Item are listed in Part IV, Item 15
of this annual report and are presented beginning on
Page F-1.
| Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
Not applicable.
| Item 9A. | Controls and Procedures |
Evaluation
of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
under the Securities Exchange Act of 1934, as amended (the
“Exchange Act”)) that are designed: (i) to ensure
that information required to be disclosed in the reports that we
file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the
SEC’s rules and forms and (ii) to ensure that such
information is accumulated and communicated to management,
including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow for timely decisions regarding
required disclosure.
44
Table of Contents
Our management, with the participation of our Principal
Executive Officer and Principal Financial Officer, evaluated the
effectiveness of our disclosure controls and procedures as of
the end of the period covered by this report, and, based on that
evaluation, our Principal Executive Officer and Principal
Financial Officer have concluded that our disclosure controls
and procedures (as defined in
Rules 13a-15(e)
and
15d-15(e)
are effective.
Changes
in Internal Control over Financial Reporting
There were no changes in our internal control over financial
reporting (as such term is defined in
Rules 13a-15(f)
and
15d-15(f) of
the Exchange Act) during the most recent fiscal quarter that
have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Management’s
Annual Report on Internal Control Over Financial
Reporting
Management of Zila, Inc (“Zila” or the
“Company”) is responsible for establishing and
maintaining effective internal controls over financial
reporting, as such term is defined in
Rules 13a-15(f)
and
15d-15(f)
under the Securities Exchange Act, as amended.
Internal control over financial reporting is a process designed
to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted
accounting principles. The Company’s internal control over
financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the Company;
(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the Company
are being made only in accordance with authorizations of
management and directors of the Company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
Company’s assets that could have a material effect on the
Company’s financial statements.
Management, with the participation of the Company’s
principal executive and principal financial officers, assessed
the effectiveness of the Company’s internal control over
financial reporting as of July 31, 2008. This assessment
was performed using the criteria established under the Internal
Control-Integrated Framework established by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
Based on the assessment performed using the criteria established
by COSO, management has concluded that the Company maintained
effective internal control over financial reporting as of
July 31, 2008.
BDO Seidman, LLP, the independent registered public accounting
firm that audited the financial statements included in this
Annual Report on
Form 10-K
for the fiscal year ended July 31, 2008, has issued an
audit report on the effectiveness of the Company’s internal
control over financial reporting. Such report appears in
Item 8 of this filing.
Report
of Independent Registered Public Accounting Firm On Internal
Control Over Financial Reporting
The report is included in Item 8 of this annual report.
| Item 9B. | Other Information |
Not applicable.
45
Table of Contents
PART III
| Item 10. | Directors, Executive Officers and Corporate Governance |
The information required by this item relating to our directors
and nominees, and regarding compliance with Section 16(a)
of the Securities Act of 1934, will be included in our
definitive proxy statement for the annual meeting of
stockholders of Zila to be held on December 11, 2008 (the
“Proxy Statement”) and is incorporated herein by
reference.
Pursuant to General Instruction G(3) of
Form 10-K,
the information required by this item relating to our executive
officers is included in the Proxy Statement.
We have adopted a code of ethics that applies to all of our
employees, including our principal executive officer and all
members of our finance department, including the principal
financial officer. This code of ethics is posted in the
“Corporate Governance” section of the Investor
Relations portion of our website at www.zila.com and is titled
“Code of Business Conduct.” We also have a “Code
of Ethical Conduct for Financial Personnel” which applies
solely to our finance personnel and which is posted in the same
place on our website. We intend to satisfy any disclosure
requirement under Item 5.05 of
Form 8-K
regarding an amendment to, or waiver from, a provision of this
code of ethics relating to an executive officer by posting such
information on our website, unless otherwise required by NASDAQ
Marketplace Rules to disclose any such waiver on
Form 8-K.
There have been no material changes to the procedures by which
security holders may recommend nominees to our Board of
directors. The procedures for submitting shareholder nominations
or recommendations will be included in the Proxy Statement.
| Item 11. | Executive Compensation |
The information required by this item will be included in our
Proxy Statement and is incorporated herein by reference.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information required by this item will be included in our
Proxy Statement and is incorporated herein by reference.
