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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities
- --- Exchange Act of 1934
For the quarterly period ended January 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
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Commission file number 0-17521
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ZILA, INC.
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(Exact Name of registrant as specified in its charter)
Delaware No. 86-0619668
- ---------------------------- ------------------------------------
(State or Other Jurisdiction (IRS Employer Identification number)
corporation or organization)
5227 North 7th Street, Phoenix, Arizona 85014
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (602)266-6700
-----------------------------
(former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No.
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
The number of shares of the Company's common stock outstanding at
January 31, 1996 was 24,557,230 shares.
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TABLE OF CONTENTS
<TABLE>
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PAGE NO.
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<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets as of January 31, 1996
and July 31, 1995 3
Condensed consolidated statements of operations for quarters
and six months ended January 31, 1996 and 1995 4
Condensed consolidated statements of cash flows for six months
ended January 31, 1996 and 1995 5
Notes to condensed consolidated financial statements 6-8
Item 2. Management's discussion and analysis of financial condition
and results of operations 9-12
PART II. OTHER INFORMATION
Item 1. Legal proceedings 12
Item 4. Submission of matters to a vote of security holders 12
Item 5. Other information 13
Item 6. Exhibits and reports on Form 8-K 13
SIGNATURES 14
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ZILA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
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<TABLE>
<CAPTION>
January July
ASSETS 31, 1996 31, 1995
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<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 240,767 $ 459,014
Securities available-for-sale 739,295 694,719
Trade accounts receivable, less allowance for
doubtful accounts of $20,000 988,846 839,307
Inventories 382,746 203,647
Prepaid expenses and other assets 185,649 249,294
Related party receivables 38,331 38,331
------------ ------------
Total current assets 2,575,634 2,484,312
------------ ------------
PROPERTY AND EQUIPMENT - Net 881,903 739,701
DEFERRED PATENT AND LICENSING COSTS - Net 1,006,878 955,727
------------ ------------
TOTAL $ 4,464,415 $ 4,179,740
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $ 0 $ 24,062
Accounts payable 511,639 412,137
Accrued royalties 48,594 49,062
Other accrued expenses 73,383 85,719
Deferred revenue 35,443 63,000
Current portion of long-term debt 10,385 9,795
------------ ------------
Total current liabilities 679,444 643,775
LONG-TERM DEBT 407,916 412,502
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Total liabilities 1,087,360 1,056,277
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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 24,557,230 shares
(January 31, 1996) and 24,355,462 shares (July 31, 1995) 24,557 24,355
Capital in excess of par value 13,122,560 12,759,350
Unrealized loss on securities available-for-sale (2,253) (27,961)
Deficit (9,767,384) (9,631,856)
------------ ------------
3,377,480 3,123,888
Less 42,546 common shares held by wholly-owned
subsidiary (at cost) (425) (425)
------------ ------------
Total shareholders' equity 3,377,055 3,123,463
------------ ------------
TOTAL $ 4,464,415 $ 4,179,740
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
3
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ZILA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
QUARTERS AND SIX MONTHS ENDED JANUARY 31, 1996 AND 1995
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<TABLE>
<CAPTION>
Quarters ended Six months ended
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January January January January
31, 1996 31, 1995 31, 1996 31, 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES
Net sales $ 1,534,277 $ 1,201,831 $ 3,046,255 $ 2,570,863
Licensing fees and royalty revenue 78,232 15,830 107,557 32,081
----------- ----------- ----------- -----------
1,612,509 1,217,661 3,153,812 2,602,944
----------- ----------- ----------- -----------
OPERATING COSTS AND EXPENSES
Cost of products sold 212,277 190,727 433,080 391,255
Selling, general and administrative 1,519,302 1,364,689 2,861,394 2,639,004
----------- ----------- ----------- -----------
1,731,579 1,555,416 3,294,474 3,030,259
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (119,070) (337,755) (140,662) (427,315)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSES)
Interest income 15,212 15,599 32,529 29,066
Interest expense (12,562) (18,038) (25,989) (39,485)
Realized loss on short-term
investments (1,731) 0 (1,406) (424)
----------- ----------- ----------- -----------
919 (2,439) 5,134 (10,843)
----------- ----------- ----------- -----------
LOSS BEFORE CUMULATIVE
EFFECT OF ACCOUNTING CHANGE (118,151) (340,194) (135,528) (438,158)
----------- ----------- ----------- -----------
CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 0 0 0 29,945
----------- ----------- ----------- -----------
NET LOSS $ (118,151) $ (340,194) $ (135,528) $ (408,213)
=========== =========== =========== ===========
LOSS PER SHARE $ - $ (0.01) $ ($0.01) $ ($0.02)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER
OF COMMON AND COMMON
EQUIVALENT SHARES
OUTSTANDING 24,525,317 24,086,083 24,465,079 24,065,220
=========== =========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
4
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ZILA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JANUARY 31, 1996 AND 1995
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<TABLE>
<CAPTION>
1996 1995
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<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $(135,528) $(408,213)
Cumulative effect of accounting change (29,945)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 103,036 79,712
Realized loss on sale of investments 1,406 424
Change in assets and liabilities:
Trade accounts receivable (149,539) 254,198
Investment interest receivable 889 600
Inventories (179,099) 88,084
Prepaid expenses and other assets 63,645 68,858
Accounts payable, accrued expenses and
deferred revenue 59,141 163,759
--------- ---------
Net cash provided by (used in) operating activities (236,049) 217,477
--------- ---------
INVESTING ACTIVITIES:
Purchases of short-term investments (165,563) (165,323)
Proceeds from sale of short-term investments 144,400 202,840
Purchases of property and equipment (205,194) (62,802)
Patents and licensing costs incurred (91,195) (179,685)
Funding of related party receivables (5,914)
Collections of related party receivables 19,090
--------- ---------
Net cash used in investing activities (317,552) (191,794)
--------- ---------
FINANCING ACTIVITIES:
Principal payments on line of credit (250,000)
Principal payments on short-term borrowings (24,062)
Net proceeds from borrowings collateralized by securities 328,993
Net proceeds from issuance of common stock 363,412 101,299
Principal payments on long-term debt (3,996) (3,523)
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Net cash provided by financing activities 335,354 176,769
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NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (218,247) 202,452
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 459,014 37,240
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 240,767 $ 239,692
========= =========
CASH PAID FOR INTEREST $ 25,989 $ 39,486
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
5
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ZILA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of management of Zila, Inc. and Subsidiaries (the
"Company"), all adjustments, consisting of normal recurring accruals,
considered necessary for a fair presentation have been included in the
condensed consolidated financial statements. The results of operations
for the interim period are not necessarily indicative of the results
that may be expected for the entire year. Certain prior year balances
have been reclassified to conform with the current year presentation.
2. Net loss per common share is computed based on the weighted average
number of shares outstanding during each period after giving effect for
any dilutive stock options and warrants which are considered to be
common stock equivalents. For the quarters ended January 31, 1996 and
1995, options and warrants that would otherwise qualify as common stock
equivalents are excluded since their inclusion would have the effect of
decreasing the loss per share.
3. On August 1, 1994, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." 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.
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 six months ended January 31, 1996 is as
follows:
<TABLE>
<S> <C>
Unrealized loss on securities available-for-sale at July 31, 1995 $(27,961)
Net decrease in unrealized loss, due principally to decreases in
interest rates 25,708
--------
Unrealized loss on securities available-for-sale at January 31,1996 $ (2,253)
========
</TABLE>
A summary of securities available-for-sale at January 31, 1996 is as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Mutual funds $454,963 671 $455,634
Corporate debt
securities 111,186 1,262 112,448
U. S. Government
agencies 175,399 4,186 171,213
-------- ------ ------ --------
$741,548 $1,933 $4,186 $739,295
======== ====== ====== ========
</TABLE>
Maturities of securities at January 31, 1996 are as follows:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------- --------
<S> <C> <C>
Due in : 1996-1999 $630,151 $627,104
2000-2004 111,397 112,191
-------- --------
$741,548 $739,295
======== ========
</TABLE>
6
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4. Inventories consist of the following:
<TABLE>
<CAPTION>
January 31 July 31
1996 1995
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<S> <C> <C>
Finished goods $176,159 $ 91,690
Empty tubes and packaging materials 206,587 111,957
-------- --------
$382,746 $203,647
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</TABLE>
5. The Company adopted SFAS No. 109 "Accounting for Income Taxes",
effective August 1, 1993.
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 January 31, 1996 and July 31, 1995 are as follows:
<TABLE>
<CAPTION>
January 31, 1996 July 31, 1995
---------------- -------------
<S> <C> <C>
Deferred tax assets:
Operating loss carryforwards $ 5,150,000 $ 5,096,000
Other 15,000 15,000
----------- -----------
5,165,000 5,111,000
Valuation allowance (5,165,000) (5,111,000)
----------- -----------
Net deferred tax asset 0 0
=========== ===========
</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 $1,530,000 of the deferred
tax asset relates to deductions generated by the exercise of stock
options, which upon realization will result in an increase in capital
in excess of par value.
6 The Company has 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 payment. Interest is payable monthly on the
unpaid balance at the bank's prime rate plus one and three quarters
percent (1.75%). At July 31, 1995, and January 31,1996, the Company had
no short-term borrowings against this line of credit. Included in
short-term borrowings at July 31, 1995 is $24,062 for installments due
on the Company's product liability insurance.
7 The Company has obtained a commitment from Bank One, Arizona (the
"Bank") to refinance the Company's mortgage on the building at 5227
North Seventh Street, Phoenix, Arizona which matures April 1, 1996. The
terms of the commitment 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, or a fixed rate
which will be established at closing. Principal and interest payments
are due monthly based on a 20 year amortization, with a balloon payment
due May 15, 2001.
8 Colgate. On April 13, 1994, the Company 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-CAM. 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
the Company'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 the Company'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
7
<PAGE> 8
intends to vigorously prosecute its claims for injunctive relief and
damages against Colgate. Colgate has requested the Court to enter
summary judgment that the `158 Patent is invalid. The Company has
filed its written Opposition to this request and the parties are
waiting the Court's decision. The Company's patent counsel has
advised that the Court should deny Colgate's request for summary
judgment. If Colgate's request is denied, the case will be scheduled
for trial.
