999, and is located in an
25
<PAGE> 29
area with property available for expansion. The agreement has an option to
renew for an additional five years. Monthly lease payments are $1,922.
Management believes that continued growth in the Company's sales of its
products will provide sufficient funding for the Company's current operations
for the next twelve months. The Company may require additional financing to
support the production of its products in quantities sufficient to support
continued market expansion. In anticipation of these potential requirements, the
Company has obtained a $250,000 line of credit from Bank One, Arizona, NA, which
is secured by trade accounts receivable, inventories and rights to payment. This
line of credit expires in April of 1997. Interest is payable monthly on the
unpaid balance outstanding at the rate of one and three quarters percent (1.75%)
over the "prime rate" of interest charged by the bank. At July 31, 1996, the
Company had no borrowings against the line of credit. The Company also has the
availability of additional financing by borrowing against the Company's
short-term investments. At July 31, 1996, the Company had no borrowings against
its short-term investments.
26
<PAGE> 30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements, together with the related notes and the
report of Deloitte & Touche LLP, independent certified public accountants, are
set forth hereafter. Other required financial information and schedules are set
forth herein, as more fully described in Item 14 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Information respecting the directors of the Company is incorporated herein
by reference to the "Election of Directors" and the "Section 16(a) Beneficial
Ownership Reporting Compliance" sections of the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders on December 12, 1996.
Information respecting the executive officers of the Company is set forth at
Part I of this Form 10-K Report.
ITEM 11. EXECUTIVE COMPENSATION
Information responsive to this Item is incorporated herein by reference to
the "Executive Compensation" section of the Company's definitive Proxy Statement
for the Annual Meeting of Stockholders on December 12, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning the Common Stock beneficially owned by each director
of the Company, by all officers and directors of the Company as a group, and by
each shareholder known by the Company to be the beneficial owner of more than 5%
of the outstanding Common Stock is incorporated herein by reference to the
"Principal Stockholders and Stockholdings of Management" section of the
Company's definitive Proxy Statement for the Annual Meeting of Stockholders on
December 12, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information responsive to this Item is incorporated herein by reference to
the "Certain Transactions" section of the Company's definitive Proxy Statement
for the Annual Meeting of Stockholders on December 12, 1996.
27
<PAGE> 31
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
<S> <C> <C>
(a) Financial Statements. Page or
Method of Filing
----------------
(1) Report of Deloitte & Touche LLP Filed herewith
(2) Consolidated Financial Statements and Notes Filed herewith
thereto of the Company including Consolidated
Balance Sheets as of July 31, 1996 and 1995
and related Consolidated Statements of Operations,
Shareholders' Equity, and Cash Flows for each of
the years in the three-year period ended
July 31, 1996.
(b) Financial Statement Schedules.
(1) Report of Deloitte & Touche LLP as to Filed herewith
Financial Statement Schedules for fiscal years
ended July 31, 1996, 1995 and 1994
(2) Schedule II - Valuation and Qualifying Filed herewith
Accounts
</TABLE>
(c) Exhibits. The following exhibits are filed as part of this Report.
<TABLE>
<CAPTION>
Exhibit
Number Description Page or Method of Filing
- ------ ----------- ------------------------
<S> <C> <C>
2 Merger Agreement dated August 8, 1996 among Zila, Inc. A
Bio-Dental Technologies Corporation and Zila Merger
Corporation
3-A Certificate of Incorporation, as amended B
3-B Bylaws B
</TABLE>
28
<PAGE> 32
<TABLE>
<S> <C> <C>
4-A Specimen Stock Certificate B
4-C Specimen Warrant Certificate C
10-A Revolving Line of Credit Loan Agreement dated April 8, D
1991 between Zila, Inc. and The Valley National Bank of
Arizona
10-B# Stock Option Award Plan (as amended through April 10, E
1991)
10-C# Non-Employee Directors Stock Option Plan (as amended E
through April 10, 1991)
10-D License Agreement dated February 5, 1990 between Zila F
Pharmaceuticals, Inc. and Bausch and Lomb Ireland
10-E Manufacturing and Distribution Agreement dated March 12, G
1993 between Zila, Inc. and Germiphene Corporation
10-F Agreement dated November 26, 1993 between H
Cheseborough Ponds USA Co and Zila Pharmaceuticals,
Inc.
10-G# Employment Agreement dated February 10, 1992 between C
Zila, Inc. and Joseph Hines
10-H# Employment Agreement dated February 10, 1992 between C
Zila, Inc. and Clarence J. Baudhuin
</TABLE>
29
<PAGE> 33
<TABLE>
<S> <C> <C>
11 Statement re: Computation of Net Income (Loss) Per *
Common Share
21 Subsidiaries of Registrant I
23 Consent of Deloitte & Touche LLP (regarding Form S-8 *
and Form S-3 Registration Statements)
24-A Power of Attorney of Joseph Hines *
24-B Power of Attorney of Clarence J. Baudhuin *
24-C Power of Attorney of James E. Tinnell, M.D. *
24-D Power of Attorney of Patrick M. Lonergan *
24-E Power of Attorney of Michael S. Lesser *
24-F Power of Attorney of Carl A. Schroeder *
24-G Power of Attorney of H. Ray Cox *
27 Financial Data Schedule *
99 The Company's 1996 Proxy Statement for the Annual J
Meeting of Stockholders to be held on December 12, 1996
</TABLE>
# Management contract or compensation plan or arrangement
* Filed herewith
A Incorporated by reference to Exhibit 2 to the Company's Form S-4
Registration Statement No. 333-10107, as amended
B Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended July 31, 1988, as amended
C Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended July 31, 1994, as amended
D Incorporated by reference to the Company's Form S-3 Registration Statement
No. 33-46239
E Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the quarterly period ended January 31, 1996, as amended
30
<PAGE> 34
F Incorporated by reference to Exhibit 10-C to Post-Effective Amendment No.
3 to Form S-1 Registration Statement No. 33-27739
G Incorporated by reference to Exhibit 10-L to the Company's Annual Report
on Form 10-K for the fiscal year ended July 31, 1993, as amended
H Incorporated by reference to the Company's Quarterly Report for the
quarterly period ended October 31, 1996, as amended
I Incorporated by reference to the Company's Annual Report on Form 10-K for
the fiscal year ended July 31, 1995, as amended
J To be filed by amendment
(d) Reports on Form 8-K.
The Company filed a Current Report on Form 8-k dated June 3, 1996, to
report that the following events:
1. That the Company had signed a letter of intent with Bio-Dental
Technologies for the merger of Bio-Dental into Zila; and
2. That the Company had acquired the remaining two-thirds of the
outstanding shares of CTM Associates ("CTM"). The acquisition of such two-thirds
interest, together with Zila's previous acquisition of the CTM common stock
brought Zila's interest in CTM to 100%.
