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FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

          ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended July 31, 2001
OR

          TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number 0-17521

Registrant’s telephone number, including area code (602) 266-6700

Securities registered pursuant to Section 12 (b) of the Act:

Securities registered pursuant to Section 12 (g) of the Act:

Common Stock, $.001 par value
(Title of Class)

         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 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 28, 2001, the aggregate market value of common stock held by non-affiliates of the registrant was $ 77,267,000.

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 28, 2001, the number of shares of common stock outstanding was 43,653,727.

DOCUMENTS INCORPORATED BY REFERENCE

         Materials from the Registrant’s 2001 Proxy Statement have been incorporated by reference into Part III, Items 10, 11, 12 and 13.

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This Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Company’s actual results could differ materially from those set forth in the forward-looking statements. Certain factors that might cause such a difference are discussed in the section entitled “Cautionary Factors that May Affect Future Results” on page 15 of this Form 10-K.

PART I

Item 1. BUSINESS

General

         Zila, Inc., a Delaware corporation, is an international manufacturer and marketer of pharmaceutical, biomedical, dental, and nutraceutical products. The Company’s business is organized into four major product groups: Consumer Pharmaceuticals, Professional Products, Dental Supplies and Nutraceuticals. Unless the context otherwise indicates, the terms “Zila” and “Company” as used herein refer to Zila, Inc. and each of its subsidiaries.

         The Consumer Pharmaceuticals Group consists of over-the-counter products, including the Zilactin® family of over-the-counter products. The Consumer Pharmaceuticals Group operates under a wholly owned subsidiary of the Company, Zila Pharmaceuticals, Inc., a Nevada corporation.

         The Professional Products Group includes Peridex® prescription mouth rinse, Pro-Ties™, a bundling system for instrument sterilization, the Pro-Series line of specialty products marketed directly to dentists, OraTest®, an oral cancer diagnostic system and the plastic molded products from Zila Swab Technologies, Inc., dba Innovative Swab Technologies (“IST”), a wholly owned subsidiary of the Company. The Professional Products Group (excluding OraTest® and IST) operates under a wholly owned subsidiary of the Company, Zila Pharmaceuticals, Inc., a Nevada corporation. The OraTest® product is sold in Europe under a wholly owned subsidiary of the Company, Zila Limited, a United Kingdom company, and in other parts of the world through Zila, Inc.

         On February 5, 2001, the Company announced that it had acquired the patent rights and the Antioch, Illinois manufacturing operations for swab products from National Healthcare Manufacturing Corporation (“NHMC”), headquartered in Winnipeg, Canada. Intellectual property, inventory, plus molding, labeling, filling and sealing equipment were included in the acquisition. The business unit is known as Innovative Swab Technologies. Zila paid approximately $2.3 million in a combination of cash and preferred stock for the unit.

         The Dental Supply Group operates through the Company’s wholly owned subsidiaries Bio-Dental Technologies Corporation, a California corporation, and Zila Technologies, Inc., formerly Cygnus Imaging Inc. (“Cygnus”), an Arizona corporation. Bio-Dental Technologies Corporation has two subsidiaries, Ryker Dental of Kentucky, Inc., a Kentucky corporation, which does business under the name Zila Dental Supply (“ZDS”) and is a national distributor of professional dental supplies, and Integrated Dental Technologies, Inc. (“IDT”), a California corporation that distributed PracticeWorks™ dental practice management software and is currently inactive.

         On October 28, 1999, Cygnus, a manufacturer and marketer of dental imaging products including digital x-ray systems and intraoral cameras, completed the sale of substantially all of its assets and certain of its liabilities to Procare Laboratories, Inc. (“Procare”), of Scottsdale, Arizona for approximately $4.0 million.

         On December 20, 1999, IDT completed the sale of substantially all of its assets and liabilities related to its PracticeWorks division located in Gold River, California to InfoCure Corporation (“InfoCure”), of Atlanta, Georgia for approximately $4.65 million. InfoCure is a national provider of healthcare practice management software products and services to targeted healthcare practice specialties.

         The Nutraceuticals Group includes Oxycal Laboratories, Inc., an Arizona corporation (“Oxycal”), and its two subsidiaries, Inter-Cal Corporation, Inc, (“Inter-Cal”), an Arizona corporation, and Oxycal Export, Inc., a U.S. Virgin Islands corporation. Oxycal and its subsidiaries manufacture and distribute a patented and unique form of Vitamin C under the trademark Ester-C® and a line of botanical products that includes the Palmettx™ saw palmetto product.

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         Financial information for each group or segment for each of the last three fiscal years is included in the Audited Consolidated Financial Statements and the notes thereto and have been restated to reflect the new segments.

         The Company’s principal executive offices are located at 5227 North Seventh Street, Phoenix, Arizona 85014-2800, and its telephone number is (602) 266-6700.

Products

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Marketing

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Manufacturing and Supply

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Competition

All industries in which the Company sells its products are highly competitive. A number of companies, many 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 that 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.