CTM. Because of contrary positions asserted by CTM Associates,
Inc. ("CTM"), on July 14, 1995, the Company filed a declaratory
judgment action against CTM in federal district court in Phoenix,
Arizona (CIV No. 95-1441 PHX-PGR), seeking judgment in the Company's
favor to the effect that (i) the Company is the absolute owner of
OraScan patents and technology assigned to it, rather than a licensee
of such patents and technology as asserted by CTM; and (ii) the consent
of CTM was not required in order to enter into, and failure to obtain
CTM's consent has no effect on the validity of, the OraScan License
Agreements between the Company, as licensor, and Block Drug Company,
Inc. ("Block") and The Procter & Gamble Company ("P&G"), respectively,
as licensees. CTM has filed an answer denying the allegations in the
Company's complaint, and has counterclaimed for declaratory judgment
that it is the owner of the OraScan patents and technology which it
assigned to the Company, and that the Block and P&G License Agreements
are invalid because of failure to obtain CTM's prior consent. The
Company does not believe that CTM's position has any legal merit, and
the Company has filed a motion for summary judgment on these issues. A
hearing on the Company's motion is scheduled for March 18, 1996. If the
Company were ultimately unsuccessful in obtaining the requested relief,
such a result could have a material adverse effect on the Company's
OraScan marketing efforts and on the Company.
9. On January 18, 1996, the Company entered into an agreement in which The
Procter & Gamble Company will market and distribute OraScan in the U.S.
and 55 other countries worldwide, pending needed regulatory approvals.
U.S. marketing clearance is being sought from the U.S. Food & Drug
Administration (FDA).
10. On March 7, 1996, the Company purchased one-third of the outstanding
common stock of CTM from Raymond J. Tucci ("Tucci"), one of three
directors and shareholders of CTM. The effect of the purchase entitles
the Company to one-third of CTM's royalty interest related
to OraScan revenues receivable under the Assignment and Royalty
Agreement between the Company and CTM dated December 31, 1991 (the
Assignment Agreement). As consideration the Company issued Tucci
225,000 shares of the Company's Common Stock and paid $125,000 to
Tucci. The remaining shareholders of CTM are seeking to remove Tucci as
a director as a result of the Company's purchase of Tucci's interest.
The Company is currently involved in litigation with CTM regarding the
effect of certain provisions of the Assignment Agreement. See Note 8
and "Part II - Item 1, Legal Proceedings."
11. In March 1995 the Financial Accounting Standards Board issued SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("SFAS 121"), which is effective
for fiscal years beginning after December 15, 1995. The Company does
not believe the adoption of SFAS 121 will have a significant impact
on the Company's financial position, results of operations, or cash
flows.
8
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
ZILA, INC. AND SUBSIDIARIES
RESULTS OF OPERATIONS:
For the quarter ended January 31, 1996, the Company had a net loss of
$118,151 compared to a net loss of $340,194 for the quarter ended January 31,
1995. For the six month period ended January 31, 1996, the Company had a net
loss of $135,528 compared to a net loss of $408,213 for the six month period
ended January 31, 1995.
Net sales during the second quarter of the current fiscal year totaled
$1,534,277 compared to net sales of $1,201,831 during the second quarter of the
previous fiscal year, a 27.7% increase. For the first six months of this fiscal
year, net sales were $3,046,255 compared to $2,570,863 for the same period of
the prior fiscal year, an 18.5% increase. This increase was primarily the result
of sales of a new product that was first introduced after the end of the first
quarter of fiscal 1995.
In the second quarter ended January 31, 1996, cost of sales increased
11.3% to $212,277 from $190,727 for the same period last year primarily as a
result of increased net sales. For the six month period ended January 31, 1996,
cost of sales increased 10.7% from the same period last year, $391,255 to
$433,080. Although the cost of sales increased in the second quarter of the 1996
fiscal year and during the first six months of the 1996 fiscal year as compared
to the same periods in the prior fiscal year, the percentage of cost of sales to
net sales decreased from 15.9% in the quarter ended January 31, 1995 to 13.8% in
the quarter ended January 31, 1996 and from 15.2% to 14.2% for the six month
periods in 1995 and 1996, respectively. The decreases are attributable to the
Company's continued efforts to control product costs through volume price breaks
and competitive purchases of packaging and other components.
Selling, general and administrative expenses increased $154,613 from
$1,364,689 in the second quarter of fiscal year 1995 to $1,519,302 during the
same period in fiscal year 1996, and increased $222,390 from $2,639,004 during
the six months of fiscal 1995 to $2,861,394 during the six months of fiscal
1996. As a result of the Company's increased sales volume, the expenses for
sales commissions, royalties, product liability and freight charges increased by
$12,083 during the second quarter ended January 31, 1996 as compared to the same
period of fiscal 1995. Sales commissions, royalties, product liability insurance
and freight charges decreased by $11,820 during the first six months of fiscal
1996 as compared to the same period of fiscal year 1995 mainly due to a decrease
in commission rates that took effect in January of 1995. Marketing and sales
expense for the second quarter of fiscal 1996 decreased by $4,309 compared to
the second quarter of the previous fiscal year. For the six months ended January
31, 1996, marketing and sales expense decreased by $11,946 compared to the first
six months of the previous fiscal year. These decreases were primarily due to
decreased advertising, promotion and travel expenses.
Administrative expenses increased $75,847 for the quarter and $83,571
for the six months ended January 31, 1996, primarily as a result of public
relations, travel, shareholder expenses and postage. Internal funding of product
development increased by $57,734 for the quarter and $130,876 for the six months
ended January 31, 1996 as compared to the same periods of fiscal 1995, primarily
due to the funding of OraScan research, start-up manufacturing costs and
staffing and legal expenses arising out of the Company's efforts to prevent
infringements of the Zilactin patents (See "Part II - Other Information Item 1 -
Legal Proceedings").
Interest income during the second quarter of fiscal year 1996 decreased
$387 from $15,599 in the second quarter of fiscal year 1995 to $15,212 during
the same period in fiscal 1996. For the six months ended January 31, 1996,
interest income increased $3,463 to $32,529 from the same period last year.
9
<PAGE> 10
Interest expense decreased from $18,038 in the second quarter of the 1995 fiscal
year to $12,562 in the second quarter of the 1996 fiscal year and from $39,485
to $25,989 for the six month periods in 1995 and 1996 respectively. The
decreases were attributable to lower debt obligations during the first six
months of fiscal year 1996 as compared to fiscal year 1995.
Licensing fees and royalty revenues were $78,232 for the quarter ended
January 31, 1996 compared to $15,830 for the quarter ended January 31, 1995. For
the first six months of fiscal year 1996, licensing fees and royalty revenues
were $107,557 compared to $32,081 for the same period of the previous fiscal
year. These increases were attributable to licensing of OraScan for markets in
the United Kingdom and the United States by the Stafford-Miller Company and The
Procter and Gamble Company respectively. Licensing expenses increased by $13,258
from $5,231 for the quarter ended January 31, 1995 to $18,489 for the quarter
ended January 31, 1996. For the six months ended January 31, 1996, licensing
expenses increased to $37,752 from $6,043 for the same period of the previous
fiscal year, an increase of $31,709. These increases were attributable to
expenses incurred in connection with negotiations to license OraScan for the UK
and US markets.
OUTLOOK
The Company uses three strategies to market its product line. The
primary focus has been on educating health professionals on the uniqueness of
each of the products. Targeted efforts to build awareness of the product line
are made by direct mailings and attending medical and dental conventions. The
Company believes that its product line is unsurpassed in terms of efficacy;
accordingly, impartial clinical studies regarding the efficacy of the Company's
products are sent by the Company to dentists, pharmacists and physicians. The
second strategy is to participate in retailer driven activities designed to make
the Company's retail products available at more outlets and offer value to
consumers at the store level. The third strategy is to build consumer awareness
of the Company's products through focused efforts such as targeted advertising.
During the second quarter of fiscal year 1996, the Company participated
in six meetings geared to dental, pharmacy and medical professionals. At these
meetings, Company representatives interact with, and distribute information to
thousands of interested health professionals. The Company believes that these
types of marketing efforts combined with a superior product are the reason that
Zilactin is the number one product recommended by pharmacists for treating
canker sores and cold sores according to three independently conducted
pharmacist research studies.
Interest in the Company's products by health professionals continues to
grow. Sales of sample dispensers to dentist and physicians through the second
quarter of fiscal year 1996 are up approximately 16.1% in dollars and 20.9% in
units as compared to the same period of the prior fiscal year. The distribution
of the Company's new patient information pamphlet on mouth sores, which features
Zilactin, has grown into an excellent tool for health professionals to educate
their patients. Response has been strong as evidenced by requests for the
pamphlets for placement in the doctors' offices. Over 135,000 pamphlets have
been distributed to dental offices via medical conventions and doctors calling
the Company to request pamphlets. Additionally, over 30,000 pamphlets have been
distributed to pharmacists. The Company believes that the distribution of the
brochure increases the recognition of Zila products by the consumer and that
such increased recognition will have a positive effect on the sale of the
Company's products.
1996 net sales for the Company's products were up 27.6% in the second
quarter of the current fiscal year over the second quarter of the 1995 fiscal
year and 18.5% for the six months ended January 31, 1996 as compared to the same
period in the previous fiscal year. Most of the gains came from Zilactin-B.
Zilactin-L dollar sales were up 13.6% for the current fiscal year against a
strong year ago performance. The Company's newest nationally distributed
product, Zilactin-B sales were actually higher than Zilactin-L by 77%. The
Company attributed these sales to some pipe line sales and the popularity of
benzocaine for the market segment preferring a topical anesthetic. Zilactin-B
has distribution in all major drug wholesalers and approximately 80% of chain
drug outlets.
In the fourth quarter of the 1995 fiscal year, the Company began
testing a lip balm in the Arizona market. The product, called Zilactin-Lip, is
positioned to be a premium priced, effective alternative to the existing lip
balms. Zilactin-Lip prevents sun blisters, treats cold sores and treats dry,
chapped lips. Most other products perform only one or two of such applications.
Based on results to date, Zilactin-Lip is being expanded into additional
markets.
10
<PAGE> 11
At the national American Dental Association meeting in October 1995,
the Company introduced Quik Floss, a unique dental flosser. The Company is in
the early stages of an introduction of Quik Floss to retailers, started in
January 1996. The Company believes that 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. The Company will be the only distributor for Quik Floss in the United
States.
OraScan, which the Company believes to be the world's first oral cancer
diagnostic, was introduced in Canada during the third quarter of fiscal 1993.
Canada has turned out to be an excellent test market for OraScan by providing
the Company with valuable training and experience in the areas of insurance
coverage, training, sales strategy, advertising, public relations, marketing and
dentist perspectives. The Company believes that such experiences will assist
with OraScan's introduction in Europe, the United States and elsewhere.