31
<PAGE> 35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, this
29th day of October, 1996.
ZILA, INC., a Delaware corporation
By /s/ Clarence J. Baudhuin
------------------------------
Clarence J. Baudhuin
Executive Vice President of Finance and
Administration, Treasurer (Principal
Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report on Form 10-K has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Joseph Hines Chairman of the Board, October 29, 1996
- ------------------------------ President, Chief Executive
Joseph Hines Officer
/s/ Clarence J. Baudhuin Executive Vice President of October 29, 1996
- ------------------------------ Finance and Administration,
Clarence J. Baudhuin Treasurer and Director
* Director October 29, 1996
- ------------------------------
James E. Tinnell, M.D.
* Director October 29, 1996
- ------------------------------
Patrick M. Lonergan
* Director October 29, 1996
- ------------------------------
Carl A. Schroeder
* Director October 29, 1996
- ------------------------------
H. Ray Cox
* Director October 29, 1996
- ------------------------------
Michael S. Lesser
* By /s/ Clarence J. Baudhuin October 29, 1996
------------------------
Clarence J. Baudhuin
Attorney-in-Fact
</TABLE>
32
<PAGE> 36
ZILA, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
July 31, 1996 and 1995, and Related
Consolidated Statements of Operations,
Shareholders' Equity and Cash Flows for
Each of the Three Years in the
Period Ended July 31, 1996, and
Independent Auditors' Report
<PAGE> 37
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Zila, Inc.
Phoenix, Arizona
We have audited the accompanying consolidated balance sheets of Zila, Inc. and
subsidiaries as of July 31, 1996 and 1995, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended July 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Zila, Inc. and
subsidiaries at July 31, 1996 and 1995, and the results of their operations and
their cash flows for each of the three years in the period ended July 31, 1996,
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
October 18, 1996
<PAGE> 38
ZILA, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
JULY 31, 1996 AND 1995
- ----------------------------------------------------------------------------------------
ASSETS 1996 1995
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 204,055 $ 459,014
Short-term investments 711,470 694,719
Trade accounts receivable - less allowance for
doubtful accounts of $20,000 (1996 and 1995) 824,591 839,307
Inventories 398,976 203,647
Prepaid expenses and other assets 144,777 249,294
Related party receivables 16,167 38,331
------------ ------------
Total current assets 2,300,036 2,484,312
PROPERTY AND EQUIPMENT - Net 1,282,793 739,701
DEFERRED PATENT AND LICENSING COSTS - Net 1,100,744 955,727
PURCHASED TECHNOLOGY RIGHTS - Net 7,346,733
------------ ------------
TOTAL $ 12,030,306 $ 4,179,740
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 24,062
Accounts payable $ 963,388 443,137
Accrued royalties 47,532 49,062
Accrued promotional expenses 118,966 36,873
Other accrued expenses 83,791 17,846
Deferred revenue 11,195 63,000
Current portion of long-term debt 27,782 9,795
------------ ------------
Total current liabilities 1,252,654 643,775
LONG-TERM DEBT 382,006 412,502
------------ ------------
Total liabilities 1,634,660 1,056,277
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 12 and 13)
SHAREHOLDERS' EQUITY:
Preferred stock, $.001 par value - authorized,
2,500,000 shares; none issued
Common stock, $.001 par value - authorized,
50,000,000 shares; issued, 25,774,944 shares
(1996) and 24,355,462 shares (1995) 25,775 24,355
Capital in excess of par value 20,854,321 12,759,350
Unrealized loss on securities available-for-sale (24,832) (27,961)
Deficit (10,459,193) (9,631,856)
------------ ------------
Total 10,396,071 3,123,888
Less common stock held by wholly-owned subsidiary -
42,546 shares (at cost) (425) (425)
------------ ------------
Total shareholders' equity 10,395,646 3,123,463
------------ ------------
TOTAL $ 12,030,306 $ 4,179,740
============ ============
</TABLE>
See notes to consolidated financial statements.
-2-
<PAGE> 39
ZILA, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JULY 31, 1996, 1995 AND 1994
- -----------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
REVENUES:
Net sales $ 5,978,131 $ 5,147,667 $ 4,123,297
Licensing fees and royalty revenue 865,415 290,955 66,613
------------ ------------ ------------
6,843,546 5,438,622 4,189,910
------------ ------------ ------------
OPERATING COSTS AND EXPENSES:
Cost of products sold 918,296 840,377 678,530
Royalty expense 368,697 287,984 214,091
Selling, general and administrative 6,381,784 5,177,920 4,246,554
------------ ------------ ------------
7,668,777 6,306,281 5,139,175
------------ ------------ ------------
LOSS FROM OPERATIONS (825,231) (867,659) (949,265)
------------ ------------ ------------
OTHER INCOME (EXPENSES):
Interest income 55,435 49,542 58,173
Interest expense (55,873) (84,359) (54,536)
Unrealized loss on short-term investments (29,945)
Realized (loss) gain on short-term investments (1,668) 9,611 (19,632)
------------ ------------ ------------
Total other expenses (2,106) (25,206) (45,940)
------------ ------------ ------------
LOSS BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE (827,337) (892,865) (995,205)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 29,945
------------ ------------ ------------
NET LOSS $ (827,337) $ (862,920) $ (995,205)
============ ============ ============
LOSS PER COMMON SHARE:
Loss before cumulative effect of accounting change $ (.03) $ (.04) $ (.04)
Cumulative effect of accounting change ------------ ------------ ------------
NET LOSS PER COMMON SHARE $ (.03) $ (.04) $ (.04)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT
SHARES OUTSTANDING 24,839,963 24,087,308 23,862,504
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE> 40
ZILA, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JULY 31, 1996, 1995 AND 1994
- -----------------------------------------------------------------------------------------------------------------------------------
COMMON
STOCK
HELD BY UNREALIZED
COMMON STOCK WHOLLY- LOSS ON TOTAL
------------------------ CAPITAL IN OWNED SECURITIES COMMON
PAR EXCESS OF SUBSIDIARY AVAILABLE- SHAREHOLDERS'
SHARES VALUE PAR VALUE DEFICIT (AT COST) FOR-SALE EQUITY
BALANCE,
<S> <C> <C> <C> <C> <C> <C> <C>
AUGUST 1, 1993 23,521,723 $ 23,522 $ 11,506,003 $ (7,773,731) $ (425) $ 3,755,369
Exercise of common
stock warrants 320,265 320 239,453 239,773
Exercise of common
stock options 187,980 188 136,625 136,813
Net loss (995,205) (995,205)
---------- ---------- ------------ ------------ ------- ------------
BALANCE,
JULY 31, 1994 24,029,968 24,030 11,882,081 (8,768,936) (425) 3,136,750
Private placement of
common stock - net of
expenses of $30,000 234,375 234 719,766 720,000
Exercise of common
stock warrants 19,300 19 37,390 37,409
Exercise of common
stock options 71,819 72 120,113 120,185
Unrealized loss
on securities
available-for-sale $ (27,961) (27,961)
Net loss (862,920) (862,920)