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Licensing

Governmental Regulation

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Patents and Trademarks

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Product Liability Insurance

         The Company faces an inherent risk of exposure to product liability claims if the use of one or more of its products is alleged to have resulted in adverse effects. Such risk exists even with respect to those products that are manufactured in licensed and regulated facilities or that otherwise received regulatory approval for commercial sale. There can be no assurance that the Company will not be subject to significant product liability claims. Many of the Company’s customers require the Company to maintain product liability insurance coverage as a condition of their conducting business with the Company. As the loss of such insurance coverage could result in a loss of such customers, the Company intends to take all reasonable steps necessary to maintain such insurance coverage. There can be no assurance that insurance coverage will be available in the future on commercially reasonable terms, or at all, or that such insurance will be adequate to cover potential product liability claims. The loss of insurance coverage or the assertion of a product liability claim or claims could have a material adverse effect on the Company’s business, financial condition and results of operations.

Employees

         As of July 31, 2001, the Company and its operating subsidiaries had 266 employees in the following categories:

         No employees are represented by a labor union, nor are there any current labor relations complaints on file with any agency. The Company believes its relationship with its employees is good.

Cautionary Factors that May Affect Future Results

         The disclosure and analysis in this report and in the Company’s other reports, press releases and public statements of our officers contain some forward-looking statements. Forward-looking statements give the Company’s current expectations or forecasts of future events, and may be identified by the fact that they do not relate strictly to historical or current facts. In particular, forward-looking statements include statements relating to future actions, prospective products or product approvals, future performance or results of current and anticipated products, sales efforts, expenses, the outcome of contingencies such as legal proceedings, and financial results. Many factors discussed in Part I of this report, for example government regulation, competition, and the supply of raw materials, will be important in determining future results.

         Any or all forward-looking statements in this report, any other report, and in any other public statements may turn out to be wrong. They can be affected by inaccurate assumptions or by known or unknown uncertainties. No forward-looking statement can be guaranteed, and actual results may differ materially.

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Item 2.

PROPERTIES

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Item 3. LEGAL PROCEEDINGS

         The Company and certain officers of the Company were named as defendants in a consolidated First Amended Class Action Complaint filed July 6, 1999 in the United States District Court for the District of Arizona under the caption In re Zila Securities Litigation, No. CIV 99 0115 PHX EHC. The First Amended Class Action Complaint sought damages in an unspecified amount on behalf of a class consisting of purchasers of the Company’s securities for alleged violations of the federal securities laws. During the fourth quarter 2001, the parties settled this matter without a material impact on the Company’s financial statements.

         On September 8, 1999, the Securities and Exchange Commission (the “Commission”) entered an order directing an investigation entitled “In the Matter of Zila, Inc.” At that time, the Commission stated it was investigating, inter alia, whether there were false and misleading statements in press releases, filings with the Commission, or elsewhere concerning the prospects that the Oncologic Drugs Advisory Committee for the FDA would recommend approval of the OraTest® NDA and whether the FDA would subsequently approve the NDA. The Company has cooperated with the Commission in its investigation. The Company and Mr. Hines, its President, are engaged in settlement discussions with the staff of the Commission.

         In September 2000, counsel advised Zila that its obligation to pay royalties to Dr. James E. Tinnell, (“Tinnell”) under a 1980 agreement ceased as of August 25, 1998 when the patents on the invention expired. In September 2000, Zila gave notice to Tinnell that it would not continue paying such royalties and requested reimbursement of royalties paid since August 1998. After attempts to settle the matter failed, Zila filed suit in the Federal District Court for the District of Nevada (Zila, Inc. v. James E. Tinnell, No. CV-S-00-1344), requesting a declaratory judgment that it had no royalty obligations to Tinnell after August 1998 and judgment for the overpaid royalties.

         Tinnell asserted a counterclaim for royalties since the last payment in August 2000 and several additional counterclaims based on transactions between Tinnell and Zila in the 1980s. Counsel have advised Zila that, based on their investigations and discovery to date, that (i) the counterclaim for royalties is without merit and (ii) the additional counterclaims are meritless and, in any event, are time-barred by the applicable statutes of limitation.

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.

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PART II

Item 5. MARKET FOR THE COMPANY’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS

         Information regarding the market for Zila’s 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”).

         The number of stockholders of record of the Common Stock as of July 31, 2001 and September 28, 2001 were approximately 3,170 and 3,163, respectively. As of July 31, 2001 there are 100,000 shares of the Company’s Series B Preferred Stock outstanding.

         The Company has not paid dividends on the Common Stock. It is the 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.

         On March 23, 2000, the Company issued a warrant to purchase 10,000 shares of the Company’s common stock, to a financial advisor. The warrant was issued pursuant to the terms of an engagement agreement, and the exercise price is $4.906 per share. The warrant was issued pursuant to the exemption set forth in Section 4(2) of the Securities Act of 1933, as amended.