OraScan received regulatory approval in the United Kingdom by the
Medicines Control Agency ("MCA") during the third quarter of fiscal year 1995.
The MCA is the UK counterpart of the United States FDA. With this approval,
OraScan can be marketed in the UK and the Company has started the approval
process for OraScan throughout the European Union ("EU"). Prior to the UK
approval OraScan could be marketed in Canada and Australia.
The Company has already made arrangements for the production of OraScan
for the United States domestic market once FDA approval is received. The Company
has also established a local manufacturing facility for the manufacture of
toluidine blue. All other components necessary for the production of OraScan
have been designed and sourced.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1995, the Company had net working capital of $1,840,537 and
a current ratio of 3.9 to 1. At January 31, 1996, the Company had net working
capital of $1,896,190 and a current ratio of 3.8 to 1.
Accounts receivable at January 31, 1996 were $988,846 on quarterly net
sales of $1,534,277 as compared to receivables of $839,307 at July 31, 1995 on
quarterly net sales of $1,334,493. Receivables as a percentage of quarterly net
sales were 64.5% at January 31, 1996 as compared to 62.9% at July 31, 1995. The
increase is primarily due to an increase in licensing fee receivables of
$110,000 at January 31, 1996. There continues to be an emphasis on strong credit
management.
At January 31, 1996, the Company had inventories of $382,746, an
increase of $179,099 from inventories at July 31, 1995. The increase is
primarily the requirement of a build up of components and finished goods for new
products. The Company believes current inventories are at levels necessary to
support market expansion and to maintain adequate liquidity.
As of January 31, 1996, the Company had no material commitments for
capital expenditures. 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. Pursuant to the agreement with The Procter and
Gamble Company dated January 18, 1996, thereafter, all future costs for
obtaining regulatory approvals, including costs related to clinical studies,
will be paid by The Procter and Gamble Company.
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. Such loan bears interest at 11.75%, and is due in monthly installments of
$4,877, including interest, through March 1996 with a balloon payment April 1,
1996. The Company has obtained a commitment from Bank One, Arizona to refinance
the Company's mortgage note at maturity.
The Company also leases 1,751 square feet for a manufacturing facility
in Phoenix, Arizona. This facility will produce toluidine blue which will be
used in the manufacture of OraScan. The facility is on a two year lease which
expires August 14, 1997 and is located in an area with property available for
expansion. Monthly lease payments are $912.
Management believes that continued growth in the Company's sales will
provide sufficient funding for the Company's current operations for the next
twelve months. The Company may require additional
11
<PAGE> 12
financing to support production of its products in quantities sufficient to
support market expansion. In anticipation of these potential requirements, the
Company has a $250,000 line of credit with Bank One, Arizona, NA, which is
collateralized by trade receivables, inventories and rights to payment. This
line of credit expires in April of 1997. Interest is payable monthly on the
unpaid balance at the bank's prime rate plus one and three quarters percent
(1.75%). At January 31, 1996, the Company had no borrowings against this line of
credit. The Company also has the availability of additional financing by
borrowing against the Company's short-term investments. At January 31, 1996, the
Company had no borrowings against its short-term investments.
PART II - OTHER INFORMATION
Item 1 - 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-CAM. 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 intends to vigorously prosecute its claims for injunctive relief and
damages against Colgate. Colgate has requested the Court to enter summary
judgment that the `158 Patent is invalid. Zila has filed its written Opposition
to this request and the parties are waiting the Court's decision. Zila's patent
counsel has advised that the Court should deny Colgate's request for summary
judgment. If Colgate's request is denied, the case will be scheduled for trial.
CTM. Because of contrary positions asserted by CTM Associates, Inc.
("CTM"), on July 14, 1995, the Company filed a declaratory judgment action
against CTM in federal district court in Phoenix, Arizona (CIV No. 95-1441
PHX-PGR), seeking judgment in tthe Company's favor to the effect that (i) the
Company is the absolute owner of OraScan patents and technology assigned to it,
rather than a licensee of such patents and technology as asserted by CTM; and
(ii) the consent of CTM was not reguired in order to enter into, and failure to
obtain CTM's consent has no effect on the validity of, the OraScan License
Agreements between the Company, as licensor, and Block Drug Company, Inc.
("Block") and The Procter & Gamble Company ("P&G"), respectively, as licensees.
CTM has filed an answer denying the allegations in the Company's complaint, and
has counterclaimed for declaratory judgment that it is the owner of the OraScan
patents and technology which it assigned to, and that the Block and P&G License
Agreements are invalid because of failure to obtain CTM's prior consent. The
Company does not believe that CTM's position has any legal merit, and the
Company has filed a motion for summary judgment on these issues. A hearing on
the Company's motion is scheduled for March 18, 1996. If the Company were
ultimately unsuccessful in obtaining the requested relief, such a result could
have a material adverse effect on the Company's OraScan maketing efforts and on
the Company.
Item 4 - Submission of matters to a vote of security holders.
(a) The Company held its Annual Meeting on December 8, 1995.
(b) Joseph Hines, Clarence J. Baudhuin, Michael Lesser, Patrick M.
Lonergan, Carl A. Schroeder, James E. Tinnell, M.D., and H. Ray Cox
were elected directors of the Company at the Annual Meeting.
(c) At the Annual Meeting, the Company's stockholders ratified the proposed
increase in shares authorized for issuance under the Stock Option Award
Plan. The vote was as follows:
Votes for Votes withheld Votes against
16,683,000 389,641 2,119,095
12
<PAGE> 13
At the Annual Meeting, the Company's stockholders ratified the proposed
increase in shares authorized for issuance under the Non-Employee
Directors Stock Option Plan. The vote was as follows:
Votes for Votes withheld Votes against
16,594,399 386,381 2,241,456
At the Annual Meeting, the Company's stockholders ratified Deloitte &
Touche LLP as auditors for the Company for its 1996 fiscal year. The
vote was as follows:
Votes for Votes withheld Votes against
19,312,674 128,857 202,429
(d) Not applicable.
Item 5 - Other information
The Procter & Gamble Company. On January 18, 1996, the Company entered
into an agreement in which the Procter & Gamble Company will market and
distribute OraScan in the U.S. and 55 other countries worldwide, pending needed
regulatory approvals. U.S. marketing clearance is being sought from the U.S.
Food & Drug Administration (FDA).
CTM. On March 7, 1996, the Company purchased one-third of the
outstanding common stock of CTM Associates, Inc. ("CTM") from Raymond J. Tucci
("Tucci"), one of three directors and shareholders of CTM. The effect of the
purchase entitles the Company to one-third of CTM's royalty interest related to
OraScan revenues receivable under the Assignment and Royalty Agreement between
the Company and CTM dated December 31, 1991 (the Assignment Agreement). As
consideration the Company issued 225,000 shares of the Company's Common
Stock and paid $125,000 to Tucci. The remaining shareholders of CTM are seeking
to remove Tucci as a director as a result of the Company's purchase of Tucci's
interest. The Company is currently involved in litigation with CTM regarding
the effect of certain provisions of the Assignment Agreement. See Note 8 and
"Part II - Item 1, Legal Proceedings."
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit Description Method of Filing
Number
<S> <C> <C>
10-A(1) Stock Option Award Plan (as amended through *
December 8, 1995)
10-A(2) Non-Employee Directors Stock Option Plan (as *
amended through December 8, 1995)
10-B License Agreement dated as of December 1, 1995 *
between and among Zila, Inc., Zila Pharmaceuticals,
Inc. and the Procter and Gamble Company, Inc.
(Confidential Treatment Request Pending)
10-C License Agreement dated as of March 27, 1995 Incorporated by reference
between and among Zila, Inc. and Block Drug to Exhibit 10.1 of the
Company Inc. (Confidential Treatment Request Company's Quarterly Report
Granted) on Form 10-Q for the Fiscal
quarter ended April 30, 1995
27 Financial Data Schedules *
_____________
* Filed Herein
</TABLE>
(b) Reports on Form 8-K
On Februay 1, 1996 the Company filed a Current Report on Form 8-K to
report that it had entered into a license agreement with The Procter
and Gamble Company relating to the distribution and marketing of
OraScan.
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: March 18, 1996 By: /s/ Joseph Hines
-------------- -----------------------------------
Joseph Hines
President, Chairman of the Board
(Principal Executive Officer)
By: /s/ Clarence J Baudhuin
-----------------------------------
Clarence J. Baudhuin
Executive Vice President of
Finance & Administration
Treasurer, Director (Principal
Financial & Accounting Officer)
14
<PAGE> 1
EXHIBIT 10-A(1)
ZILA, INC.
STOCK OPTION AWARD PLAN
(as amended through October 25, 1995)
1. DEFINITIONS.
The following definitions shall be applicable throughout the Plan:
(a) "Board" means the Board of Directors of the Company.
(b) "Certificate of Incorporation" means the Company's
Certificate of Incorporation, as amended or restated from time to time.
(c) "Code" means the Internal Revenue Code of 1986, as amended
from time to time. Reference in the Plan to any Section of the Code
shall be deemed to include any amendments or successor provisions to
such Section and any rules or regulations under such Section.
(d) "Committee" means the committee of the Board referred to
in Section 4.
(e) "Company" means Zila, Inc., a Delaware corporation.
(f) "Date of Grant" means the date on which the granting of an
Option is authorized by the Board or such later date as may be
specified by the Board in such authorization.
(g) "Eligible Employee" means any person regularly employed by
the Company or a Subsidiary on a full-time salaried basis who satisfies
all of the requirements of Section 6.
(h) "Non-Employee Director" means any person who is not an
Eligible Employee who serves as a Director of the Company.
(i) "Exchange Act" means the Securities Exchange Act of 1934,
as amended from time to time, and the rules and regulations promulgated
thereunder.
(j) "Fair Market Value" shall mean, with respect to the date a
given Option is granted or exercised, the value determined by the Board
in good faith using a generally accepted valuation method and, in the
case of Incentive Stock Options, determined in accordance with
applicable Treasury regulations; provided, however, that where there is
a public market for the Stock, the Fair Market Value per Share shall be
the mean of the final bid and asked prices of the Stock on the date of
grant, as reported in the Wall Street Journal (or, if not so reported,
as otherwise reported by the National Association of Securities Dealers
Automated Quotation System) or, in the event the Stock is listed on a
stock exchange, the Fair Market Value per Share shall be the closing
price on such exchange on the date of grant of the Option, as reported
in the Wall Street Journal.