---------- ---------- ------------ ------------ ------- ------------ ------------
BALANCE,
JULY 31, 1995 24,355,462 24,355 12,759,350 (9,631,856) (425) (27,961) 3,123,463
Issuance of common
stock 869,118 869 7,169,354 7,170,223
Exercise of common
stock warrants 140,138 141 179,368 179,509
Exercise of common
stock options 410,226 410 746,249 746,659
Change in unrealized
loss on securities
available-for-sale 3,129 3,129
Net loss (827,337) (827,337)
---------- ---------- ------------ ------------ ------- ------------ ------------
BALANCE,
JULY 31, 1996 25,774,944 $ 25,775 $ 20,854,321 $(10,459,193) $ (425) $ (24,832) $ 10,395,646
========== ========== ============ ============ ======= ============ ============
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE> 41
ZILA, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 31, 1996, 1995 AND 1994
- -----------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (827,337) $ (862,920) $ (995,205)
Cumulative effect of accounting change (29,945)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 289,787 169,259 108,761
Loss on disposals of property and equipment 5,994 1,955 2,550
Realized loss (gain) on short-term investments 1,668 (9,611) 19,632
Unrealized loss on short-term investments 29,945
Change in assets and liabilities:
Trade accounts receivable 14,716 38,318 (207,900)
Investment interest receivable 982 3,306
Inventories (195,329) 181,936 (36,738)
Prepaid expenses and other assets 55,269 (25,869) 21,461
Accounts payable and accrued expenses 591,759 212,791 (29,060)
Deferred revenue (51,805) 63,000
----------- ----------- -----------
Net cash used in operating activities (114,296) (257,780) (1,086,554)
----------- ----------- -----------
INVESTING ACTIVITIES:
Purchases of short-term investments (214,150) (270,985) (1,747,634)
Proceeds from sale of short-term investments 197,878 564,761 717,851
Purchases of property and equipment (685,035) (85,374) (104,246)
Proceeds from sale of property and equipment 474
Patent and licensing costs incurred (226,117) (186,642) (259,290)
Acquisition of CTM (125,000)
Loans to related parties (8,836) (154,824)
Collections of related party loans 22,164 22,192 271,388
----------- ----------- -----------
Net cash (used in) provided by investing activities (1,030,260) 35,590 (1,276,755)
----------- ----------- -----------
FINANCING ACTIVITIES:
Principal payments on borrowings collateralized by securities (230,000) (587,804)
Net proceeds from borrowings collateralized by securities 230,000 587,804
Net (payments) proceeds on short-term borrowings (24,062) (225,938) 250,000
Net proceeds from issuance of common stock 926,168 877,594 376,586
Principal payments on long-term debt (12,509) (7,692) (6,833)
----------- ----------- -----------
Net cash provided by financing activities 889,597 643,964 619,753
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (254,959) 421,774 (1,743,556)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 459,014 37,240 1,780,796
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 204,055 $ 459,014 $ 37,240
=========== =========== ===========
</TABLE>
(Continued)
-5-
<PAGE> 42
ZILA, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 31, 1996, 1995 AND 1994
- --------------------------------------------------------------------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION - Cash paid for interest $ 55,873 $ 84,359 $ 54,536
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Issuance of 869,118 shares of common stock in connection
with the acquisition of CTM $7,170,223
==========
Assumption of liabilities in connection with the
acquisition of CTM $ 70,000
==========
</TABLE>
See notes to consolidated financial statements.
(Concluded)
-6-
<PAGE> 43
ZILA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1996, 1995 AND 1994
1. NATURE OF BUSINESS ACTIVITIES AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
NATURE OF BUSINESS ACTIVITIES - Zila, Inc. and subsidiaries (the
"Company") is involved in the acquisition, development and marketing of
over-the-counter, non-prescription products.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Zila, Inc. and its wholly-owned subsidiaries,
Zila Pharmaceuticals, Inc., Zila International Inc. and Zila Ltd. Zila
International, Inc. has no operations and its assets at July 31, 1996
and 1995 consist of 42,546 shares of common stock of the Company. All
significant intercompany balances and transactions are eliminated in
consolidation.
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles necessarily
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period.
Actual results could differ from those estimates.
CASH EQUIVALENTS - The Company considers highly liquid investments
purchased with original maturities of three months or less to be cash
equivalents.
SHORT-TERM INVESTMENTS - The Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, Accounting for Certain
Investments in Debt and Equity Securities, on August 1, 1994. SFAS No.
115 requires the classification of securities at acquisition into one
of three categories: available-for-sale, held to maturity or trading.
All the Company's investments are classified as available-for-sale.
Prior to adoption of SFAS No. 115, the Company carried its investments
in short-term marketable debt and equity securities at the lower of
cost or market.
INVENTORIES, which consist of finished goods, empty tubes and packaging
materials, are stated at the lower of cost (first-in, first-out method)
or market.
PROPERTY AND EQUIPMENT are stated at cost and are depreciated using
straight-line methods over their respective estimated useful lives,
ranging from 10 to 20 years for building and improvements, three to
eight years for leasehold improvements and other assets, and three
years for furniture and equipment.
DEFERRED PATENT AND LICENSING COSTS - Certain costs incurred in
connection with the acquisition of patent rights, obtaining Food and
Drug Administration ("FDA") regulatory approvals and obtaining other
licensing rights for treatment compositions are capitalized and
amortized over the estimated benefit period not exceeding 17 years.
Research and development costs totaling approximately $626,000,
$711,000 and $293,000 in 1996, 1995 and 1994, respectively, were
expensed.
-7-
<PAGE> 44
NET INCOME (LOSS) PER COMMON SHARE is computed based on the weighted
average number of common shares outstanding during each period after
giving effect for any dilutive stock options, warrants and convertible
preferred stock, all of which are considered to be common stock
equivalents. For the years ended July 31, 1996, 1995 and 1994, options
and warrants that would otherwise qualify as common stock equivalents
are excluded because their inclusion would have the effect of
decreasing the loss per share. Fully diluted net income (loss) per
common share is not materially different from primary net income (loss)
per common share.
INCOME TAXES - The Company adopted SFAS No. 109, Accounting for Income
Taxes, on August 1, 1993. The effect of such adoption had no
significant impact on the Company's financial position or results of
operations for the year ended July 31, 1994.