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The information required by this item will be included in our
Proxy Statement and is incorporated herein by reference.
| Item 14. | Principal Accounting Fees and Services |
The information required by this item will be included in our
Proxy Statement and is incorporated herein by reference.
PART IV
| Item 15. | Exhibits and Financial Statement Schedules |
(a)(1) Financial Statements. The Index to
Consolidated Financial Statements and Financial Statement
Schedule on
page F-1
is incorporated herein by reference as the list of financial
statements required as part of this report.
(a)(2) Financial Statement Schedule. The
Index to Consolidated Financial Statements and Financial
Statement Schedule on
page F-1
is incorporated herein by reference as the list of financial
statements required
46
Table of Contents
as part of this report. The Index to Consolidated Financial
Statements and Financial Statement Schedule on
page F-1
is incorporated herein by reference as the list.
(a)(3) Exhibits. The exhibit list in the
Index to Exhibits is incorporated herein by reference as the
list of exhibits required as part of this report.
Documents filed as exhibits to this report or incorporated by
reference:
INDEX TO
EXHIBITS
|
Exhibit |
Method |
|||||
|
Number
|
Description
|
of Filing
|
||||
| 3-A | Certificate of Incorporation, as amended | A | ||||
| 3-B | Certificate of Amendment to Certificate of Incorporation | M | ||||
| 3-C | Certificate of Amendment to Certificate of Incorporation | V | ||||
| 3-D | Certificate of Amendment to Certificate of Incorporation | Ag | ||||
| 3-E | Amended and Restated Bylaws of Zila, Inc., as amended and restated through April 2, 2008 | Af | ||||
| 4-A | Specimen Stock Certificate | A | ||||
| 4-B | Form of 12% Unsecured Note due May 2007 | W | ||||
| 4-C | Form of 6% Senior Secured Note due November 2009 | W | ||||
| 4-D | Form of Initial Warrant | W | ||||
| 4-E | Form of Additional Warrant | W | ||||
| 4-F | Form of Secured Note Warrant | W | ||||
| 4-G | Warrant, dated February 20, 2007, issued to Roth Capital Partners, LLC | X | ||||
| 4-H | Form of Third Amended and Restated Senior Secured Convertible Note due July 2010 | Am | ||||
| 10-A | Employee Stock Purchase Plan(1) | E | ||||
| 10-B | Investment Agreement between Zila, Inc. and PharmaBio Development, Inc. dated December 18, 2002 | H | ||||
| 10-C | Reimbursement Agreement between Oxycal Laboratories, Incorporated, an Arizona Corporation, and Wells Fargo Business Credit, Inc. relating to $3,900,000 — The Industrial Development Authority Revenue Bonds (Oxycal Laboratories, Incorporated Project) Series 1999A, dated as of February 6, 2004 | I | ||||
| 10-D | Employment Agreement between Zila, Inc. and Douglas D. Burkett, Ph.D., dated as of October 21, 2003(1) | I | ||||
| 10-E | Lease between Zila, Inc. and Phoenix 7 LLC, dated January 30, 2004 | I | ||||
| 10-F | Offer letter between Zila, Inc. and Andrew A. Stevens dated January 15, 2004(1) | J | ||||
| 10-G | 1997 Stock Award Plan, as amended, dated September 30, 2004(1) | K | ||||
| 10-H | Offer letter between Zila, Inc. and Gary V. Klinefelter dated November 16, 2004(1) | L | ||||
| 10-I | Retention Agreement with Andrew A. Stevens effective March 7, 2005(1) | L | ||||
| 10-J | Retention Agreement with Diane E. Klein effective March 7, 2005(1) | L | ||||
| 10-K | Agreement of Purchase and Sale of Assets dated June 27, 2005 with Blairex Laboratories, Inc. | M | ||||
| 10-L | Form of Option Agreement(1) | M | ||||
| 10-M | Credit Agreement dated March 24, 2006 by and among Zila, Inc., Zila Technical, Inc., Zila Biotechnology, Inc., Zila Nutraceuticals, Inc., Zila Pharmaceuticals, Inc., and Zila Swab Technologies, Inc. and Black Diamond Commercial Finance, L.L.C. | N | ||||