         On December 21, 2000, the Company issued a warrant to purchase 15,000 shares of the Company’s common stock, to a financial advisor. The warrant was issued pursuant to the terms of a consulting agreement and 7,500 of the shares underlying the warrant have an exercise price of $4.00 per share and 7,500 of the shares have an exercise price of $5.00 per share. The warrant was issued pursuant to the exemption set forth in Section 4(2) of the Securities Act of 1933, as amended.

         On February 1, 2001, the Company issued 100,000 shares of Series B convertible preferred stock to National Healthcare Manufacturing Corporation, U.S. as part of the acquisition of the patent rights and the Antioch, Illinois manufacturing operations for swab products. The preferred stock is convertible into shares of the Company’s common stock at any time at a conversion ratio of one to one. The holders of the preferred stock are entitled to receive cumulative quarterly dividends at a rate of $0.0975 per share per fiscal quarter, payable in arrears. Holders of the preferred shares have no voting rights except as required by applicable law.

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Item 6. SELECTED FINANCIAL DATA

         The following tables summarize selected financial information derived from the Company’s audited financial statements. The information set forth below is not necessarily indicative of results of future operations 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 in this Form 10-K.

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

         This Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words “believe,” “expect,” “anticipate,” “intend,” “estimate” and other expressions which are predictions of or indicate future events and trends and which do not relate to historical matters, identify forward-looking statements. These forward-looking statements are based largely on the Company’s expectations or forecasts of future events, can be affected by inaccurate assumptions and are subject to various business risks and known and unknown uncertainties, a number of which are beyond the Company’s control. Therefore, actual results could differ materially from the forward-looking statements contained in this document, and readers are cautioned not to place undue reliance on such forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. There can be no assurance that the forward-looking statements contained in this document will, in fact, transpire or prove to be accurate.

Company Overview

         The following discussion and analysis should be read in conjunction with “Selected Financial Data” and the audited Consolidated Financial Statements and Notes thereto.

         Zila is a worldwide manufacturer and marketer of pharmaceutical, biomedical, dental and nutritional products. The Company has four major product groups: Consumer Pharmaceuticals, Professional Products, Dental Supplies and Nutraceuticals. The Consumer Pharmaceuticals Group consists of over-the-counter products, including the Zilactin® family of over-the-counter products. The Professional Products Group includes Peridex® prescription mouth rinse, the Pro-Series family of products including Pro-Ties™, the bundling system of instrument sterilization, OraTest®, an oral cancer detection system, and the plastic molded products from IST. The Dental Supply Group includes Zila Dental Supply, a national distributor of professional dental supplies. The Nutraceuticals Group is comprised of Oxycal Laboratories, Inc. (“Oxycal”) and its Inter-Cal subsidiary (“Inter-Cal”), a manufacturer and distributor of mineral and botanical products including a patented and unique form of Vitamin C under the trademark Ester-C® and the Palmettx botanical line of products.

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         On October 28, 1999, Cygnus completed the sale of substantially all of its assets and certain liabilities to Procare Laboratories, Inc. (“Procare”), of Scottsdale, Arizona for approximately $4.0 million. Procare is controlled by the former owner and President of Cygnus.

         On December 20, 1999, IDT completed the sale of substantially all of its assets and liabilities related to its PracticeWorks division located in Gold River, California to InfoCure Corporation (“InfoCure”), of Atlanta, Georgia for approximately $4.65 million. InfoCure is a national provider of healthcare practice management software products and services to targeted healthcare practice specialties.

         On February 5, 2001, the Company announced it had acquired the patent rights and the Antioch, Illinois manufacturing operations for swab products from National Healthcare Manufacturing Corporation (“NHMC”), headquartered in Winnipeg, Canada. Intellectual property, inventory, plus molding, labeling, filling and sealing equipment were included in the acquisition. The business unit is known as Innovative Swab Technologies (“IST”) and is a wholly owned subsidiary of the Company. Zila paid approximately $2.3 million in a combination of cash and preferred stock for the unit.

Operating Results

         Fiscal year ended July 31, 2001. Net revenues declined 5.0% to $73.7 million for fiscal year 2001, compared to revenues of $77.6 million for the 2000 fiscal year.

         Net revenues in 2001 for the Dental Supply Group increased 4.6% to $41.6 million compared to $39.8 million for the previous fiscal year. This increase was primarily attributable to an increase in both full-service supplies and equipment revenue due to the contribution of the branch offices opened in fiscal 1999 and increases in Internet sales. The Consumer Pharmaceuticals Group had net revenues of $11.8 million for fiscal year 2001, a slight increase from the $11.7 million recorded during the corresponding period last year. Sales of the three Zilactin® canker and cold sore medicines for fiscal 2001 were approximately equal to those in fiscal 2000. Sales of the Zilactin® Toothache for fiscal 2001 increased 13.9% over the previous year while sales of the Zilactin® Baby declined 25% over the previous fiscal year. International sales for fiscal 2001 increased 3.9% when compared to fiscal year 2000.