(k) "Holder" means an employee of the Company or a Subsidiary
who has been granted an Option.
(l) "Incentive Stock Option" means an Option within the
meaning of Section 422A of the Code.
<PAGE> 2
(m) "Nonqualified Options" means an Option which is not an
Incentive Stock
Option
(n) "Normal Termination" means termination at retirement
pursuant to the Company or Subsidiary retirement plan then in effect.
(o) "Option" means an award granted under Section 7 of the
Plan and includes both Nonqualified Options and Incentive Stock Options
to purchase Stock.
(p) "Plan" means the Zila, Inc. Stock Option Award Plan.
(q) "Securities Act" means the Securities Act of 1933, as
amended from time to time, and the rules and regulations promulgated
thereunder.
(r) "Share" means a share of Stock.
(s) "Stock" means common stock of the Company as described in
the Certificate of Incorporation.
(t) "Subsidiary" means any corporation of which a majority of
the outstanding voting stock or voting power is beneficially owned
directly or indirectly by the Company.
(u) "Termination" means separation from employment with the
Company or any of its Subsidiaries for any reason except due to death.
(v) "Treasury" means the Department of the Treasury of the
United States of America.
(w) "Zila" means Zila Pharmaceuticals, Inc., a Nevada
corporation.
2. PURPOSE.
The purpose of the Plan is to provide a means through which the Company
and its Subsidiaries may attract able persons to enter the employ of the Company
or its Subsidiaries and to provide a means whereby employees upon whom the
responsibilities of the successful administration and management of the Company
and its Subsidiaries rest, and whose present and potential contributions to the
welfare of the Company and its Subsidiaries are of importance, can acquire and
maintain stock ownership, thereby strengthening their commitment to the welfare
of the Company and its Subsidiaries and their desire to remain in its employ. A
further purpose of the Plan is to provide such employees with additional
incentive and reward opportunities designed to enhance the profitable growth of
the Company. So that the appropriate incentive can be provided, the Plan
provides for granting Nonqualified Options and Incentive Stock Options, or any
combination of the foregoing.
3. EFFECTIVE DATE, DURATION, SCOPE AND STOCKHOLDER APPROVAL.
The Plan is effective as of September 1, 1988, the effective time of
the merger pursuant to which stockholders of Zila became stockholders of the
Company. Options may be granted as provided herein for a period of ten years
after such date. The Plan shall continue in effect until all matters relating to
the payment of Options and administration of the Plan have been settled.
The Plan shall govern options to purchase a total of 372,501 shares of
Zila common stock granted to certain employees and directors of Zila pursuant to
Zila's Non-Qualified Stock Option Plan, options to purchase a total of 954,999
shares of Zila common stock granted to certain employees of Zila pursuant to
Zila's Incentive
-2-
<PAGE> 3
Stock Option Plan, options to purchase an additional 765,000 shares of Zila
common stock granted to certain officers of Zila and options to purchase an
additional 225,000 shares of Zila common stock granted to Zila's directors
(collectively, the "Zila Options"). However, to the extent of any inconsistency
between the terms of any of the Zila Options and the terms of the Plan, the
former shall govern.
4. ADMINISTRATION.
The Plan shall be administered by the Board; provided, however, that
the Board may appoint a committee (the "Committee") to administer the Plan at
any time and from time to time; provided further, that, to the extent reasonable
and practicable, the Plan shall be consistent with the provisions of Rule 16b-3
of the Exchange Act, including the disinterested administration requirements, to
the extent necessary to ensure that those certain transactions pursuant to the
Plan enumerated in such Rule shall be exempt from the operation of Section 16(b)
of the Exchange Act. Any reference herein to the Board shall, where appropriate,
encompass a Committee appointed to administer the Plan in accordance with this
Section 4.
The Board shall from time to time in its discretion determine which of
the Eligible Employees are to be granted Options and the form, amount and timing
of such Options and, unless otherwise provided herein, the terms and provisions
thereof and the form of payment of an Option, if applicable, and such other
matters specifically delegated to It under this Plan. Subject to the express
provisions of the Plan, the Board shall have authority to interpret the Plan and
Options granted hereunder, to prescribe, amend and rescind rules and regulations
relating to the Plan, and to make all other determinations necessary or
advisable in administering the Plan, all of which determinations shall be final
and binding upon all persons. A quorum of the Board shall consist of a majority
of its members and the Board may act by vote of a majority of its members at a
meeting at which a quorum is present, or without a meeting by a written consent
to the action taken signed by all members of the Board. No member of the Board
shall be liable for any action, interpretation or construction made in good
faith with respect to the Plan or any Option granted hereunder.
5. OPTIONS, SHARES SUBJECT TO THE PLAN.
The Board may, from time to time, grant Options to one or more
employees determined by it to be eligible for participation in the Plan, in
accordance with the provisions of Section 6; provided, however, that:
(a) Subject to Section 9, the aggregate number of Shares made
subject to Options under this Plan may not exceed 5,000,000.
(b) Such Shares shall be deemed to have been used in the
exercise of Options whether actually delivered or whether the Fair
Market Value equivalent of such Share is paid in cash. To the extent
that an Option lapses or the rights of its Holder terminate, such
Shares subject to such Option shall again be available for the grant of
an Option.
(c) Stock delivered by the Company in settlement under the
Plan may be authorized and unissued Stock or Stock held in the treasury
of the Company.
6. ELIGIBILITY.
Officers and other employees of the Company and its Subsidiaries who,
in the opinion of the Board, are responsible for the continued growth and
development and financial success of the business of the Company or for more of
its Subsidiaries shall be eligible to be granted Options under the Plan. Subject
to the provisions of the Plan, the Board shall from time to time select from
such eligible persons those to whom Options shall be granted and determine the
number of Shares to be granted. Non-Employee Directors shall not be eligible to
receive Options under the Plan.
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<PAGE> 4
7. STOCK OPTIONS.
One or more Options can be granted to any Eligible Employee. Each
Option so granted shall be subject to the following conditions:
(a) Option Price. The Option price per Share shall be set by
the Board but shall in no instance be less than the Fair Market Value
(110% of the Fair Market Value in the case of a grant of Incentive
Stock Options to Eligible Employees owning 10% or more of the combined
voting power of all classes of stock of the Company) at the Date of
Grant in the case of an Incentive Stock Option. The Option price per
Share for Shares to be issued pursuant to exercise of a Nonqualified
Option shall be determined by the Board.
(b) Form of Payment. At the time of the exercise of the
Option, the Option price (plus the applicable withholding tax) shall be
payable in (i) cash, (ii) Shares having a Fair Market Value at the time
the Option is exercised equal to the Option price (plus the applicable
withholding tax) with the prior approval of the Company, (iii) a manner
acceptable to the Company, or (iv) any combination of the foregoing.
(c) Other Terms and Conditions. If the Holder has not died or
terminated employment, the Option shall become exercisable in such
manner and within such period or periods, not to exceed ten years (in
the case of Incentive Stock Options, not to exceed five years for
Eligible Employees owning 10% or more of the combined voting power of
all classes of stock of the Company) from its Date of Grant as shall be
set forth in the Stock Option Agreement relating to such grant. An
Option may be exercised as to such number of Shares and at such times
as set forth in the Stock Option Agreement; provided, however, no
Option shall be exercised for less than the lesser of 100 Shares or the
full number of Shares for which the Option is then exercisable. An
Option shall lapse under the following circumstances:
(i) Ten years after it is granted, twelve months after
Normal Termination (in the case of an Incentive Stock Option held
by a retiree, three months after such Normal Termination), three months
after any other Termination, or any earlier time set by the grant.
(ii) If the Holder dies within the Option period, the
Option shall lapse unless it is exercised within the Option period and
in no event later than twelve months after the date of his death by the
Holder's legal representative or representatives or by the person or
persons entitled to do so under the Holder's last will and testament
or, if the Holder shall fail to make testamentary disposition of such
Option or shall die intestate, by the person or persons entitled to
receive said Option under the applicable laws of descent and
distribution.
(iii) Notwithstanding the foregoing, in no event
shall the period of exercise be less than thirty days after Normal
Termination or the death of the Holder; provided, however, in no event
shall an Incentive Stock Option be exercised more than ten years after
the Date of Grant.
(d) Stock Option Agreement. Each Option granted under the Plan
shall be evidenced by a "Stock Option Agreement" between the Company
and the Holder of the Option containing provisions determined by the
Board. The provisions shall be subject to the following terms and
conditions:
(i) Any Option or portion thereof that is exercisable
shall be exercisable as to such number of Shares and at such times as
set forth in the Stock Option Agreement, except as limited by the terms
of the Plan heretofore.
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<PAGE> 5
(ii) Every Share purchased through the exercise of an
Option shall be paid for in full at the time of the exercise. Each
Option shall cease to be exercisable, as to any Share, when the Holder
purchases the Share, or when the Option lapses.
(iii) Options shall not be transferable by the Holder
except by will or the laws of descent and distribution and shall be
exercisable during the Holder's lifetime only by the Holder.
(iv) An unexpired Option shall become immediately
exercisable (1) automatically on the Holder's normal retirement date as
defined under the Company's retirement plan, (2) at the discretion of
the Board, in whole or in part, on the date the Holder becomes eligible
to receive early retirement benefits, as defined under the retirement
plan of the Company, and (3) under such other circumstances as the
Board may direct.
(e) Individual Dollar Limitations. In the case of an Incentive
Stock Option, the aggregate Fair Market Value (determined as of the
time such Option is granted) of the Stock with respect to which the
Incentive Stock Option is exercisable for the first time by an
individual during any calendar year (under all such plans of the
Company or Subsidiaries) shall not exceed $100,000.
(f) Restriction on Stock Subject to Option. The Board may
require in connection with the grant of an Option that the Holder
remain in the employ of the Company or a Subsidiary for at least one
year following the exercise. The terms of such restriction shall be set
forth in the Stock Option Agreement.
8. GENERAL.
(a) Government and Other Regulations. Shares shall not be
issued pursuant to the exercise of the Option unless the exercise of
such Option and the issuance and delivery of such Shares pursuant
thereto shall comply with all relevant provisions of law, including,
without limitation, the Securities Act, the Exchange Act, and the
requirements of any stock exchange upon which the Shares may then be
listed, and shall be further subject to the approval of counsel for the
Company with respect to such compliance. Inability of the Company to
obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the
lawful issuance and sale of any Shares hereunder, shall relieve the
Company of any liability in respect of the failure to issue or sell
such Shares as to which such requisite authority shall not have been
obtained.