| 10-N | First Amendment to Credit Agreement dated June 6, 2006 by and among Zila, Inc., Zila Technical, Inc., Zila Biotechnology, Inc., Zila Nutraceuticals, Inc., Zila Pharmaceuticals, Inc., and Zila Swab Technologies, Inc. and Black Diamond Commercial Finance, L.L.C. | N | ||||
| 10-O | Second Amendment to Credit Agreement dated June 6, 2006 by and among Zila, Inc., Zila Technical, Inc., Zila Biotechnology, Inc., Zila Nutraceuticals, Inc., Zila Pharmaceuticals, Inc., and Zila Swab Technologies, Inc. and Black Diamond Commercial Finance, L.L.C. | O | ||||
47
Table of Contents
|
Exhibit |
Method |
|||||
|
Number
|
Description
|
of Filing
|
||||
| 10-P | Third Amendment to Credit Agreement dated August 18, 2006 by and among Zila, Inc., Zila Technical, Inc., Zila Biotechnology, Inc., Zila Nutraceuticals, Inc., Zila Pharmaceuticals, Inc., and Zila Swab Technologies, Inc. and Black Diamond Commercial Finance, L.L.C. | P | ||||
| 10-Q | Fourth Amendment to Credit Agreement dated August 31, 2006 by and among Zila, Inc., Zila Technical, Inc., Zila Biotechnology, Inc., Zila Nutraceuticals, Inc., Zila Pharmaceuticals, Inc., and Zila Swab Technologies, Inc. and Black Diamond Commercial Finance, L.L.C. | Q | ||||
| 10-R | Fifth Amendment to Credit Agreement dated September 25, 2006 by and among Zila, Inc., Zila Technical, Inc., Zila Biotechnology, Inc., Zila Nutraceuticals, Inc., Zila Pharmaceuticals, Inc., and Zila Swab Technologies, Inc. and Black Diamond Commercial Finance, L.L.C. | R | ||||
| 10-S | Registration Rights Agreement, dated as of March 24, 2006, by and between Black Diamond Commercial Finance, L.L.C. and Zila, Inc. | N | ||||
| 10-T | Offer Letter between Zila, Inc. and Frank J. Bellizzi dated May 22, 2006 | N | ||||
| 10-U | Warrant for the purchase of shares of common stock, dated March 24, 2006, issued to Black Diamond Commercial Finance, L.L.C. by Zila, Inc. | N | ||||
| 10-V | Amended and Restated Warrant to Purchase Shares of Common Stock, dated June 6, 2006, issued to BDC Finance, L.L.C. by Zila, Inc. | N | ||||
| 10-W | Amended and Restated Warrant to Purchase Shares of Common Stock, dated September 25, 2006, issued to BDC Finance, L.L.C. by Zila, Inc. | R | ||||
| 10-X | Stock Purchase Agreement by and between NBTY, Inc. and Zila, Inc. with respects to all of the outstanding capital stock of Zila Nutraceuticals, Inc. dated August 13, 2006 | S | ||||
| 10-Y | First Amendment to Stock Purchase Agreement, dated September 28, 2006, by and between Zila, Inc. and NBTY, Inc. | T | ||||
| 10-Z | Purchase Agreement for the Shares, Unsecured Notes, Initial Warrants and Additional Warrants, dated November 13, 2006, by and among Zila, Inc. and the investors thereto | U | ||||
| 10-Aa | Purchase Agreement for the Secured Notes and Secured Note Warrants, dated November 13, 2006, by and among Zila, Inc. and the investors thereto | U | ||||
| 10-Ab | Agreement and Plan of Merger, dated November 13, 2006, by and among Zila, Inc., Zila Merger, Inc., Professional Dental Technologies, Inc. and certain stockholders thereto | U | ||||
| 10-Ac | Pledge and Security Agreement, dated November 28, 2006, by and among Zila, Inc., Zila Biotechnology, Inc., Zila Pharmaceuticals, Inc., Zila Technical, Inc., Zila Limited, Balyasny Asset Management, L.P. and the investor parties thereto | W | ||||
| 10-Ad | Engagement Letter, dated July 14, 2006, by and between Zila, Inc. and Roth Capital Partners, LLC | Ae | ||||
| 10-Ae | Registration Rights Agreement for the Shares, Unsecured Notes, Initial Warrants and Additional Warrants, dated November 28, 2006, by and among Zila, Inc. and the investor parties thereto | W | ||||