         The Professional Products Group had revenues of $4.8 million in fiscal 2001, a 6.9% decrease from the $5.2 million recorded in 2000. The decrease was due primarily to lower sales of Peridex®, which declined 32.9% from $5.1 million in 2000 to $3.4 million in 2001 due to increased pricing pressures and substitutions of generic equivalents. In addition, the current year revenues include (i) a one-time licensing fee of $499,000 generated from an agreement executed during the second fiscal quarter, whereby the Company granted a customer the right to use its technology related to chlorhexidine gluconate, the active ingredient in Peridex®, to produce a generic form of the product for distribution, and (ii) revenues for IST of $521,000 (excluding $425,000 of intercompany sales) for the partial year. In order to stimulate sales of its Professional Products, in April 2001, the Company signed a contract with the Lanmark Group for telemarketing and fulfillment services for its new Pro-Series line of products that are being marketed directly to dental professionals.

         Net revenues for the Nutraceuticals Group for fiscal year 2001 were $15.4 million, a 19.4% decrease when compared to $19.1 million for fiscal year 2000. The decrease was largely attributable to an overall slowdown in the domestic and foreign vitamin and food supplement market during the first nine months of the fiscal year and the effects of promotional discounting that occurred in prior year periods. International sales for the Nutraceuticals Group for 2001 declined approximately 26.0% when compared to the previous fiscal year.

         Cost of products sold was $41.4 million for the fiscal year ended July 31, 2001, a 3.6% increase from $40.0 million for the previous fiscal year. Cost of products sold as a percentage of net revenues increased to 56.2% in fiscal year 2001 from 51.6% in the corresponding 2000 period. The increase for the period reflects the growth of the Dental Supply Group as a percentage of total revenues, 56.5% for fiscal 2001 compared to 51.3% for same period of the previous fiscal year. The gross profit margin for the Dental Supply Group is lower as compared to the other operating groups resulting in a higher cost of products sold as a percentage of revenues.

         Cost of products sold as a percentage of net revenues for the Dental Supply Group increased slightly to 75.1% in fiscal year 2001 from 74.3% in fiscal year 2000 primarily due to a change in product mix. In addition, the Dental Supply Group had no increase in prices to customers until the fourth quarter of the year even though the cost of products increased from the manufacturers. Cost of products sold as a percentage of net revenues for Consumer Pharmaceuticals increased to 24.5% in fiscal year 2001, compared to 22.5% for the corresponding period in fiscal 2000. The increase for the period is a result of a change in the mix of products sold as the toothache product has a higher cost than the other Zilactin® products.

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         Cost of products sold as a percentage of net revenue for the Professional Products Group increased to 32.6% from 26.1% in the prior fiscal year due primarily to the addition of IST to the group during the year. IST had a cost of products sold of 70.6% of net revenue for the current fiscal year. Cost of products sold as a percentage of net revenues for the Nutraceuticals Group increased to 35.6% for the current fiscal year from 27.2% The increase was caused by costs associated with the manufacturing of the new Palmettx™ botanical line of products as well as the duplicate overhead, moving and equipment validation costs related to the relocation of the manufacturing equipment to the new facility during the current fiscal year.

         The Company incurred selling, general and administrative expenses of $31.9 million in fiscal year 2001, a 1.8% decrease when compared to $32.4 million in fiscal year 2000. The decrease is primarily attributable to the elimination of the costs related to the Cygnus and PracticeWorks businesses partially offset by increased costs related to the expansion of the sales force and service department at Zila Dental Supply’s full service branches, increased marketing and advertising expenses at Inter-Cal and the inclusion of the costs at IST. Selling, general and administrative expenses as a percentage of net sales in fiscal 2001 increased to 43.2% from 41.8% in fiscal 2000 as a result of lower net revenues.

         Research and development expenses increased $1.4 million, or 86.5%, from $1.6 million incurred in fiscal year 2000 to $3.0 million for fiscal year 2001. The increase was primarily due to an increase in expenses related to research and clinical activities associated with the OraTest® clinical study, partially offset by a reduction of expenses related to seeking international approval of OraTest® and a reduction of costs resulting from the sale of the Cygnus and PracticeWorks businesses.

         Depreciation and amortization expenses increased $47,000 when compared to fiscal year 2000. The increase was mainly related to the increase in depreciation of assets associated with Inter-Cal’s new manufacturing facility that were placed in service during fiscal 2001.

         The Company recorded interest expense of $597,000 for the year ended July 31, 2001 compared to $213,000 in the prior fiscal year, an increase of $384,000. The increase was attributable to an increase in bank borrowings during fiscal year 2001 as compared to the previous year period.

         In the year ended July 31, 2001, the Company recorded income tax benefit of $335,000 compared to an income tax expense of $1.8 million in fiscal 2000. The Company offset most of its deferred tax asset generated in the current year with a valuation allowance.

         For the fiscal year ended July 31, 2001, the Company had a net loss of $6.3 million compared to a net income of $2.9 million for 2000. The loss is due primarily to decreased profitability in the Company’s businesses during the year and increased spending on OraTest®.