NEW ACCOUNTING PRONOUNCEMENTS - In March 1995, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 121, Accounting for Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. This
Statement establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles and goodwill
related to those assets to be held and used and long-lived assets and
certain identifiable intangibles to be disposed of. The Statement
requires that long-lived assets and certain identifiable intangibles to
be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. In addition, the Statement requires
that certain long-lived assets and intangibles to be disposed of be
reported at the lower of carrying amount or fair value less costs to
sell. The Company does not expect the adoption of this accounting
standard to materially impact its results of operations or financial
position. The Company will adopt this accounting standard effective
August 1, 1996, as required.
In October 1995, the FASB issued SFAS No. 123, Accounting for
Stock-Based Compensation. This Statement establishes financial
accounting and reporting for stock-based employee compensation plans,
including stock purchase plans, stock options plans, restricted stock
and stock appreciation rights. The Statement requires a fair value
based method of accounting for employee stock options or similar
instruments and encourages a similar method for all employee stock
compensation plans. This method measures compensation cost at the grant
date based on the value of an award and recognizes it over the service
period, usually the vesting period. However, the Statement also allows
an entity to continue measuring compensation cost for such plans using
the intrinsic value method of accounting prescribed by Accounting
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees, provided pro forma disclosures are made. The Company expects
to continue to account for its stock-based employee compensation plans
using the method of accounting prescribed by APB No. 25 and does not
expect this accounting standard will materially impact its results of
operations or financial position. The Company will adopt this
accounting standard effective August 1, 1996, as required.
FINANCIAL INSTRUMENTS - The following disclosure of the estimated fair
value of financial instruments is made in accordance with the
requirements of SFAS No. 107, Disclosures About Fair Value of Financial
Instruments. The carrying amounts and estimated fair value of the
Company's financial instruments are as follows:
The carrying values of cash and cash equivalents, receivables, accounts
payable and accrued expenses approximate fair values due to the
short-term maturities of these instruments.
The carrying amount of long-term debt is estimated to approximate fair
value as the actual interest rate is consistent with the rate estimated
to be currently available for debt of similar term and remaining
maturity.
-8-
<PAGE> 45
CERTAIN RECLASSIFICATIONS have been made to the 1995 and 1994 financial
statements to conform to the classifications used in 1996.
2. ACQUISITION OF CTM ASSOCIATES, INC.
On March 7, 1996, the Company purchased one-third of the outstanding
common stock of CTM Associates, Inc. ("CTM") from one of the three
directors and shareholders of CTM. On June 3, 1996, the Company
acquired the remaining two-thirds of the outstanding shares of CTM. The
only significant asset of CTM was the technology rights it held related
to OraTest (a diagnostic for oral cancer and site delineation device
for biopsy and surgical excision) and its right to receive certain
royalties from sales of OraTest from the Company. Accordingly, the
acquisition of CTM eliminates the Company's obligation to pay royalties
to CTM on revenues generated from sales of OraTest. As consideration
for the acquisition of all of the CTM common stock, the Company issued
a total of 869,118 shares of the Company's common stock with a value of
$7,170,223, paid $125,000, and assumed certain liabilities of
approximately $70,000. The acquisition was accounted for as an
acquisition of assets and the purchase price was recorded as purchased
technology rights. The purchased technology rights are being amortized
on a straight-line basis over the expected period of benefit of 17
years which is based on the remaining life of the related patents.
Accumulated amortization and amortization expense was $72,740 as of and
for the year ended July 31, 1996.
3. SHORT-TERM INVESTMENTS
Short-term investments consist of the following at July 31:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
1996 COST GAINS LOSSES VALUE
<S> <C> <C> <C> <C>
Mutual and money market funds $449,718 $ 10,971 $ 24,702 $435,987
Corporate fixed income securities 111,186 284 3,506 107,964
Government fixed income securities 175,399 7,880 167,519
-------- -------- -------- --------
Total short-term investments $736,303 $ 11,255 $ 36,088 $711,470
======== ======== ======== ========
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
1995 COST GAINS LOSSES VALUE
Mutual and money market funds $309,120 $ 1,412 $ 18,208 $292,324
Corporate fixed income securities 111,186 328 3,856 107,658
Government fixed income securities 302,374 1,066 8,703 294,737
-------- -------- -------- --------
Total short-term investments $722,680 $ 2,806 $ 30,767 $694,719
======== ======== ======== ========
</TABLE>
-9-
<PAGE> 46
Maturities of securities at July 31, 1996 are as follows:
<TABLE>
<CAPTION>
ESTIMATED
AMORTIZED FAIR
COST VALUE
<S> <C> <C>
Due in:
1996-1998 $599,942 $580,256
1999-2003 111,361 107,589
2004 and later 25,000 23,625
-------- --------
Total $736,303 $711,470
======== ========
</TABLE>
Securities that are being held for indefinite periods of time, including
those securities which may be sold in response to needs for liquidity or
changes in interest rates are classified as securities available-for-sale
and are carried at fair value, with the net, after-tax, unrealized holding
gain or loss reported as a separate component of shareholders' equity with
no effect on current results of operations. The change in the unrealized
loss on securities available-for-sale for the years ended July 31, 1996
and 1995 is as follows:
<TABLE>
<S> <C>
Unrealized loss on securities available-for-sale
at August 1, 1994, the date of adoption of
SFAS No. 115 $(29,945)
Net decrease in unrealized loss, due principally
to decrease in interest rates 1,984
--------
Unrealized loss on securities available-for-sale
at July 31, 1995 (27,961)
Net decrease in unrealized loss, due principally
to decrease in interest rates 3,129
--------
Unrealized loss on securities available-for-sale at July 31, 1996 $(24,832)
========
</TABLE>
4. INVENTORIES
Inventories consist of the following at July 31:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Finished goods $189,179 $ 91,690
Empty tubes and packaging materials 209,797 111,957
-------- --------
Total inventories $398,976 $203,647
======== ========
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at July 31:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Land $ 216,731 $ 216,731
Building and improvements 517,628 507,931
Furniture and equipment 639,967 294,493
Leasehold improvements and other assets 297,910
----------- -----------
Total 1,672,236 1,019,155
Less accumulated depreciation and amortization (389,443) (279,454)
----------- -----------
Total property and equipment - net $ 1,282,793 $ 739,701
=========== ===========
</TABLE>
-10-
<PAGE> 47
6. INTANGIBLE ASSETS
Intangible assets consist of the following at July 31:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Patents - net of accumulated amortization,
$287,139 (1996) and $259,670 (1995) $ 179,838 $ 207,308
Licensing - net of accumulated amortization,
$142,730 (1996) and $89,102 (1995) 920,906 748,419
---------- ----------
Total deferred patent and licensing costs - net $1,100,744 $ 955,727
========== ==========
Purchased technology rights - net of accumulated
amortization of $72,740 (1996) $7,346,733
==========
</TABLE>
Deferred licensing costs consist primarily of certain costs associated
with obtaining FDA approval for a new product, OraTest (formerly OraScan).