| 10-Af | Registration Rights Agreement for the Secured Notes and Secured Note Warrants, dated November 28, 2006, by and among Zila, Inc. and the investor parties thereto | W | ||||
| 10-Ag | Offer letter between Zila, Inc. and Lawrence A. Gyenes(1) | Y | ||||
| 10-Ah | Asset Purchase Agreement, dated September May 31, 2007, by and between Zila, Inc., Zila Pharmaceuticals, Inc., 3M and 3M Innovative Properties Company | Z | ||||
| 10-Ai | Employment Agreement between Zila, Inc. and Gary V. Klinefelter, dated as of March 30, 2007(1) | Ab | ||||
| 10-Aj | Employment Agreement between Zila, Inc. and Diane E. Klein, dated as of March 30, 2007(1) | Ab | ||||
| 10-Ak | Form of Restricted Stock Award Agreement(1) | Ab | ||||
| 10-Al | Severance Agreement and Release of Claims, dated June 13, 2007, by and between Zila, Inc. and Douglas D. Burkett | Aa | ||||
48
Table of Contents
|
Exhibit |
Method |
|||||
|
Number
|
Description
|
of Filing
|
||||
| 10-Am | Registration Rights Agreement, dated August 13, 2007, by and among Zila, Inc., Visium Balanced Offshore Fund, Ltd., Visium Balanced Fund, LP, Visium Long Bias Offshore Fund, Ltd., Visium Long Bias Fund, LP, and Atlas Master Fund, Ltd. | Ac | ||||
| 10-An | Amendment Agreement, dated August 13, 2007, by and among Zila, Inc., Visium Balanced Offshore Fund, Ltd., Visium Balanced Fund, LP, Visium Long Bias Offshore Fund, Ltd., Visium Long Bias Fund, LP, and Atlas Master Fund, Ltd. | Ac | ||||
| 10-Ao | Offer Letter, accepted August 16, 2007, by and between Zila, Inc. and David R. Bethune | Ad | ||||
| 10-Ap | Severance Agreement and Release, dated July 30, 2007, by and between Zila, Inc. and Lawrence A. Gyenes | Al | ||||
| 10-Aq | Amendment to Zila, Inc. 1997 Stock Award Plan | Ah | ||||
| 10-Ar | Employment Letter with David R. Bethune dated May 9, 2008 | Ai | ||||
| 10-As | Registration Rights Agreement, dated June 3, 2008 by and among Zila, Inc., Visium Balanced Offshore Fund, Ltd., Visium Balanced Fund, LP, Visium Long Bias Offshore Fund, Ltd., Visium Long Bias Fund, LP, and Atlas Master Fund, Ltd. | Aj | ||||
| 10-At | Second Amendment Agreement dated June 3, 2008 by and among Zila, Inc., Visium Balanced Offshore Fund, Ltd., Visium Balanced Fund, LP, Visium Long Bias Offshore Fund, Ltd., Visium Long Bias Fund, LP, and Atlas Master Fund, Ltd. | Aj | ||||
| 10-Au | Severance Agreement and Release of Claims Agreement with Frank J. Bellizzi dated June 6, 2008 | Ak | ||||
| 10-Av | Third Amendment Agreement dated September 11, 2008 by and among Zila, Inc., Visium Balanced Offshore Fund, Ltd., Visium Balanced Fund, LP, Visium Long Bias Offshore Fund, Ltd., Visium Long Bias Fund, LP, and Atlas Master Fund, Ltd. | Am | ||||
| 21 | Subsidiaries of Registrant | * | ||||
| 23 | Consent of BDO Seidman, LLP, Independent Registered Public Accounting Firm | * | ||||
| 24 | .1 | Power of Attorney (included on page 45 of this Annual Report on Form 10-K) | * | |||
| 31 | .1 | Sarbanes-Oxley Section 302 Certification of the Chief Executive Officer | * | |||
| 31 | .2 | Sarbanes-Oxley Section 302 Certification of the Chief Financial Officer | * | |||
| 32 | .1 | Sarbanes-Oxley Section 906 Certification of the Chief Executive Officer | ** | |||
| 32 | .2 | Sarbanes-Oxley Section 906 Certification of the Chief Financial Officer | ** | |||
| (1) | Management contract or compensatory plan or arrangement | |
| * | Filed herewith | |
| ** | Furnished herewith | |
| 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 Annual Report on Form 10-K for fiscal year ended July 31, 2002 | |
| C | Incorporated by reference to the Company’s Current Report on Form 8-K filed January 3, 2000 | |