         Fiscal year ended July 31, 2000. Total net revenues grew 8.8% to $77.6 million for the 2000 fiscal year, compared to revenues of $71.3 million for the prior fiscal year.

         Net revenues in 2000 for the Dental Supply Group increased 26.3% to $39.8 million compared to $31.5 million for the previous fiscal year. This increase was primarily attributable to an increase in full-service operations due to the contribution of the two additional branch offices opened in fiscal 1999 and increases in Internet sales. Consumer Pharmaceuticals had net revenues of $11.7 million for the 2000 fiscal year, a 28.4% increase from the $9.1 million recorded during the corresponding period last year. Over-the-counter sales of the Zilactin® family of products increased primarily due to higher sales of the Zilactin® Toothache Swab and Zilactin-L product lines. Net revenues for the Professional Products Group were $5.2 million in 2000, a decrease of 44.3% from the $9.3 million recorded in fiscal year 1999. The decrease was due primarily to a decline in sales of Peridex® due to increased pricing pressures from generic equivalents. In order to increase sales of Peridex, the Company signed a distribution agreement with Omnii Products, a national marketer and detailer of dental products that targets dispensing dentist professionals in the United States.

         Net revenues for the Nutraceuticals Group for fiscal year 2000 were $19.1 million, a 27.5% increase when compared to $15.0 million for fiscal year 1999. International sales for the group increased 104% to $6.1 million during the current fiscal year as compared to the previous year due to improved economic conditions in foreign markets, primarily in the Pacific Rim region. In addition, Inter-Cal had increased demand for all of its major domestic product lines in fiscal 2000 when compared to the fiscal 1999 year.

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         Cost of products sold were $40.0 million for the fiscal year ended July 31, 2000, a 16.5% increase from $34.3 million for the previous fiscal year. Cost of products sold as a percentage of net revenues increased to 51.6% in fiscal year 2000 from 48.2% in the corresponding 1999 period. The increase for the period reflects the growth of the Dental Supply Group as a percentage of total revenues, 51.3% for fiscal 2000 compared to 44.2% for same period of the previous fiscal year. The gross profit margin for the Dental Supply Group is lower as compared to the other operating groups resulting in a higher cost of products sold as a percentage of revenues.

         Cost of products sold as a percentage of net revenues for the Dental Supply Group decreased slightly to 74.3% in fiscal year 2000 from 74.6% in fiscal year 1999 primarily due to an increase in vendor rebate programs in the first quarter of fiscal 2000. Cost of products sold as a percentage of net revenues for the Consumer Pharmaceuticals Group increased to 22.5% in fiscal year 2000, compared to 19.3% for the corresponding period in fiscal 1999. The increase for the period is a result of a change in the mix of products sold during 2000. Cost of products sold as a percentage of net revenue for the Professional Products Group increased to 26.1% from 16.7% in the prior fiscal year due primarily to a promotional program for Peridex® that offered the product at reduced pricing during the second half of the year. Cost of products sold as a percentage of net revenues for the Nutraceuticals Group decreased slightly to 27.2% for the current fiscal year from 27.9% due primarily to favorable raw material contracts in effect for fiscal year 2000 as compared to fiscal year 1999.

         The Company incurred selling, general and administrative expenses of $32.4 million, or 41.8% of net revenues during the fiscal year ended July 31, 2000 compared to $31.9 million, or 44.7% of net revenue in fiscal year 1999. The decrease in selling, general and administrative expenses as a percentage of revenue is attributable to a reduction in costs related to the Cygnus and PracticeWorks businesses partially offset by increased costs related to the expansion of the sales force and service department at Zila Dental Supply’s full service branches, increased selling and administrative costs related to the OraTest® international product launches, increased marketing and selling expenses at Inter-Cal and increased corporate legal, professional and insurance expenses.

         Research and development expenses decreased $2.4 million, or 59.2%, from $4.0 million incurred in fiscal year 1999 to $1.6 million for the same period in fiscal year 2000. The decrease was primarily due to reduced expenses related to research and clinical activities associated with the OraTest® product, and reduced expenses related to seeking international approval of OraTest® and a reduction of costs incurred in the Cygnus and PracticeWorks businesses which were sold in fiscal year 2000.

         Depreciation and amortization expenses decreased $104,000 from $3.6 million in fiscal year 1999 to $3.5 million in fiscal year 2000. The decrease was mainly related to the sale of the Cygnus and PracticeWorks businesses.

         The Company recorded interest expense of $212,000 for the year ended July 31, 2000 compared to $393,000 in the prior fiscal year, a decrease of $181,000. The decrease was attributable to decreases in debt obligations incurred during fiscal year 2000 as compared to the previous year period.