As a condition to the exercise of an Option, the Company may
require the person exercising such Option to represent and warrant at
the time of any such exercise that the Shares are being purchased only
for investment and without any present intention to sell or distribute
such Shares if, in the opinion of counsel for the Company, such a
representation is required by law.
(b) Reservation of Shares. The Company, during the term of
this Plan, will at all times reserve and keep available such number of
Shares as shall be sufficient to satisfy the requirements of the Plan.
The inability of the Company to obtain authority from any regulatory
body having jurisdiction, which authority is deemed by the Company's
counsel to be necessary to the lawful issuance and sale of any Shares
hereunder, shall relieve the Company of any liability in respect of the
failure to issue or sell such Shares as to which such requisite
authority shall not have been obtained.
-5-
<PAGE> 6
(c) Tax Withholding. The employee or other person receiving
Stock upon exercise of an Option may be required to pay to the Company
or to a Subsidiary, as appropriate, the amount of any such taxes which
the Company or Subsidiary is required to withhold with respect to such
Stock. In connection with such obligation to withhold tax, the Company
may defer making delivery of such Stock unless and until indemnified on
such withholding liability to its satisfaction.
(d) Claim to Options and Employment Rights. No employee or
other person shall have any claim or right to be granted an Option
under the Plan. Neither this Plan nor any action taken hereunder shall
be construed as giving any employee any right to be retained in the
employ of the Company or a Subsidiary.
(e) Beneficiaries. Any payment of Options due under this Plan
to a deceased participant shall be paid to the beneficiary designated
by the participant and filed with the Board. If no such beneficiary has
been designated or survives the participant, payment shall be made to
the participant's legal representative. A beneficiary designation may
be aged or revoked by a participant at any time provided the change or
revocation is filed with the Board. The designation by a married
participant of one or more persons other than the participant's spouse
must be consented to by the spouse.
(f) Nontransferability. A person's rights and interests udder
the Plan, including amounts payable, may not be assigned, pledged, or
transferred except, in the event of an employee's death, to a
designated beneficiary as provided In the Plan, or in the absence of
such designation, by will or the laws of descent and distribution.
(g) Indemnification. Each person who is or shall have been a
member of the Board shall be indemnified and held harmless by the
Company against and from any loss, cost, liability, or expense that may
be Imposed upon or reasonably incurred by him In connection with or
resulting from any claim, action, suit, or proceeding to which he may
be a party or in which he may be involved by reason of any action or
failure to act under the Plan and against and from any and all amounts
paid by him in satisfaction of judgment in such action, suit, or
proceeding against him. He shall give the Company an opportunity, at
its own expense, to handle and defend the same before he undertakes to
handle and defend it on his own behalf. The foregoing right of
indemnification shall not be exclusive of any other rights of
indemnification to which such persons may be entitled under the
Company's Bylaws or Certificate of Incorporation, as a matter of law,
or otherwise, or any power that the Company may have to indemnify them
or hold them harmless.
(h) Reliance on Reports. Each member of the Board shall be
fully justified in relying or acting in good faith upon any report made
by the independent public accountants of the Company and its
Subsidiaries and upon any other information furnished in connection
with the Plan by any person or persons other than himself. In no event
shall any person who is or shall have been a member of the Board be
liable for any determination made or other action taken, including the
furnishing of information, or failure to act, if in good faith.
(i) Relationship to Other Benefits. No payment under the Plan
shall be taken into account in determining any benefits under any
pension, retirement, savings, profit sharing, group insurance, welfare
or other benefit plan of the Company or any Subsidiary.
(j) Expenses. The expenses of administering the Plan shall be
borne by the Company and its Subsidiaries.
-6-
<PAGE> 7
(k) Pronouns. Masculine pronouns and other words of masculine
gender shall refer to both men and women.
(l) Titles and Headings. The titles and headings of the
Sections in the Plan are for convenience of reference only, and in the
event of any conflict, the text of the Plan, rather than such titles or
headings, shall control.
(m) Fractional Shares. No fractional Shares shall be issued
and the Board shall determine whether cash shall be given in lieu of
fractional Shares or whether such fractional Shares shall be eliminated
by rounding up or rounding down unless otherwise provided in the Plan.
(n) Construction of Plan. The place of administration of the
Plan shall be in the State of Arizona, and the validity, construction,
interpretation, administration and effect of the Plan and of its rules
and regulations, and rights relating to the Plan, shall be determined
in accordance with the laws of the State of Arizona.
-7-
<PAGE> 8
9. CHANGES IN CAPITAL STRUCTURE.
(a) If the outstanding Stock of the Company shall at any time
be changed or exchanged by declaration of a stock dividend, split-up,
combination of Shares, recapitalization, merger, consolidation, or
other corporate reorganization in which the Company is the surviving
corporation, the number and kind of Shares subject to the Plan or
subject to any Options theretofore granted, and the Option prices,
shall be appropriately and equitably adjusted so as to maintain the
proportionate number of Shares without changing the aggregate Option
price and the Board may make any other adjustments as the Board deems
appropriate for purposes of the Plan. The determination of the Board as
to the terms of any adjustment shall be conclusive except to the extent
governed by Treasury regulations applicable to Incentive Stock Options.
(b) In the event of a liquidation or dissolution of the
Company, sale of all or substantially all of its assets, or a merger,
consolidation or other corporate reorganization in which the Company is
not the surviving corporation, or any merger or other reorganization in
which the Company is the surviving corporation but the holders of its
Stock receive securities of another corporation, or in the event a
person makes a tender offer to the stockholders of the Company, the
Board may, but need not, accelerate the time at which unexercised
Options may be exercised. Nothing herein contained shall prevent the
substitution of a new Option by the surviving or acquiring corporation.
10. AMENDMENTS AND TERMINATION.
The Board may at any time or from time to time (i) amend, terminate or
suspend the Plan and, if suspended, reinstate the Plan in whole or in part, or
(ii) with the express written consent of an individual participant, cancel,
reduce or otherwise alter such participant's outstanding Options under the Plan;
provided, however, that any such amendment, termination, suspension,
cancellation, reduction or alteration shall be further approved by the
shareholders of the Company if such approval is required to preserve or comply
with any exemption, whether under Rule 16b-3 or otherwise, from Section 16(b) of
the Exchange Act or to preserve the status of Incentive Stock Options within the
meaning of Section 422A of the Code.
As approved by the Board of Directors as of October 25, 1995.
/s/ Joseph Hines
- ---------------------------
JOSEPH HINES
Chairman
/s/ Janice Backus
- ---------------------------
JANICE BACKUS
Secretary
-8-
<PAGE> 1
EXHIBIT 10-A(2)
ZILA, INC.
NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
(as amended through October 25, 1995)
1. Purposes Of The Plan. The purposes of this Plan are to
enable the Company to attract and retain the best available individuals to serve
as non-employee members of the Board, to reward such directors for their
contributions to the Company, and to maximize the identity of interest between
such directors and the Company's stockholders generally.
2. Definitions. As used herein, the following definitions shall
apply:
(a) "Board" shall mean the Board of Directors of the Company.
(b) "Company" shall mean ZILA, INC., a Delaware corporation.
(c) "Exercise Price" shall mean, with respect to each Share
granted, the Fair Market Value on the date of grant.
(d) "Fair Market Value" shall mean, with respect to the date a
given Option is granted or exercised, the value determined by the Board
in good faith using a generally accepted valuation method; provided,
however, that where there is a public market for the Stock, the Fair
Market Value per Share shall be the mean of the final bid and asked
prices of the Stock on the date of grant or exercise, as reported in
The Wall Street Journal (or, if not so reported, as otherwise reported
by NASDAQ/National Market System or NASDAQ) or, in the event the Stock
is listed on a stock exchange, the Fair Market Value per Share shall be
the closing price of the Stock on such exchange on the date of grant or
exercise of the Option, as reported in The Wall Street Journal.
(e) "Option" shall mean a right to purchase Stock, granted
pursuant to the Plan.
(f) "Optioned Stock" shall mean the Stock subject to an
Option.
(g) "Optionee" shall mean a non-employee director of the
Company who has been granted an Option.
(h) "Plan" shall mean this Zila, Inc. Non-Employee Directors
Stock Option Plan.
(i) "Share" shall mean a share of the Stock.
(j) "Stock" shall mean the common stock of the Company
described in the Company's Certificate of Incorporation, as amended or
restated from time to time.
(k) "Trading Day" shall mean a day on which the Fair Market
Value of the Stock can be determined.
3. Stock Subject To The Plan.
(a) Subject to increases and adjustments pursuant to Section 9
hereof, the initial number of Shares reserved and available for
distribution under the Plan shall be 200,000.
(b) If an Option should terminate, or be canceled, rescinded
or surrendered, the Optioned Stock subject to such Option shall not be
available for future grants under the Plan.
<PAGE> 2
4. Option Grants. An Option to purchase 2,500 Shares shall be
granted annually to each non-employee director of the Board on the date
determined pursuant to Section 10 hereof; provided, however, that such Option
shall not be granted to any non-employee director of the Company who during the
fiscal year immediately preceding such grant date (or the period that he served
as a director of the Company, if less than the full fiscal year) attended fewer
than 75 percent of the aggregate of (i) the total number of the regularly
scheduled and special meetings of the Board and (ii) the total number of
meetings held by all committees of the Board on which he served; provided,
further, that no such Options shall be granted to any of the non-employee
directors of the Company in the event that, on such grant date, the number of
Shares remaining available for distribution under the Plan is less than the
product of the number of then current non-employee directors of the Company
multiplied by 2,500.
5. Board Approval And Effective Dates. This Plan shall become
effective as of October 20, 1989, the date as of which the Board adopted the
Plan. The Plan shall be submitted as a proposal for stockholder approval at the
Company's 1989 Annual Meeting of Stockholders, or any adjournment thereof. In
the event that such approval is not obtained, the Board may, but need not,
terminate the Plan. The Plan and all outstanding Options shall remain in effect
until such Options shall have been exercised, shall have expired or shall
otherwise be terminated.
6. Term; Exercise; Rights As A Stockholder.
(a) The term of each Option shall be five years from the date
of grant thereof. Subject to Section 5, an Option shall be exercisable
upon grant and may be exercised in whole or in part at any time or
times during its term; provided, however, that an Option may not be
exercised for a fraction of a Share.
(b) An Option shall be deemed to be exercised upon receipt by
the Company from the Optionee of written notice of such exercise. Such
notice shall be accompanied by full payment for the Shares subject to
such exercise.