The Company has estimated that an additional $100,000 of costs will
ultimately be required in order to gain FDA approval and bring OraTest to
the domestic market. The recoverability of the deferred licensing costs
and purchased technology rights is dependent upon both FDA approval and
sufficient revenues generated from sales of OraTest; management believes
that they will receive FDA approval and generate revenues sufficient to
recover such costs.
Purchased technology rights relate to the acquisition of CTM (Note 2).
7. SHORT-TERM BORROWINGS AND LONG-TERM DEBT
LINE OF CREDIT - The Company has renewed a $250,000 revolving bank line of
credit which expires in April 1997, and which is collateralized by trade
accounts receivable, inventories and rights to payments. Interest is
payable monthly on the unpaid balance at the bank's prime rate (8.25% at
July 31, 1996) plus 1.75%. At July 31, 1996, the Company had no borrowings
against the line of credit.
OTHER BORROWINGS - At July 31, 1995, short-term borrowings consisted of
$24,062 for installments due on the Company's product liability insurance.
No such borrowings exist at July 31, 1996.
LONG-TERM DEBT consists of a mortgage note bearing interest at the bank's
prime rate (8.25% at July 31, 1996) plus 2.25% per year due in monthly
principal installments of $2,315, through March 2001 with a balloon
payment due April 1, 2001. The Company has the option through March 1997
to convert to a fixed interest rate of 4.25% over the U.S. Treasury rate.
The note is collateralized by the Company's land and building.
Aggregate annual maturities of long-term debt for the years ending July 31
are as follows:
<TABLE>
<S> <C>
1997 $ 27,782
1998 27,782
1999 27,782
2000 27,782
2001 298,660
--------
Total $409,788
========
</TABLE>
-11-
<PAGE> 48
Under the bank line of credit and mortgage note, the Company is required
to comply with financial covenants based on certain financial ratios. At
July 31, 1996, the Company was in compliance with these covenants.
8. LICENSING FEE INCOME AND ROYALTIES
The Company has entered into various licensing agreements (the
"Agreements"). Under the terms of the Agreements, the licensees acquire
the right to manufacture and sell the Company's products in markets
previously not pursued by the Company. In return, the Company will receive
non-refundable license fees and/or royalties equal to a fixed percentage
of the net sales by the licensees of the Company's products. One of the
Agreements provides that the royalty payments will meet certain minimum
annual levels irrespective of the volume of sales subject to the
Agreement.
During the year ended July 31, 1996, the Company received $750,000 in
non-refundable licensing fees from The Procter & Gamble Company ("P&G") in
connection with a licensing agreement between P&G and the Company, which
was subsequently terminated on April 3, 1996. Additionally, under the
licensing agreement with P&G, the Company received $265,330 in
reimbursements for costs associated with obtaining FDA approval for
OraTest. At July 31, 1996, the Company had a receivable of approximately
$130,000 from P&G which was received after year-end.
The Company recognized approximately $865,000, $291,000 and $67,000 during
the years ended July 31, 1996, 1995 and 1994, respectively, as licensing
fees and royalty revenue, including guaranteed minimum royalties of
approximately $60,000, $61,000 and $65,000, respectively.
9. STOCK OPTIONS AND WARRANTS
a. OPTIONS - The Company adopted a Stock Option Award Plan which became
effective on September 1, 1988, authorizing the Board of Directors
to grant options to employees and certain employee-directors of the
Company to purchase up to 4,000,000 shares of the Company's common
stock. The plan was amended December 8, 1995 to increase the number
of shares to 5,000,000. The options will be issued with an exercise
price no less than the market value at the date of grant. Options
may be exercised at any time up to five to ten years from the date
of grant. At July 31, 1996, 1,032,893 shares were available for
grant under this plan.
The Company adopted a Non-Employee Directors Stock Option Plan which
became effective October 20, 1989, authorizing the Board of
Directors to grant options to 100,000 shares to non-employee members
of the Board of Directors in increments of 2,500 shares per director
each year. The plan was amended December 8, 1995 to increase the
number of shares to 200,000. The options will be issued with an
exercise price equal to the market value at the date of grant. All
options may be exercised at any time up to five years from the date
of grant. At July 31, 1996, 112,500 shares were available for grant
under this plan.
-12-
<PAGE> 49
Activity related to all of the aforementioned options, which expire
at various dates through 2005, is summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
<S> <C> <C> <C>
Outstanding, August 1, 1993 1,260,750 $ 1.22 - $ 3.16
Surrendered and cancelled (69,726) 1.25 - 1.31
Granted 346,110 2.53 - 3.44
Exercised (187,980) 1.25 - 2.53
---------
Outstanding, July 31, 1994 1,349,154 1.22 - 3.44
Surrendered and cancelled (23,421) 1.25 - 3.25
Granted 166,780 3.22 - 3.63
Exercised (71,819) 1.22 - 3.25
---------
Outstanding, July 31, 1995 1,420,694 1.31 - 3.63
Surrendered and cancelled (49,502) 1.31 - 3.25
Granted 287,967 4.00 - 4.75
Exercised (410,226) 1.31 - 4.75
---------
Outstanding, July 31, 1996 1,248,933 $ 1.31 - $ 4.75
=========
</TABLE>
b. WARRANTS - The Company has issued warrants to various investors,
shareholders, officers and other third parties in connection with
services provided and purchases of the Company's stock. Activity
related to such warrants, which expire at various dates through
October 2000, is summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF WARRANT PRICE
SHARES PER SHARE
<S> <C> <C> <C>
Outstanding, August 1, 1993 993,065 $ .60 - $ 3.13
Issued 325,000 2.50 - 3.00
Exercised (320,265) .60 - 2.88
Expired (57,828) .60 - 2.88
---------
Outstanding, July 31, 1994 939,972 .60 - 3.13
Issued 50,000 2.50 -
Exercised (19,300) .60 - 2.41
Expired (137,520) - 3.00
---------
Outstanding, July 31, 1995 833,152 .60 - 3.13
Exercised (140,138) 2.41 - 3.13
Expired (46,092) 3.13 -
---------
Outstanding, July 31, 1996 646,922 $ .60 - $ 3.00
=========
</TABLE>
-13-
<PAGE> 50
10. RELATED PARTY TRANSACTIONS
In connection with the acquisition of patent rights in 1980, the Company
agreed to pay to Dr. James E. Tinnell, the inventor of one of the
Company's treatment compositions and a director of the Company, a royalty
of 5% of gross sales of the treatment composition. Royalty expense to Dr.
Tinnell for the years ended July 31, 1996, 1995 and 1994 was $300,078,
$263,311 and $201,014, respectively.
The Company advanced $129,338 in fiscal year 1994 to certain of its
officers for withholding taxes due upon exercise of common stock options.