         In the year ended July 31, 2000, the Company recorded income tax expense of $1.8 million which is net of $2.9 million in income tax benefit resulting from the reversal of a valuation allowance ($1 million of which was attributable to the exercise of common stock options and therefore credited to capital in excess of par value) as compared to an income tax benefit of $846,000 ($250,000 of which was attributable to the exercise of common stock options and therefore credited to capital in excess of par value) for the fiscal year ended July 31, 1999. The reversal of the valuation allowance was based on the Company’s estimate that it is more likely than not that certain net operating losses of prior years will be realized. Excluding the effects of the reversal of the valuation allowance, the Company’s effective tax rate for the current fiscal year is higher than the statutory rate due primarily to the amortization of intangible assets that is not deductible for tax purposes and the non-deductibility of the Company’s foreign operating losses. Additionally, approximately $1.7 million of goodwill related to the sale of Cygnus was not deductible for tax purposes.

         For the fiscal year ended July 31, 2000, the Company had net income of $2.9 million compared to a net loss of $2.0 for 1999. The increase in profitability is due primarily to the increased profitability in the Nutraceuticals Group, the sale of the PracticeWorks business and the elimination of losses associated with the Cygnus business.

Inflation and Seasonality

         Inflation has had no material effect on the operations or financial condition of the Company. The Company’s consolidated operations are not considered seasonal in nature.

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Liquidity and Capital Resources

         At July 31, 2001, the Company had cash and cash equivalents of $1.6 million compared to $5.6 million at July 31, 2000. Excess cash and cash equivalents are invested primarily in money market accounts. The Company’s working capital was $16.4 million at July 31, 2001 as compared to $20.3 million at July 31, 2000. Working capital decreased primarily due to an increase in bank borrowings during the year. The Company’s current ratio was 2.0 at July 31, 2001, compared to 2.8 at July 31, 2000.

         During the year ended July 31, 2001, cash used in operating activities totaled $8.7 million primarily related to the net loss of $6.3 million plus changes in operating assets and liabilities totaling $5.9 million offset by non-cash depreciation and amortization of $3.5 million. Significant changes in operating assets and liabilities were comprised of (i) an increase in inventories of $4.3 million related primarily to the new Palmettx™ botanical line of products at Inter-Cal and purchases of Pro-Series products and (ii) a decrease in accounts payable and accrued expenses of $1.6 million primarily due to vendor payments made during the year for inventory purchases.

         The Company used cash in investing activities of $4.3 million during the year ended July 31, 2001, primarily due to (i) the purchase of property and equipment of $2.6 million, consisting of manufacturing additions for the new Inter-Cal facility, (ii) the purchase of assets related to IST of $1.8 million, (iii) the purchase of intangible assets of $833,000 related to the Pro-Ties™ product and patent filings for Oxycal products. Additionally, financing activities during the 2001 fiscal year provided approximately $9.0 million. The Company (i) borrowed $6.1 million against its line of credit with Bank One, (ii) received $476,000 from the exercise of warrants and options, and (iii) received $2.9 million from the trustee for reimbursement for equipment and constructions costs related to the new Inter-Cal facility. The Company used $125,370 to repurchase 60,000 shares of Zila common stock on the open market and made debt payments of $361,000.

         At July 31, 2001, the Company had federal income tax net operating loss carryforwards of approximately $14.4 million, which expire in years 2007 through 2022.

         In December 2000, the Company renewed its $9.0 million line of credit with Bank One for an additional 12 months under similar terms and conditions, including a variable interest rate equal to the prime rate (“the Index”), which was 6.75% at July 31, 2001. Under the line of credit loan agreement, the Company was required to comply with financial covenants based on certain financial ratios. As of April 30, 2001, the Company was in default under the debt service coverage ratio. On May 7, 2001, the Company and Bank One entered into the First Loan Modification Agreement whereby the line of credit was reduced to $7.25 million, the interest rate was raised to 3.0% over the Index, the Company agreed to cross-defaulting and cross-collateralizing of all Bank One loans and obligations and Bank One agreed to forebear in exercising any remedy with respect to the default through May 31, 2001. On June 14, 2001, the forbearance period contained in the First Loan Modification Agreement, and the Agreement were amended and the forbearance period was extended to June 29, 2001.

         On July 3, 2001 and effective June 29, 2001, the Company and Bank One entered into a Second Extension to the First Loan Modification Agreement. Under this Agreement, the line of credit was reduced to $6.9 million and Bank One agreed to forebear in exercising any remedy with respect to certain covenant defaults under the line of credit through July 31, 2001 and agreed to extend the maturity date of the building loan for the Company’s 7th Street location until July 31, 2001.

         The Company entered into a Third Extension to First Loan Modification Agreement effective July 31, 2001. Under this agreement, Bank One agreed to forebear in exercising any remedy with respect to certain covenant defaults under the line of credit through August 31, 2001 and agreed to extend the maturity date of the building loan for the Company’s 7th Street location until August 31, 2001.