(c) No person shall have any right or privilege as a
stockholder of the Company, whether to vote or to receive dividends or
otherwise, by reason of the grant of an Option, but shall obtain such
right only when Shares are actually issued to such person upon the
exercise thereof.
7. Payment. The Exercise Price shall be paid:
(a) In United States dollars in cash or by check payable to
the order of the Company; or
(b) At the election of the Optionee by delivery of Shares with
an aggregate Fair Market Value equal to the Exercise Price; or
(c) By any combination of (a) and (b) above.
The Board shall determine acceptable methods for tendering Stock as
payment upon exercise of an Option and may impose such limitations and
prohibitions on the use of Stock to exercise an Option as it deems appropriate.
8. Transferability Of Options. The Option may not be sold,
pledged, assigned, hypothecated, transferred, or disposed of in any manner other
than by will or by the laws of descent and distribution and may be exercised,
during the lifetime of the Optionee, only by the Optionee or by his guardian or
legal representative.
In the event of the Optionee's death, his Option shall be exercisable,
prior to the expiration of the Option, by the person or entity to whom his
accrued and vested rights pass by will or by the laws of descent and
distribution.
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<PAGE> 3
9. Adjustments Upon Changes In Capitalization Or Merger. If the
outstanding Stock of the Company shall at any time be changed or exchanged by
declaration of a stock dividend, split-up, combination of shares,
recapitalization, merger, consolidation, or other corporate reorganization in
which the Company is the surviving corporation, the number and kind of Shares
subject to the Plan or subject to any Options theretofore granted, and the
Options' prices, shall be appropriately and equitably adjusted.
In the event of a liquidation or dissolution of the Company, sale of
all or substantially all of its assets, or a merger, consolidation or other
corporate reorganization in which the Company is not the surviving corporation,
or any merger or other reorganization in which the Company is the surviving
corporation but the holders of its Stock receive securities of another
corporation, any outstanding Options hereunder shall be appropriately and
equitably adjusted.
10. Time Of Granting Options. The Option grant date shall be the third
Trading Day after the Company publicly announces its year-end financial results
for the immediately preceding fiscal year; provided, however, that grants for
the first year only under the Plan shall be effective as of the date the
Company's stockholders approve the Plan.
11. Amendment And Termination Of The Plan. The Board may from time to
time amend the Plan in whole or part in such respects as the Board may deem
advisable or may terminate the Plan, provided, however, that amendments to the
Plan relating to the amount, price, or timing of the option grants shall not be
made more than once in any six month period. Any amendment or termination of the
Plan shall not affect Options already granted and such Options shall remain in
full force and effect as if the Plan had not been amended or terminated. Any
amendment to the Plan shall be submitted as a proposal for approval of the
Company's stockholders if such approval of the amendment is necessary for the
Plan to comply or to continue to comply with the applicable exemption, if any,
under Section 16(b) of the Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated thereunder.
12. Conditions Upon Issuance Of Shares. The Plan, the grant, the
exercise of Options and the obligations of the Company shall be subject to all
applicable federal and state laws, rules and regulations, and to such approvals
by any regulatory or governmental agency as may be required. The Company shall
not be required to issue or deliver any certificate or certificates for Shares
of Stock prior to (i) the admission of such Shares to listing on any stock
exchange on which the Stock may then be listed, and (ii) the completion of any
registration or other qualification of such Shares under any state or federal
law (including, without limitation, the Securities Act of 1933, as amended, and
the Securities Exchange Act of 1934, as amended), or rulings or regulations of
any government body which the Company shall, in its sole discretion, determine
to be necessary or advisable.
As a condition to the exercise of an Option, the Company may require
the Optionee to represent and warrant at the time of any such exercise that the
Shares are being purchased only for investment and without any present intention
to sell or distribute such Shares if, in the opinion of counsel for the Company,
such a representation is necessary or advisable.
13. Option Agreement. Options shall be evidenced by written option
agreements in accordance with the terms of the Plan. A form of such agreement is
attached hereto as Exhibit "B".
14. Miscellaneous Provisions.
(a) Plan Expense. Any expenses of administering this Plan
shall be borne by the Company.
(b) Taxes. The Company shall be entitled if necessary or
desirable to pay or withhold the amount of any tax attributable to the
delivery of Stock under the Plan after giving the person entitled to
receive such Stock notice as far in advance as practical, and the
Company may defer making delivery of such Stock if any such tax may be
pending unless and until indemnified to its satisfaction.
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<PAGE> 4
(c) Construction Of Plan. The validity, construction,
interpretation, administration and effect of the Plan and of its rules
and regulations, and rights relating to the Plan, shall be determined
by the Board in accordance with the laws of the State of Delaware, and
such determinations shall be final and conclusive.
(d) Gender. For purposes of this Plan, words used in the
masculine gender shall include the feminine and neuter, and the
singular shall include the plural and vice versa, as appropriate.
As approved by the Board of Directors as of October 25, 1995.
/s/ Joseph Hines
- -------------------------
JOSEPH HINES
Chairman
ATTEST:
/s/ Janice L. Backus
- -------------------------
JANICE L. BACKUS
Secretary
4
<PAGE> 1
EXHIBIT 10-B
LICENSE AGREEMENT
This is an Agreement, entered into as of December 1, 1995 (the
"Effective Date"), between and among Zila, Inc., a Delaware corporation, and
Zila Pharmaceuticals, Inc., a Nevada corporation, each with its principal place
of business at 5227 North 7th Street, Phoenix, Arizona 85014, U.S.A.
(collectively, "Zila"), and The Procter & Gamble Company Inc., an Ohio
corporation, with its principal place of business at One Procter & Gamble Plaza,
Cincinnati, Ohio 45201 ("P&G" or "Licensee").
Zila is the owner of or has acquired rights in and to certain patents
and trademarks;
Licensee wishes to obtain from Zila, and Zila is willing to grant to
Licensee, a license under such patents and trademarks on the terms and
conditions of this Agreement;
NOW, THEREFORE, for and in consideration of the mutual covenants
herein, it is hereby agreed by and between the parties as follows:
1. Definitions. As used herein the following terms have the following
meanings:
1.1 "AFFILIATE" means any wholly-owned (directly or
indirectly) subsidiary or branch of Licensee which conducts business within the
Territory and which makes, has made, uses or sells Licensed Products. The term
"Licensee" shall be deemed to include all such Affiliates.
1.2 "ASSETS" means the Licensed Patents, Know-how, Licensed
Marks and Product Registrations.
1.3 "COMMENCEMENT OF SALE" means, with respect to any country
in the Territory, the date of the first commercial sale, as evidenced by an
invoice, of the Licensed Product by Licensee in such country following the
Regulatory Approval Date; provided, however, that in no event shall the
Commencement of Sale in any country be later than one hundred twenty (120) days
after the Regulatory Approval Date in such country.
1.4 "COMPETITIVE PRODUCT" means any commercially available and
government approved oral cancer detection and screening system using a stain
rinse with toluidine blue dye. As used in the preceding sentence and Section
5.5.2, "commercially available" in any country shall mean that such product has
at least two (2) of the following characteristics: such product is (i)
advertised, marketed or promoted in such country, (ii) found in more than twenty
(20) dental offices in such country or (iii) reimbursed by any third party
health or insurance plans (including government plans) in such country, with
Licensee having the responsibility to provide Zila with written notice of any
such product being "commercially available" containing credible evidence of same
which may include copies of advertisements, price lists, promotional materials,
or written reports from Licensee's employees calling on dentists. As used in the
first sentence of this Section 1.4, "government approved" means that such
product may be sold pursuant to applicable national or international law,
regulation, practice, treaty, judicial ruling or directive.
1.5 "CONTRACT(S)" means any agreement, contract, license,
commitment, understanding or similar relationship which relates to the Assets.
1.6 "FDA" means the United States Food and Drug
Administration.
1.7 "IMPROVEMENT(S)" means any and all ideas, inventions,
Know-how, concepts, and reductions to practice thereof, relating to possible
additions, changes or developments relating to the Licensed Products, including
the manufacturing, testing, safety, efficacy, indications and use thereof for
any and all indications/uses.
1.8 "KNOW-HOW" means information, material, documents, data,
and specifications respecting the making, using, marketing and regulatory
approval of the Licensed Products, as comprehensively listed in Schedule 1.8
attached hereto and any future changes, developments and Improvements thereof.
1.9 "LIABILITY" or "LIABILITIES" means any liability,
indebtedness, claim, loss, obligation or responsibility, fixed or unfixed,
secured or unsecured, absolute, contingent or otherwise.
<PAGE> 2
1.10 "LICENSED MARKS" means those trademarks and associated
trade dress specified in Schedule 1.10 to this Agreement as may be amended from
time to time by agreement of the parties which includes all registrations of
pending applications for, all common law rights in and goodwill represented by,
the name ORASCREEN in each country within the Territory and each country which
may be added to the Territory as provided for in this Agreement.
1.11 "LICENSED PATENTS" means each patent and patent
application identified in Schedule 1.11 of this Agreement, including
continuations, divisions and re-examinations and reissues thereof, international
and foreign applications corresponding thereto or derived therefrom, each patent
issuing upon a patent application referred to above and all other patent
applications and patents owned or controlled by Zila which would be infringed by
the manufacture, sale or use of the Licensed Products in the Territory.
1.12 "LICENSED PRODUCTS" means oral cancer detection and
screening systems using a liquid stain or stain rinse covered by or the use or
manufacture of which is covered by the Licensed Patents and/or the Know-how
provided by Zila to Licensee hereunder. The ingredients, formula, test methods
and specifications for the Licensed Products to be adhered to in the manufacture
of same to comply with the Product Registrations are set forth in Schedule 1.12
attached hereto.
1.13 "LIEN" means any mortgage, lien, pledge, charge, lease,
security interest, license, claim, restriction, encumbrance, limitation, marital
interest or any other defect of title of any kind in respect to the Assets.