| D | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended April 30, 2001 | |
| E | Incorporated by reference to the Company’s Proxy Statement on Schedule 14A filed November 7, 2000 | |
| F | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended October 31, 2001 | |
| G | Incorporated by reference to the Company’s Current Report on Form 8-K filed July 3, 2002 | |
| H | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended January 31, 2003 | |
| I | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended January 31, 2004 |
49
Table of Contents
| J | Incorporated by reference to the Company’s Annual Report on Form 10-K for fiscal year ended July 31, 2004 | |
| K | Incorporated by reference to the Company’s Proxy Statement on Schedule 14A filed November 8, 2004 | |
| L | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended January 31, 2005 | |
| M | Incorporated by reference to the Company’s Annual Report on Form 10-K for fiscal year ended July 31, 2005 | |
| N | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended April 30, 2006 | |
| O | Incorporated by reference to the Company’s Current Report on Form 8-K filed August 7, 2006 | |
| P | Incorporated by reference to the Company’s Current Report on Form 8-K filed August 24, 2006 | |
| Q | Incorporated by reference to the Company’s Current Report on Form 8-K filed September 7, 2006 | |
| R | Incorporated by reference to the Company’s Current Report on Form 8-K filed September 29, 2006 | |
| S | Incorporated by reference to the Company’s Proxy Statement on Schedule 14A filed September 6, 2006 | |
| T | Incorporated by reference to the Company’s Current Report on Form 8-K filed October 4, 2006 | |
| U | Incorporated by reference to the Company’s Current Report on Form 8-K filed November 17, 2006 | |
| V | Incorporated by reference to the Company’s Proxy Statement on Schedule 14A filed November 24, 2006 | |
| W | Incorporated by reference to the Company’s Current Report on Form 8-K filed December 4, 2006 | |
| X | Incorporated by reference to the Company’s Current Report on Form 8-K filed February 23, 2007 | |
| Y | Incorporated by reference to the Company’s Current Report on Form 8-K filed March 13, 2007 | |
| Z | Incorporated by reference to the Company’s Current Report on Form 8-K filed June 6, 2007 | |
| Aa | Incorporated by reference to the Company’s Current Report on Form 8-K filed June 14, 2007 | |
| Ab | Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended April 30, 2007 | |
| Ac | Incorporated by reference to the Company’s Current Report on Form 8-K filed August 14, 2007 | |
| Ad | Incorporated by reference to the Company’s Current Report on Form 8-K filed August 22, 2007 | |
| Ae | Incorporated by reference to the Company’s Pre-Effective Amendment No. 1 to Registration Statement on Form S-3 filed April 23, 2007 | |
| Af | Incorporated by reference to the Company’s Current Report on Form 8-K filed April 4, 2008 | |
| Ag | Incorporated by reference to the Company’s Current Report on Form 8-K filed September 17, 2008 | |
| Ah | Incorporated by reference to the Company’s Current Report on Form 8-K filed November 9, 2007 | |
| Ai | Incorporated by reference to the Company’s Current Report on Form 8-K filed May 12, 2008 | |
| Aj | Incorporated by reference to the Company’s Current Report on Form 8-K filed June 6, 2008 | |
| Ak | Incorporated by reference to the Company’s Current Report on Form 8-K filed June 12, 2008 | |
| Al | Incorporated by reference to the Company’s Annual Report on Form 10-K filed October 15, 2007 | |
| Am | Incorporated by reference to the Company’s Annual Report on Form 10-K filed September 16, 2008 |
50
Table of Contents
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 6th day of October, 2008.