         On August 27, 2001, the Company and Congress Financial Corporation (“Congress”) entered into a Loan and Security Agreement (the “Agreement”) whereby Congress will provide a $12 million revolving line of credit to the Company at an interest rate equal to the prime rate plus 3/4 percent. The amount of funds available to the Company from the line of credit is based upon a percentage of the value of eligible receivables and inventory (excluding the inventory of Zila Dental) and was $7.7 million at August 27, 2001. The obligations under the Agreement are collateralized by various assets, including, but not limited to, trade accounts receivable, inventories, equipment and intangible assets of the Company and of certain of its operating subsidiaries. Zila, Inc. and all of its direct and indirect operating subsidiaries guarantee the obligations under the Agreement. The Agreement expires August 17, 2004; however the line of credit is classified as current because of certain provisions required by Congress. Under the Agreement, the Company is required to comply with a financial covenant based on an adjusted tangible net worth calculation. A portion of the available funds from the new line of credit were used to pay off in full the line of credit and building loan due to Bank One, totaling approximately $6.4 million.

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         During October 2000, Inter-Cal moved into its new manufacturing and laboratory facility in Prescott, Arizona. The facility was financed through a transaction with The Industrial Development Authority of the County of Yavapai (the “Authority”) in which the Authority issued $5.0 million in Industrial Development Revenue Bonds (the “Bonds”), the proceeds of which were loaned to Inter-Cal for the construction of the facility. The Bond proceeds were held by the trustee, Bank One, Arizona, until such time as invoices for building construction costs and new equipment were submitted for payment. As of July 31, 2001, the trustee had released all the Bond proceeds. As of July 31, 2001, the Bonds outstanding consisted of $3.9 million Series A and $675,000 Taxable Series B which carried interest rates of 3.0% and 3.9%, respectively. The Bonds were marketed and sold by Banc One Capital Markets and carry a maturity of 20 years. In connection with the issuance of the Bonds, the Authority required that Oxycal obtain, for the benefit of the Bondholders, an irrevocable direct-pay letter of credit to secure payment of principal and interest. The letter of credit was issued by Bank One and is guaranteed by Zila.

         On December 20, 1999, IDT completed the sale of substantially all of its assets and liabilities related to its PracticeWorks division located in Gold River, California to InfoCure of Atlanta, Georgia for approximately $4.65 million. InfoCure is a national provider of healthcare practice management software products and services to targeted healthcare practice specialties.

         In November 1999, the Company contracted with ILEX™ Oncology Services, Inc. (“ILEX”), a wholly owned subsidiary of ILEX™ Oncology, Inc. of San Antonio, Texas, for management of clinical research and liaison with the U.S. Food and Drug Administration (“FDA”) related to the Company’s pursuit of regulatory approval for the OraTest® oral cancer detection product. In March 2000, the Company paid approximately $792,000 to ILEX as a deposit on estimated expenses related to an FDA-required clinical study associated with the Company’s ongoing efforts to obtain FDA approval of OraTest®. Current commitments under the ILEX agreement include a monthly installment payment of $76,000 plus reimbursement for out of pocket expenses as they occur during the course of the study. Zila may terminate the contract or any work plan at any time upon not less than 90 days prior written notice of termination to ILEX. If the agreement is so terminated, Zila shall pay ILEX any amount owed, but not yet paid, for work performed prior to the date of termination.

         On November 10, 1999, the Company announced that the Company’s Board of Directors authorized the repurchase of up to one million shares of Zila common stock. Purchases will be made on the open market depending on market conditions and other factors. As of July 31, 2001, 195,000 shares had been repurchased for $535,120.

         On February 5, 2001, the Company issued 100,000 shares of Series B Convertible Preferred Stock as part of the IST acquisition. The holders of the preferred stock are entitled to receive cumulative quarterly dividends at a rate of $0.0975 per share per fiscal quarter, payable in arrears.

         The Company believes that cash generated from its operations, its investing activities and the availability of cash under its line of credit are sufficient to finance its level of operations, anticipated capital expenditures and stock repurchase program through the next 12 months. The Company may require additional financing to support the production and future OraTest® clinical, regulatory, manufacturing and marketing costs or to make any significant acquisitions. There can be no assurances that such funds will be available on terms acceptable to the Company.

New Accounting Pronouncements

         The Securities and Exchange Commission released Staff Accounting Bulletin (“SAB”) No. 101 “Revenue Recognition in Financial Statements” on December 3, 1999, SAB No. 101A on March 24, 2000 and SAB No. 101B on June 26, 2000. SAB No. 101 sets forth revenue recognition issues, including conceptual issues as well as certain industry specific guidance. The Company adopted SAB 101 during the fourth quarter of fiscal 2001, and its adoption did not have a material impact on the operating results or the financial condition of the Company.

         Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities”, (“SFAS 133”), establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. SFAS No. 133 requires that an enterprise recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge. The accounting for changes in the fair value of a derivative instrument depends on the intended use of the derivative and resulting designation. The Company adopted SFAS No. 133 effective August 1, 2000 and the adoption did not have a material impact on the Company’s results of operations as the Company has no derivative financial instruments or hedging activities.