The outstanding advances were $16,167 and $38,331 at July 31, 1996 and
1995, respectively. The notes bear interest at 4.16% per year and are
payable in full on December 31, 1996. Included in interest income is $962,
$1,609 and $2,216 for the years ended July 31, 1996, 1995 and 1994,
respectively, related to these notes.
The Company leases office space to a radio broadcasting company (the
"Broadcast Company") controlled by one of the directors of the Company.
During fiscal 1996, 1995 and 1994, the Company recognized approximately
$3,109, $11,863 and $23,494, respectively, in rental income under this
lease. Under the terms of the current lease, monthly rent is approximately
$3,600. As of July 31, 1996, the Broadcast Company is in arrears of
approximately $42,000 in rent and other items related to this lease. The
rent receivable is offset in full, by a reserve.
11. INCOME TAXES
The Company has no income tax provision or benefit for the years ended
July 31, 1996, 1995 and 1994 because of the operating losses incurred.
Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes,
and (b) operating loss and tax credit carryforwards. The tax effects of
significant items comprising the Company's net deferred tax asset as of
July 31 are as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Deferred tax assets:
Operating loss carryforwards $ 5,487,000 $ 5,096,000
Other 15,000 15,000
----------- -----------
5,502,000 5,111,000
Valuation allowance (5,502,000) (5,111,000)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
</TABLE>
As a result of applying SFAS No. 109, previously unrecorded deferred tax
benefits from operating loss carryforwards incurred by the Company were
recognized at August 1, 1993, as part of the cumulative effect of adopting
the Statement. Also recognized at that date was a valuation allowance for
the same amount. Approximately $245,000 of the deferred tax asset relates
to deductions generated by the exercise of stock options, which, if
realized, will result in an increase in capital in excess of par value.
-14-
<PAGE> 51
Net operating loss carryforwards for tax and financial reporting purposes
at July 31, 1996 are as follows:
<TABLE>
<CAPTION>
FEDERAL FINANCIAL FEDERAL
YEAR ENDED TAX REPORTING EXPIRATION
JULY 31, AMOUNT AMOUNT DATE
<S> <C> <C> <C>
1996 $ 1,540,000 $ 827,000 2011
1995 871,000 863,000 2010
1994 2,119,000 1,000,000 2009
1993 1,228,000 2008
1992 352,000 239,000 2007
1991 4,700,000 3,699,000 2006
1990 98,000 2005
1988 189,000 265,000 2003
1987 429,000 441,000 2002
1986 667,000 646,000 2001
1985 1,000,000 1,023,000 2000
1984 1,081,000 1,092,000 1999
1983 337,000 259,000 1998
1982 444,000 1997
----------- ------------
Total $15,055,000 $ 10,354,000
=========== ============
</TABLE>
Net operating loss carryforwards for state income tax purposes, totaling
approximately $6,138,000, must be utilized within five years of the date
of their origination, and expire from 1998 through 2002.
12. DALECO ZILA PARTNERS II, L.P.
In June 1992, the Company entered into an agreement with Daleco Capital
Corporation to form a limited partnership known as Daleco Zila Partners
II, L.P. (the "Partnership"). The Company and its officers have no
partnership interest in the Partnership. The purpose of the Partnership
was to provide the Company with a means to fund the marketing program for
certain new products. The original Partnership agreement provided for a
minimum of $150,000 and a maximum of $1,562,500 to be raised by the sale
of partnership units. Under the original agreement, the Partnership will
expend up to 80% of the gross partnership proceeds for marketing and
sales-related expenditures on behalf of the Company. In 1994, the
Partnership agreement was amended to increase the maximum amount of
marketing funds potentially available to the Company to be raised to
$2,250,000.
In addition, the Company issued to Daleco Capital Corporation and the
Partnership warrants to purchase 100,000 and 300,000 shares, respectively,
of the Company's common stock at $3.00 a share subject to a vesting
schedule. As a part of the amendment to the original agreement, Daleco
Capital Corporation and the Partnership were issued an additional 80,000
and 240,000 warrants, respectively. The warrants vest at the rate at which
the Partnership expends the net partnership proceeds on the Company's
marketing program.
At July 31, 1996 and 1995, approximately $1,820,000 has been spent. The
Company is committed to pay the Partnership a commission equal to 5% to
10% of the gross sales of certain of the Company's new products, until
such time as three times the amount of funds expended on the Company's
marketing program by the Partnership has been paid to the Partnership.
-15-
<PAGE> 52
Included in selling, general and administrative expense for the years
ended July 31, 1996, 1995 and 1994 is approximately $15,000, $25,000 and
$19,000, respectively, of commissions paid to the Partnership.
During the years ended July 31, 1996, 1995 and 1994, the Partnership
funded or accrued approximately $-0-, $10,500 and $810,000, respectively,
in marketing costs. Included in trade accounts receivable at July 31, 1995
is approximately $60,000 of such costs which were reimbursed by the
Partnership in fiscal 1996.
The Company had no funding of marketing programs by the Partnership after
July 31, 1995 and anticipates no further funding. Accordingly, 137,520
warrants expired as a result of the Partnership raising less than the
maximum level of marketing funds.
13. COMMITMENTS AND CONTINGENCIES
Two officers of the Company are covered under separate employment
contracts. Each contract provides for five years notice of termination and
provides for an annual base compensation ranging from $165,000 to
$175,000.
The Company has a New Drug Application pending with the FDA for OraTest.
The initiation of the marketing of OraTest in the United States is
dependent upon the approval of the New Drug Application by the FDA. During
1994, the FDA approved the Company's application for an Investigational
New Drug for OraTest, which allows the Company to manufacture the product
in the United States for clinical studies and export to certain foreign
countries. The Company believes that the FDA will approve the New Drug
Application and the production and marketing of OraTest (Note 6).
The Company has filed a complaint against Colgate-Palmolive Company
("Colgate") alleging that one of Colgate's products infringes upon one of
the Company's patents. Colgate answered the Company's complaint, denying
the infringement and asserting that the Company's patent is invalid and
unenforceable. The Company intends to prosecute its claims for injunctive
relief and damages against Colgate. Although the outcome of this
uncertainty cannot presently be determined, management believes the
ultimate resolution will not have a material adverse effect on the
Company's financial position or results of operations.
In March 1993, the Company entered into a manufacturing and distribution
agreement with Germiphene Corporation ("Germiphene") to manufacture,
distribute and sell OraTest in Canada. For the years ended July 31, 1996,
1995 and 1994, the Company had $7,000, $18,000 and $48,000, respectively,
in sales of OraTest related to the Germiphene agreement.
The Company also leases a manufacturing facility in Phoenix, Arizona under
a three year agreement which expires April 30, 1999. The agreement has an
option to renew for an additional five years. Annual lease payments are
due as follows: $23,064 (1997), $23,064 (1998) and $17,298 (1999). Rent
expense for the year ended July 31, 1996 totaled $10,866.