1.14 "NET SALES" means the invoice price to customers of
Licensee for sales of Licensed Products in the ordinary course of business, as
recorded in Licensee's audited financial statements in accordance with GAAP,
less deductions from such invoice price for: (1) refunds actually allowed or
taken for rejected or returned Licensed Products, (2) excise, use, value added
and sales taxes, to the extent included in the amounts invoiced, (3) customs,
duties and other imposts, to the extent included in the amounts invoiced, (4)
quantity discounts actually allowed or taken, (5) off- invoice allowances,
actually allowed or taken, (6) credits on account of retroactive price
reductions, actually allowed or taken, (7) promotional dollars which effectively
reduce the price paid by Licensee's customers for the Licensed Products, (8)
cost of insurance, billed to and paid by the customer, (9) cost of
transportation, billed to and paid by the customer, and (10) rebates required by
government rule, regulation, program or fiat, to the extent that any such
rebates may be paid or allowed by Licensee. In determining the Net Sales in each
country, on a country-bycountry basis, the local currency shall be converted to
U.S. dollars quarterly, as of the last day of each calendar quarter, based on
applicable currency conversion rates then in effect as reported by Chemical
Bank, and in a manner consistent with Licensee's audited financial statements
and GAAP; accordingly, the Net Sales figures set forth in Section 5.5 and
Minimum Royalties are stated in U.S. dollars. Licensed Products shall be deemed
to be sold when shipped. For purposes of this definition: (i) Net Sales shall
not be imputed, nor deductions made, for samples, free goods or other marketing
programs pursuant to which Licensee dispenses Licensed Products without charge
in order to induce sales; and (ii) Zila will not be entitled to any compensation
on Licensee's sales to Affiliates.
1.15 "PAPER NDA" means a New Drug Application (NDA) submitted
under section 505 (b) (2) of the Federal Food Drug and Cosmetic Act (21 U.S.C.
ss. 355 (b) (2)), the efficacy section of which does not rely upon any clinical
studies in which Zila was the listed sponsor of the study pursuant to an
Investigational New Drug (IND) exemption. This term is being used for
convenience in drafting. The NDA contemplated by the parties, in addition to
relying upon relevant published literature, may contain unpublished non-clinical
toxicology data, unpublished manuscripts (scheduled for publication in the near
future) of clinical trials in which Zila provided partial funding and may
subsequently obtain ownership and/or exclusive rights of access, details of
investigator records regarding clinical trials even though such details are not
intended to be published, and other data (except for clinical data explicitly
sponsored by Zila pursuant to an IND) that would not meet a narrow definition of
a paper NDA as it might be defined for other purposes.
1.16 "PRODUCT REGISTRATIONS" means the applications for
regulatory approval and the approvals for the same, allowing the marketing and
sale of the Licensed Products within the countries in the Territory.
2
<PAGE> 3
1.17 "REGULATORY APPROVAL DATE" in a country shall mean the
date sixty (60) days after the date of receipt by Licensee of documentary proof
that Zila has received the required regulatory approval authorizing the
marketing and sale of a Licensed Product in that country by Licensee.
1.18 "TERRITORY" shall initially mean those countries listed
in Schedule 1.18 hereto. Pursuant to a License Agreement dated March 27, 1995
between Zila and Block Drug, Inc. ("Block"), Zila has granted Block an option
(the "Block Option") to take an exclusive license for the following countries:
Germany, France, Spain, Italy, Belgium/Luxembourg, Holland and Sweden (the
"Western European Countries"). If the Block Option is terminated, the Western
European Countries shall be included within the Territory upon payment by
Licensee to Zila of the license fee provided in Section 5.4 hereof. Although
Canada is not included in the Territory, Zila agrees that it will not enter into
any license of the Licensed Patents and Know-how with any third party to make,
use or sell Licensed Products in Canada prior to January 1, 1997, unless such
license is terminable by Zila upon not less than ninety (90) days' notice by
Zila to the licensee thereunder.
1.19 "YEAR" shall mean for any country each successive twelve
(12) month period with the first such period ending twelve (12) months after the
first day of the calendar month during which Minimum Royalties in such country
commence pursuant to Section 5.5.3.
2. License Grant.
2.1 Subject to the terms and conditions of this Agreement,
Zila grants to Licensee a sole and exclusive license (even as to Zila) under the
Licensed Patents and Know-how to make, have made, use and sell the Licensed
Products within the Territory.
2.2 Licensee shall not sell the Licensed Products outside of
the Territory or knowingly sell the Licensed Products to others for resale
outside of the Territory.
2.3 Licensee may sublicense the rights obtained under this
Agreement to a third party for purposes of manufacturing and/or packaging, in
whole or in part, the Licensed Products only for sale by Licensee in the
Territory; provided however, that Licensee shall remain primarily liable to
Zila.
2.4 Subject to the terms and conditions of this Agreement,
Zila grants to Licensee a sole and exclusive license (even as to Zila) to use
the Licensed Marks in connection with Licensed Products sold within the
Territory pursuant to this Agreement.
2.5 Licensee shall have the right to use marks other than
Licensed Marks in connection with Licensed Products.
2.6 Licensee shall use commercially reasonable efforts to
promote the Licensed Products in the Territory, consistent with Licensee's
commercially reasonable business judgment.
2.7 Licensee shall be fully responsible for and obligated to
Zila to ensure the performance of this Agreement in all respects by Affiliates
of Licensee.
3. Use of the Licensed Marks.
3.1 Licensee acknowledges that Zila is the exclusive owner of
the Licensed Marks, and that all of its uses of the Licensed Marks shall inure
to the benefit of Zila. Licensee agrees not to do anything or cause anything to
be done, which contests, impairs, or tends to contest or impair any of Zila's
rights in the Licensed Marks.
3.2 Upon termination of this Agreement with respect to any
country in the Territory or deletion of such country from the Territory as
provided herein prior to the expiration of the full term set forth in Section 9
below, Licensee will immediately cease all use of the Licensed Marks in any such
country other than the sale or other disposition of Licensee's inventory of the
Licensed Products, and, in such event, Licensee shall not thereafter adopt or
use the Licensed Marks or any confusingly similar words or mark without Zila's
prior written consent. If Licensee is
3
<PAGE> 4
then using marks other than the Licensed Marks, Licensee shall transfer all of
Licensee's right title and interest in and to such marks in such country to
Zila; provided however, that Licensee shall not be required to transfer any
right, title or interest in any mark which is also used by Licensee with
products sold by Licensee other than the Licensed Products. In addition to the
above obligations, upon termination of this Agreement with respect to any
country in the territory wherein Licensee has registered a Licensed Mark or
deletion of such country from the Territory as provided herein prior to the
expiration of the full term set forth in Section 9 below, Licensee shall
transfer all Licensee's right title and interest in and to such Licensed Mark in
such country to Zila.
3.3 Upon expiration of the full term of this Agreement with
respect to any country in the Territory, if this Agreement has not first been
terminated with respect to such country or such country has not first been
deleted from the Territory as provided herein, Licensee will thereafter, and
without any further action of the parties hereto, own all right, title and
interest in and to the Licensed Marks in such country, and Zila shall take all
actions as are reasonably necessary or as reasonably requested by Licensee to
reflect such ownership, including but not limited to the execution of an
assignment thereof in form and substance acceptable to Licensee.
3.4 Licensee agrees that it will not use the Licensed Marks in
any manner which tends to damage the goodwill associated with the Licensed
Marks.
3.5 Licensee may use the Licensed Marks only on such Licensed
Products that:
3.5.1 meet the specifications set forth in Schedule 1.12
as may be amended in writing by the parties from time to time;
3.5.2 are manufactured in accordance with "good
manufacturing practices" as defined in the rules and regulations of the FDA; and
3.5.3 are manufactured, sold, distributed and advertised
in accordance with all applicable laws and regulations (international, national,
federal, state, local or otherwise), and in compliance with any regulatory
agency that has jurisdiction.
3.6 Licensee agrees to cooperate with Zila in facilitating
Zila's review of such standards of quality, to permit reasonable inspection of
Licensee's operation, and to supply Zila with specimens of all uses of the
Licensed Marks upon request; provided, however, that Licensee shall not be
required to perform any such actions in a manner which unreasonably interferes
with the conduct of Licensee's business.
4. Know-how and Provision of Component Materials.
4.1 Licensee shall not use the Know-how other than in
connection with making, using and selling of Licensed Products under this
Agreement.
4.2 At the request of either party, once every calendar
quarter (or at such other interval or intervals as are mutually agreed to by the
parties) during the term hereof, personnel of Zila and Licensee shall meet to
discuss marketing of the Licensed Products.
4.3 The parties acknowledge that certain aspects of the
Know-how provided by one party to the other under this Agreement may consist of
confidential and proprietary information or data of the providing party which is
not readily ascertainable by proper means and which derives economic value,
actual or potential, from not being generally known. Each party, therefore,
agrees to hold such material and information provided by the other in confidence
(applying the same standard of care used in protecting the confidentiality of
its own proprietary information), not to make use thereof other than for
performance hereunder, and not to release or disclose such material or
information to another party without prior written consent of the other party to
this agreement. All items of Know-how and other confidential information
provided by one party under this Agreement to the other party shall be deemed
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<PAGE> 5
to be confidential and proprietary information or data, unless the receiving
party can show, by written record, that the item of Know-how or other
confidential information: (a) at the time of disclosure is generally known to
the public or, after disclosure, becomes generally known to the public other
than through fault of the receiving party; (b) is already in the receiving
party's possession at the time of disclosure, and was not impermissibly acquired
directly or indirectly from the disclosing party; (c) later received on a
non-confidential basis from a third party having the right to impart such
information; or (d) is independently developed by the receiving party.
5. Fees.
5.1 Effective as of the Effective Date and on the first day of
each month thereafter until the month after the submission of the Paper NDA to
the FDA, in a form approved by Licensee, such approval not to be unreasonably
withheld, Licensee shall make payments to Zila in the amount of * * * * as
non-refundable licensing fees for the Territory.
5.2 Commencing on the first day of the month after the month
during which the Paper NDA is accepted for filing by the FDA, and on the first
day of and each month thereafter until the Paper NDA is approved by the FDA, the
Licensee shall make payments to Zila in the amount of * * * * as non-refundable
licensing fees for the Territory; provided, however, that Licensee's payment
obligations under Section 5.1 and 5.2 shall cease at such time as the aggregate
payments thereunder equal * * * *.
5.3 Upon approval of the Paper NDA by the FDA, subject to
Section 9.5.2 hereof, Licensee shall pay to Zila an additional non-refundable
licensing fee for the Territory in the amount of * * * *, less the amounts
previously paid by the Licensee to Zila under Sections 5.1 and 5.2.
5.4 In addition, upon termination of the Block Option,
Licensee shall pay to Zila an additional non-refundable licensing fee of * * * *
for the Western European Countries, contingent upon Zila being able to
re-acquire the right to grant Licensee an exclusive license in such countries,
and Licensee agrees to accept such countries as part of the Territory.