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         In May 2000, the Financial Accounting Standards Board’s EITF issued Issue No. 00-14, “Accounting for Certain Sales Incentives”. The Issue addresses the recognition, measurement, and income statement classification for certain sales incentives including coupons, rebates and free products. The consensus on EITF 00-14 will be effective for the Company in the third quarter of 2002. The implementation of this consensus will require the Company to change the way it classifies certain sales incentives, which are currently recorded as selling, general and administrative expenses. The cost of coupons and rebates will be recorded as a reduction of net sales. The cost of free products will be recorded as a reduction of products sold. The Company is in the process of analyzing the impact that this statement will have on the financial statements.

         In April 2001, the EITF issued Issue No. 00-25, “Vendor Income Statement Characterization of Consideration from a Vendor to a Retailer”. The issue discusses accounting and income statement classification of costs, other than those directly addressed in Issue 00-14, that are incurred by a vendor (typically a manufacturer or distributor) to or on behalf of a customer (typically a retailer) in connection with the customer’s purchase or promotion of the vendor’s products. Such costs include consideration given to retailers for space in their stores (slotting fees), consideration given to obtain favorable display positions in the retailer’s stores and other promotional activity (cooperative advertising). The issue addresses the recognition and measurement of such costs and whether a vendor should classify such costs in its income statement when incurred as a reduction of revenues or as an expense item. The consensus on EITF 00-25 will be effective for the Company in the third quarter of 2002. The Company is in the process of analyzing the impact that this statement will have on the financial statements.

         In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” The statements will change the accounting for business combinations and goodwill in two significant ways. SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method will be prohibited. SFAS No. 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Thus, amortization of goodwill, including goodwill recorded in past business combinations, will cease upon adoption of that statement. The Company will adopt SFAS 142 effective August 1, 2002, as required. The Company expects that the adoption of SFAS No. 142 will reduce annual amortization expense by approximately $1.2 million annually pre-tax. The Company is in the process of analyzing the impact that the impairment analyses will have on the Company’s recorded intangibles.

         In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This Statement supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of”, and the accounting and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions”, for the disposal of a segment of a business (as previously defined in that Opinion). The Company will adopt SFAS 144 effective August 1, 2002, as required. The Company has not completed its evaluation of the impact of implementing SFAS No. 144.

Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         The Company is exposed to market risk primarily from interest rates and, to a lesser extent, from changes in foreign currency exchange rates. The Company is exposed to interest rate fluctuations on its revolving line of credit and the Industrial Development Revenue Bonds. The Company has operations in the United Kingdom and, therefore, has risk to changes in foreign currencies.

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.

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Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

         None.

PART III

         The information called for by this Part III is, in accordance with General Instruction G (3) to Form 10-K, incorporated herein by reference to the information contained in the Company’s definitive proxy statement for the annual meeting of stockholders of Zila to be held December 20, 2001, which will be filed with the SEC not later than 120 days after July 31, 2001.

PART IV

Item 14. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES, AND REPORTS ON FORM 8-K

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A		Incorporated by reference to the Company’s Annual Report on Form 10-K for fiscal year ended July 31, 1999
B		Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended January 31, 1996, as amended
C		Incorporated by reference to the Company’s Annual Report on Form 10-K for fiscal year ended July 31, 1997
D		Incorporated by reference to the Company’s Annual Report on Form 10-K for fiscal year ended July 31, 1998
E		Incorporated by reference to the Company’s Current Report on Form 8-K dated January 3, 2000
F		Incorporated by reference to the Company’s Form S-8 Registration Statement No. 333-54958 dated February 5, 2001
G		Incorporated by reference to the Company’s Form S-8 Registration Statement No. 333-54960 dated February 5, 2001
H		Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended April 30, 2001
I		Incorporated by reference to the Company’s Current Report on Form 8-K dated June 29, 2001
J		Incorporated by reference to the Company’s Current Report on Form 8-K dated July 31, 2001
K		Incorporated by reference to the Company’s Current Report on Form 8-K dated August 17, 2001
L		Incorporated by reference to the Company’s Annual Report on Form 10-K for fiscal year ended July 31, 2001 located on signature page.

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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 23rd day of October 2001.

ZILA, INC., a Delaware corporation

	By	/s/ BRADLEY C. ANDERSON
		Bradley C. Anderson Vice President and Chief Financial Officer (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:

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INDEPENDENT AUDITORS’ REPORT

Board of Directors and Shareholders
Zila, Inc.
Phoenix, Arizona

We have audited the consolidated balance sheets of Zila, Inc. and subsidiaries (the “Company”) as of July 31, 2001 and 2000, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the three years in the period ended July 31, 2001. 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 auditing standards generally accepted in the United States of America. 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, such consolidated financial statements present fairly, in all material respects, the financial position of Zila, Inc. and subsidiaries at July 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended July 31, 2001 in conformity with accounting principles generally accepted in the United States of America.

DELOITTE & TOUCHE LLP
Phoenix, Arizona
October 15, 2001

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ZILA, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
JULY 31, 2001 AND 2000

         See notes to condensed consolidated financial statements.

F-2

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ZILA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended July 31, 2001, 2000 and 1999

         See notes to consolidated financial statements.

F-3

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ZILA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Years Ended July 31, 2001, 2000 and 1999