ZILA, INC., a Delaware corporation
/s/ DAVID
R. BETHUNE
David R. Bethune
Chairman and Interim Chief Executive Officer
(Principal Executive Officer)
POWER OF
ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Dave R. Bethune
his or her attorney-in-fact, with the full power of
substitution, for such person, in any and all capacities, to
sign the Zila, Inc. Annual Report on
Form 10-K
and all amendments thereto, with all exhibits thereto and other
documents in connection therewith, with the Securities and
Exchange Commission, granting unto said 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 connection
therewith, as fully to all intents and purposes as he or she
might do or could do in person hereby ratifying and confirming
all that each of said attorneys-in-fact and agents, or his
substitute, may do or cause to be done by virtue hereof.
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 in the capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
||||
|
/s/ DAVID
R. BETHUNE David R. Bethune |
Executive Chairman of the Board and Interim Chief Executive Officer |
October 6, 2008 | ||||
|
/s/ J.
STEVEN GARRETT J. Steven Garrett |
Director | October 6, 2008 | ||||
|
/s/ LESLIE
H. GREEN Leslie H. Green |
Director | October 6, 2008 | ||||
|
/s/ O.
B. PARRISH O. B. Parrish |
Director | October 6, 2008 | ||||
|
/s/ GEORGE
J. VUTURO George J. Vuturo |
Director | October 6, 2008 | ||||
|
/s/ DIANE
E. KLEIN Diane E. Klein |
Vice President — Finance and Treasurer | October 6, 2008 | ||||
51
APPENDIX F
ZILA,
INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULE
| Page | ||||
|
1 Financial Statements
|
||||
| F-2 | ||||
| F-4 | ||||
| F-5 | ||||
| F-6 | ||||
| F-7 | ||||
| F-8 | ||||
|
2 Financial Statement Schedule
|
||||
|
Schedule II - Valuation and Qualifying Accounts
|
F-37 | |||
F-1
Table of Contents
Report of
Independent Registered Public Accounting Firm On Internal
Control Over Financial Reporting
Board of Directors and Shareholders
Zila, Inc.
Phoenix, Arizona
We have audited Zila, Inc.’s internal control over
financial reporting as of July 31, 2008, based on criteria
established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria).
Zila, Inc.’s management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Item 9A,
Management’s Annual Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion
on the company’s internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, and testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk. Our audit also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our
opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, Zila, Inc. maintained, in all material respects,
effective internal control over financial reporting as of
July 31, 2008, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of Zila, Inc. as of July 31,
2008 and 2007, and the related consolidated statements of
operations, comprehensive income, shareholders’ equity, and
cash flows for each of the three years in the period ended
July 31, 2008 and our report dated October 3, 2008
expressed an unqualified opinion thereon.
/s/ BDO Seidman, LLP
Phoenix, Arizona
October 3, 2008
F-2
Table of Contents
Report of
Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Zila, Inc.
Phoenix, Arizona
Zila, Inc.
Phoenix, Arizona
We have audited the accompanying consolidated balance sheets of
Zila, Inc. as of July 31, 2008 and 2007 and the related
consolidated statements of operations, comprehensive income,
shareholders’ equity, and cash flows for each year ended
July 31, 2008, 2007 (Restated) and 2006. In connection with
our audits of the financial statements, we have also audited the
financial statement schedule listed in the accompanying index.