-16-
<PAGE> 53
14. MAJOR CONCENTRATIONS
One customer accounted for 12.0%, 13.3% and 13.4% of total sales for 1996,
1995 and 1994, respectively. The products comprising the Company's
Zilactin family of products represent 98.6% of the Company's sales.
15. EMPLOYEE BENEFIT PLAN
The Company has adopted the Zila, Inc. 401(k) Savings and Retirement Plan
(the "Plan") for the benefit of eligible employees. Employees may elect to
defer receipt of a portion of their compensation to future years. The
Company may make matching or profit sharing contributions to the Plan.
During 1996 and 1995, the Company contributed approximately $14,000 and
$11,000, respectively, to the Plan.
16. PROPOSED MERGER WITH BIO-DENTAL
On June 3, 1996, the Company announced that it had signed a letter of
intent with Bio-Dental Technologies Corporation ("Bio-Dental") for the
merger of Bio-Dental into Zila. It is the intention of the parties that
the merger be accounted for as a pooling of interests. The proposed terms
of the transaction provide for a per share exchange rate of between .75
and .825 shares of the Company's common stock for each share of Bio-Dental
common stock. Bio-Dental had 6,427,134 shares of common stock outstanding
as of March 31, 1996. The completion of the transaction is subject to a
number of conditions, including the satisfactory completion of due
diligence by both parties, the negotiation and execution of definitive
agreements, the approval of Bio-Dental shareholders and the conclusion
that it is appropriate to account for the merger as a pooling of
interests.
* * * * * *
-17-
<PAGE> 54
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Zila, Inc.
Phoenix, Arizona
We have audited the consolidated financial statements of Zila, Inc. and
subsidiaries as of July 31, 1996 and 1995, and for each of the three years in
the period ended July 31, 1996, and have issued our report thereon dated October
18, 1996; such report is included elsewhere in this Form 10-K. Our audits also
included the financial statement schedule of Zila, Inc. and subsidiaries, listed
in Item 14. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, such financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
October 18, 1996
<PAGE> 55
ZILA, INC. AND SUBSIDIARIES SCHEDULE II
<TABLE>
<CAPTION>
VALUATION AND QUALIFYING ACCOUNTS
THREE YEARS ENDED JULY 31, 1996
- -------------------------------------------------------------------------------------------------------
CHARGED
BALANCE, TO COSTS BALANCE,
BEGINNING AND END OF
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
<S> <C> <C> <C> <C>
Year ended July 31, 1994:
Allowance for doubtful accounts $ 20,000 $ 6,367 $ 6,367 $ 20,000
Accumulated amortization - patents 205,144 27,147 232,291
Accumulated amortization - licenses 41,577 3,946 45,523
Year ended July 31, 1995:
Allowance for doubtful accounts 20,000 4,877 4,877 20,000
Accumulated amortization - patents 232,291 27,379 259,670
Accumulated amortization - licenses 45,523 43,579 89,102
Year ended July 31, 1996:
Allowance for doubtful accounts 20,000 3,741 3,741 20,000
Accumulated amortization - patents 259,670 27,469 287,139
Accumulated amortization - licenses 89,102 53,628 142,730
Accumulated amortization - purchased
technology rights 72,740 72,740
</TABLE>
<PAGE> 1
EXHIBIT 11
ZILA, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
COMPUTATION OF NET LOSS PER COMMON SHARE
THREE YEARS ENDED JULY 31, 1996
- ------------------------------------------------------------------------------------------------------------------------
JULY 31,
-----------------------------------------------------
1996 1995 1994
<S> <C> <C> <C>
PRIMARY LOSS PER COMMON SHARE:
Computation for Statements of Operations -
Net loss $ (827,337) $ (862,920) $ (995,205)
============ ============ ============
Weighted average number of common shares
outstanding 24,839,963 24,087,308 23,862,504
------------ ------------ ------------
Primary loss per common share $ (.03) $ (.04) $ (.04)
============ ============ ============
FULLY DILUTED LOSS PER COMMON SHARE:
Computation for Statements of Operations -
Net loss $ (862,920) $ (862,920) $ (995,205)
============ ============ ============
Weighted average number of common shares
outstanding 24,839,963 24,087,308 23,862,504
------------ ------------ ------------
Fully diluted loss per common share $ (.03) $ (.04) $ (.04)
============ ============ ============
</TABLE>
<PAGE> 1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-32805 and No. 33-32970 of Zila, Inc. on Form S-8 and Registration Statements
No. 33-46239, No. 333-06019 and No. 333-00645 of Zila, Inc. on Form S-3 of our
reports dated October 18, 1996, appearing in this Annual Report on Form 10-K of
Zila, Inc. for the year ended July 31, 1996.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
October 28, 1996
EXHIBIT 23
<PAGE> 1
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, constitutes and
appoints CLARENCE J. BAUDHUIN, as his true and lawful attorney-in-fact and agent
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign the Annual Report on Form
10-K for the fiscal year ended July 31, 1996, for filing with the Securities and
Exchange Commission by Zila, Inc., a Delaware corporation, together with any and
all amendments to such Form 10-K, and to file the same with all exhibits
thereto, and all documents in connection therewith, with the Securities and
Exchange Commission, granting to such attorney-in-fact and agent, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully and to all intents and purposes
as he might or could do in person, hereby ratifying and confirming that such
attorney-in-fact and agent, may lawfully do or cause to be done by virtue
hereof.
DATED: October 8 , 1996
/s/ JOSEPH HINES
------------------------
JOSEPH HINES
STATE OF ARIZONA )
) ss.
County of Maricopa )
On this 8th day of October , 1996, before me, the undersigned Notary
Public, personally appeared JOSEPH HINES, known to me to be the person whose
name is subscribed to the within instrument and acknowledged that he executed
the same for the purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/ JANICE BACKUS
------------------------
Notary Public
My commission expires:
October 23, 1997
EXHIBIT 24A
<PAGE> 1
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, constitutes and
appoints JOSEPH HINES, as his true and lawful attorney-in-fact and agent with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign the Annual Report on Form 10-K for
the fiscal year ended July 31, 1996, for filing with the Securities and Exchange
Commission by Zila, Inc., a Delaware corporation, together with any and all
amendments to such Form 10-K, and to file the same with all exhibits thereto,
and all documents in connection therewith, with the Securities and Exchange
Commission, granting to such attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully and to all intents and purposes
as he might or could do in person, hereby ratifying and confirming all that such
attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
DATED: October 8 , 1996
/s/ CLARENCE J. BAUDHUIN
------------------------
CLARENCE J. BAUDHUIN
STATE OF ARIZONA )
) ss.