These financial statements and schedule are the responsibility
of the Company’s management. Our responsibility is to
express an opinion on these financial statements and schedule
based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). 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, assessing the accounting principles
used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements
and schedules. 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. at July 31, 2008 and 2007, and the
results of its operations and its cash flows for each year ended
July 31, 2008, 2007 (Restated) and 2006, in conformity with
accounting principles generally accepted in the United States of
America.
Also, in our opinion, the financial statement schedule, when
considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), Zila,
Inc.’s internal control over financial reporting as of
July 31, 2008, based on criteria established in Internal
Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO) and our report dated October 3, 2008 expressed an
unqualified opinion thereon.
/s/ BDO Seidman, LLP
Phoenix, Arizona
October 3, 2008
F-3
Table of Contents
ZILA,
INC. AND SUBSIDIARIES
| As of July 31, | ||||||||
| 2008 | 2007 | |||||||
|
ASSETS
|
||||||||
|
Current assets:
|
||||||||
|
Cash and cash equivalents
|
$ | 4,462,328 | $ | 14,859,159 | ||||
|
Trade receivables — net of allowances of $229,000 and
$173,000
|
5,252,215 | 4,273,580 | ||||||
|
Inventories — net
|
3,107,152 | 4,074,733 | ||||||
|
Prepaid expenses and other current assets
|
1,853,373 | 1,646,229 | ||||||
|
Total current assets
|
14,675,068 | 24,853,701 | ||||||
|
Property and equipment — net
|
5,317,061 | 6,219,436 | ||||||
|
Goodwill
|
10,171,351 | 10,171,351 | ||||||
|
Purchased technology — net
|
8,860,475 | 9,884,017 | ||||||
|
Trademarks and other intangible assets — net
|
9,533,024 | 11,555,041 | ||||||
|
Other assets
|
1,813,512 | 1,197,684 | ||||||
|
Total assets
|
$ | 50,370,491 | $ | 63,881,230 | ||||
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
||||||||
|
Current liabilities:
|
||||||||
|
Accounts payable
|
$ | 3,843,262 | $ | 3,207,480 | ||||
|
Accrued liabilities
|
4,059,017 | 5,587,825 | ||||||
|
Warrant and common stock repurchase liability
|
— | 1,376,393 | ||||||
|
Current portion of deferred gain on sale leaseback
|
75,659 | 152,976 | ||||||
|
Current portion of capital lease obligations
|
71,252 | 77,472 | ||||||
|
Current liabilities of discontinued operations
|
67,532 | 165,368 | ||||||
|
Total current liabilities
|
8,116,722 | 10,567,514 | ||||||
|
Deferred gain on sale leaseback
|
— | 75,659 | ||||||
|
Long-term debt — net of current portion
|
8,974,048 | 7,258,569 | ||||||
|
Total liabilities
|
17,090,770 | 17,901,742 | ||||||
|
Commitments and Contingencies (Notes 14 and 15)
|
||||||||
|
Shareholders’ equity:
|
||||||||
|
Preferred stock — Series B, $.001 par
value — 2,500,000 shares authorized,
100,000 shares issued and outstanding, liquidation
preference of $650,000
|
462,500 | 462,500 | ||||||
|
Common stock, $.001 par value —
30,000,000 shares authorized, 9,953,818 and
8,923,762 shares issued and outstanding
|
69,677 | 62,466 | ||||||
|
Additional paid-in capital
|
125,901,682 | 123,436,957 | ||||||
|
Accumulated deficit
|
(92,471,235 | ) | (76,054,251 | ) | ||||
|
Accumulated other comprehensive loss
|
(131,832 | ) | (127,118 | ) | ||||
|
Treasury stock, at cost (31,202 and 164,464 common shares)
|
(551,071 | ) | (1,801,066 | ) | ||||
|
Total shareholders’ equity
|
33,279,721 | 45,979,488 | ||||||
|
Total liabilities and shareholders’ equity
|
$ | 50,370,491 | ||||||