County of Maricopa )
On this 8th day of October , 1996, before me, the undersigned Notary
Public, personally appeared CLARENCE J. BAUDHUIN, known to me to be the person
whose name is subscribed to the within instrument and acknowledged that he
executed the same for the purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/ JANICE BACKUS
------------------------
Notary Public
My commission expires:
October 23, 1997
- -------------------------
EXHIBIT 24B
<PAGE> 1
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, constitutes and
appoints JOSEPH HINES and CLARENCE J. BAUDHUIN, and each of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K for the fiscal year ended
July 31, 1996, for filing with the Securities and Exchange Commission by Zila,
Inc., a Delaware corporation, together with any and all amendments to such Form
10-K, and to file the same with all exhibits thereto, and all documents in
connection therewith, with the Securities and Exchange Commission, granting to
such attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully and to all intents and purposes as he might
or could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or each of them, may lawfully do or cause to be
done by virtue hereof.
DATED: October 8 , 1996
/s/ DR. JAMES E. TINNELL
------------------------
DR. JAMES E. TINNELL
STATE OF ARIZONA )
) ss.
County of Maricopa )
On this 8th day of October , 1996, before me, the undersigned Notary
Public, personally appeared DR. JAMES E. TINNELL, known to me to be the person
whose name is subscribed to the within instrument and acknowledged that he
executed the same for the purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/ JANICE BACKUS
------------------------
Notary Public
My commission expires:
October 23, 1997
EXHIBIT 24C
<PAGE> 1
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, constitutes and
appoints JOSEPH HINES and CLARENCE J. BAUDHUIN, and each of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K for the fiscal year ended
July 31, 1996, for filing with the Securities and Exchange Commission by Zila,
Inc., a Delaware corporation, together with any and all amendments to such Form
10-K, and to file the same with all exhibits thereto, and all documents in
connection therewith, with the Securities and Exchange Commission, granting to
such attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully and to all intents and purposes as he might
or could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or each of them, may lawfully do or cause to be
done by virtue hereof.
DATED: October 8 , 1996
/s/ PATRICK M. LONERGAN
------------------------
PATRICK M. LONERGAN
STATE OF ARIZONA )
) ss.
County of Maricopa )
On this 8th day of October , 1996, before me, the undersigned Notary
Public, personally appeared PATRICK M. LONERGAN, known to me to be the person
whose name is subscribed to the within instrument and acknowledged that he
executed the same for the purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/ JANICE BACKUS
------------------------
Notary Public
My commission expires:
October 23, 1997
EXHIBIT 24D
<PAGE> 1
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, constitutes and
appoints JOSEPH HINES and CLARENCE J. BAUDHUIN, and each of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K for the fiscal year ended
July 31, 1996, for filing with the Securities and Exchange Commission by Zila,
Inc., a Delaware corporation, together with any and all amendments to such Form
10-K, and to file the same with all exhibits thereto, and all documents in
connection therewith, with the Securities and Exchange Commission, granting to
such attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully and to all intents and purposes as he might
or could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or each of them, may lawfully do or cause to be
done by virtue hereof.
DATED: October 8 , 1996
/s/ MICHAEL S. LESSER
------------------------
MICHAEL S. LESSER
STATE OF ARIZONA )
) ss.
County of Maricopa )
On this 8th day of October , 1996, before me, the undersigned Notary
Public, personally appeared MICHAEL S. LESSER, known to me to be the person
whose name is subscribed to the within instrument and acknowledged that he
executed the same for the purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/ JANICE BACKUS
------------------------
Notary Public
My commission expires:
October 23, 1997
EXHIBIT 24E
<PAGE> 1
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, constitutes and
appoints JOSEPH HINES and CLARENCE J. BAUDHUIN, and each of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K for the fiscal year ended
July 31, 1996, for filing with the Securities and Exchange Commission by Zila,
Inc., a Delaware corporation, together with any and all amendments to such Form
10-K, and to file the same with all exhibits thereto, and all documents in
connection therewith, with the Securities and Exchange Commission, granting to
such attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully and to all intents and purposes as he might
or could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or each of them, may lawfully do or cause to be
done by virtue hereof.
DATED: October 8 , 1996
/s/ CARL SCHROEDER
------------------------
CARL SCHROEDER
STATE OF ARIZONA )
) ss.
County of Maricopa )
On this 8th day of October , 1996, before me, the undersigned Notary
Public, personally appeared, CARL SCHROEDER, known to me to be the person whose
name is subscribed to the within instrument and acknowledged that he executed
the same for the purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/ JANICE BACKUS
------------------------
Notary Public
My commission expires:
October 23, 1997
EXHIBIT 24F
<PAGE> 1
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, constitutes and
appoints JOSEPH HINES and CLARENCE J. BAUDHUIN, and each of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K for the fiscal year ended
July 31, 1996, for filing with the Securities and Exchange Commission by Zila,
Inc., a Delaware corporation, together with any and all amendments to such Form
10-K, and to file the same with all exhibits thereto, and all documents in
connection therewith, with the Securities and Exchange Commission, granting to
such attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully and to all intents and purposes as he might
or could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or each of them, may lawfully do or cause to be
done by virtue hereof.
DATED: October 8 , 1996
/s/ H. RAY COX
------------------------
H. RAY COX
STATE OF ARIZONA )
) ss.
County of Maricopa )
On this 8th day of October , 1996, before me, the undersigned Notary
Public, personally appeared H. RAY COX, known to me to be the person whose name
is subscribed to the within instrument and acknowledged that he executed the
same for the purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/ JANICE BACKUS
------------------------
Notary Public
My commission expires:
October 23, 1997
EXHIBIT 24G
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-START> AUG-01-1995
<PERIOD-END> JUL-31-1996
<CASH> 204,055
<SECURITIES> 711,470
<RECEIVABLES> 844,591
<ALLOWANCES> (20,000)
<INVENTORY> 398,976
<CURRENT-ASSETS> 2,300,036
<PP&E> 1,672,236
<DEPRECIATION> (389,443)
<TOTAL-ASSETS> 12,030,306
<CURRENT-LIABILITIES> 1,252,654
<BONDS> 382,006
0
0
<COMMON> 25,775
<OTHER-SE> 10,369,871
<TOTAL-LIABILITY-AND-EQUITY> 12,030,306
<SALES> 5,978,131
<TOTAL-REVENUES> 6,843,546
<CGS> 918,296
<TOTAL-COSTS> 1,286,993
<OTHER-EXPENSES> 6,381,784
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 55,873
<INCOME-PRETAX> (827,337)
<INCOME-TAX> 0
<INCOME-CONTINUING> (825,231)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (827,337)
<EPS-PRIMARY> (0.03)
<EPS-DILUTED> (0.03)
</TABLE>