5.5 During the initial term hereof as set forth in Section 9.1
below, Licensee shall pay to Zila royalties in U.S. dollars as follows:
5.5.1 * * * * of Net Sales of the Products in the
United States, Canada and the Western European Countries which are included
within the Territory and * * * * of Net Sales in all other countries within the
Territory; provided, however, that Licensee shall be entitled to a credit
against the royalties which would otherwise be payable to Zila hereunder in an
amount equal to * * * * of Net Sales until such time as the aggregate amount of
such credit equals those costs incurred by Licensee to obtain FDA approval of
the Licensed Products, which costs have been approved in advance by Zila (such
approval not to be unreasonably withheld), not to exceed in the aggregate SEVEN
HUNDRED FIFTY THOUSAND DOLLARS ($750,000). Prior to taking any credit provided
hereunder, Licensee shall submit to Zila reasonable evidence of any costs
incurred by Licensee as to which credit is claimed.
5.5.2 * * * * of Net Sales in any country in the
Territory where a Competitive Product is commercially available, with such lower
royalties commencing thirty (30) days after Licensee has provided Zila the
notice specified in Section 1.4 that such Competitive Product is first
commercially available in such country and ending when such Competitive Product
is no longer commercially available in such country. A Competitive Product shall
be deemed to be no longer commercially available in a country within the
Territory thirty (30) days after Zila has provided to Licensee by written notice
credible evidence that the specific conditions identified by Licensee as
demonstrating that a Competitive Product has become commercially available in
such country have changed in such a manner as to no longer support the
conclusion that a product remains a Competitive Product in such country as
defined herein.
- --------------------------------------------------------------------------------
* * * * Confidential Portion has been ommitted and filed separately with the
Commission.
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<PAGE> 6
5.5.3 In no case shall the royalties paid by Licensee
to Zila in any Year in respect of any country within the Territory be less than
the Minimum Royalties set forth in Schedule 5.5.3 for that year, beginning with
the Commencement of Sale in such country; provided, however, that the Minimum
Royalties for any country shall be reduced by * * * * for any portion of any
Year during which reduced royalties are in effect under Section 5.5.2. In the
event actual royalties paid by Licensee to Zila based upon Net Sales for any
Year in any country are less than the Minimum Royalties required, Licensee may
pay any deficiency to Zila within thirty (30) days after receipt by Licensee of
written notice from Zila of the amount of any deficiency. If Licensee does not
pay such deficiency within such period, Zila may delete such country from the
Territory by written notice to Licensee.
6. Regulatory Approval.
6.1 The parties agree to use their commercially reasonable
efforts to obtain any and all regulatory approvals required for the marketing
and sale of the Licensed Products in the United States as soon as practicable
hereafter.
The following is a list of activities required for FDA approval and
start of manufacture of Licensed Product as well as the party having primary
responsibility for the activity and the party responsible for payment of the
costs of such activity:
<TABLE>
<CAPTION>
Party Responsible Party Responsible
Activity for Work for Payment
- -------- -------- -----------
<S> <C> <C>
Toluidine Blue Manufacture Zila* Zila*
Readiness
Product Readiness Zila* Zila*
CMC Toluidine Blue
Stability
Manufacturing Readiness Licensee Licensee
Finished Product
Plant to Manufacture finished
product
Filing of NDA Zila* Licensee pay
Costs preapproved costs
Consultants and attorneys
Toxicology Zila* Licensee pay
preapproved costs
Clinical Work Zila* Licensee pay
preapproved costs
</TABLE>
*Licensee will assist and become involved in activities as Zila requests and P&G
agree.
Wherever it is indicated above that Licensee is responsible for payment of
preapproved costs, Licensee shall pay, in addition to its own costs, any such
costs incurred by Zila from the Effective Date forward, to the extent that such
costs have been approved in advance by the Licensee. Zila shall submit to
Licensee on a monthly basis reasonable evidence of such costs incurred by Zila
and Licensee shall pay the amount of such costs to Zila within twenty (20) days
of receipt thereof. In addition, Licensee agrees to reimburse Zila for the fees
and costs of services requested by personnel of Licensee from Keller & Heckman
in connection with the FDA approval process for the Licensed Products during the
month of November upon submission by Zila to Licensee of reasonable evidence
thereof.
- --------------------------------------------------------------------------------
* * * * Confidential Portion has been ommitted and filed separately with the
Commission.
6
<PAGE> 7
6.2 Licensee shall use its commercially reasonable efforts to
obtain any and all approvals required for the marketing and sale of the Licensed
Products in the other countries in the Territory in the order in which the
parties mutually agree that the Licensed Products should be registered as
provided in Section 6.4 . Licensee shall pay all regulatory costs in such other
countries in which the Licensed Products are to be registered, from the
Effective Date forward, including costs related to any clinical studies
undertaken in connection with obtaining such regulatory approval, and including
Zila's costs related to regulatory approval from the Effective Date forward, to
the extent that such costs have been approved in advance by the Licensee. Zila
shall submit to Licensee on a monthly basis reasonable evidence of such costs
incurred by Zila and Licensee shall pay the amount of such costs to Zila within
twenty (20) days of receipt thereof.
6.3 In the event of any termination of this Agreement with
respect to any country in the Territory or deletion of such country from the
Territory prior to the expiration of the full term as set forth in Section 9
below, all right, title and interest of Licensee in and to such regulatory
approvals shall be transferred to Zila upon payment by Zila to Licensee of the
sum of $1.00. In such event, Licensee shall take such actions as are reasonably
necessary or as reasonably requested by Zila to reflect Zila's ownership
thereof.
6.4 Licensee and Zila shall meet quarterly after the Effective
Date to discuss the appropriate regulatory approval strategy and schedule for
the countries in the Territory. By no later than January 1, 1997, Licensee shall
present to Zila a comprehensive regulatory approval strategy for the entire
Territory, which shall include a schedule for filing of required applications
for regulatory approvals in each country in the Territory. Such schedule shall
be subject to Zila's approval, which shall not be unreasonably withheld.
Thereafter, in the event Licensee shall have failed to make any such filing in a
country in accordance with such schedule, or, having made such filing, shall not
have exercised commercially reasonable efforts to secure approval in such
country, Zila shall have the right to delete such country from the Territory
upon thirty (30) days' notice to Licensee, unless within such thirty (30) day
period Licensee shall have made such filing or shall have commenced and
continued such efforts to secure approval.
7. Reports and Payments.
7.1 Within forty-five (45) days of the end of each calendar
quarter during the term hereof, Licensee shall furnish Zila a report showing the
number of Licensed Products sold during the calendar quarter in each country of
the Territory and the calculation of Net Sales and royalties derived therefrom.
Each report will be accompanied by the appropriate royalty payment.
8. Audit.
8.1 Zila shall have the right, but only during Licensee's
regular business hours and upon at least ten (10) days prior written notice, to
have the books, records and accounting procedures used by Licensee in the
determination of Net Sales and the calculation of the royalties due thereon,
reviewed by Deloitte & Touche or by another mutually acceptable Big Six
Accounting Firm; provided, however, that the sole purpose of any such review
shall be to verify the accuracy of the computations made by Licensee in
connection therewith and in no event shall the report of such Big Six Accounting
Firm disclose individual customer data. Any disputes relating to the
computations made or accounting procedures used by Licensee in its determination
of Net Sales or the calculation of royalties due thereon shall be resolved by a
different Big Six Accounting Firm acceptable to both parties. If the final
determination of such Big Six Accounting Firm with respect to the computation of
Net Sales varies by more than five percent (5%) in favor of Zila from the figure
originally submitted by Licensee, all costs and expenses of such Big Six
Accounting Firm in connection with its review hereunder shall be borne by
Licensee; otherwise, all such expenses shall be borne by Zila. Such reviews may
occur not more than once in any twelve (12) month period, cover no more than the
previous two (2) years, and cover only such periods which have not been
previously reviewed.
7
<PAGE> 8
9. Term and Termination.
9.1 Unless sooner terminated in accordance with Section 9.4
below, this Agreement shall become effective upon execution and shall continue
for an initial term with respect to any country in the Territory for so long as
any Licensed Patent covering the Licensed Products sold by Licensee is in force
in such country, or, if no such Licensed Patent is then in force with respect to
any such country, the initial term of this Agreement shall expire seven (7)
years from the Commencement of Sale of the Licensed Products in such country.
9.2 Following the expiration of the initial term of this
Agreement as set forth in Section 9.1 with respect to any country in the
Territory, this Agreement shall remain in full force and effect with respect to
such country for an additional term of five (5) years; provided, however, that
during such term, Licensee's royalties shall be reduced to * * * * of Net Sales
(allocable to the Know-how and Trademark Licenses hereunder) in such country and
no Minimum Royalty shall be payable with respect to such country during such
additional term.
9.3 Upon the expiration of the additional five (5) year term
set forth in Section 9.2 with respect to any country, unless this Agreement has
been first terminated, Licensee shall thereafter have a fully-paid, perpetual,
sole and exclusive license (even as to Zila) to use the Know-how in connection
with the manufacture, sale or use of the Licensed Products in such country.
9.4 If either party shall at any time breach this Agreement,
the other party may, at its option, terminate this Agreement by giving the
breaching party thirty (30) days' written notice of its intention to do so,
which notice shall specify the breach; provided, however, that if the breaching
party shall remedy such breach during such thirty (30) day period, then any such
notice of termination shall be null and void. In addition, either party may, at
its option, terminate this Agreement without advance notice in the event of the
institution of legal proceedings against the other party in bankruptcy or
insolvency (if such legal proceedings remain pending for 90 days), or upon an
assignment for the benefit of creditors.
9.5 Licensee shall have the right to terminate this Agreement
as follows:
9.5.1 At any time prior to approval of the Paper NDA
by the FDA, Licensee may terminate this Agreement upon ninety (90) days' notice
to Zila and payment of the maximum amount payable prior to such FDA approval
under Sections 5.1 and 5.2 hereof.
9.5.2 At any time within sixty (60) days of FDA
approval of the Paper NDA, Licensee may terminate this Agreement by notice to
Zila and without making any payments due thereafter other than as provided in
Section 9.5.1, if the claims permitted to be made for the Licensed Products in
accordance with such FDA approval are insufficient to provide Licensee with
reasonable assurance that it can successfully market the Licensed Products.
9.5.3 In addition to termination as otherwise
expressly provided in this Section 9, at any time after sixty (60) days from FDA
approval of the Paper NDA, Licensee may terminate this Agreement in any country
upon ninety (90) days' notice to Zila, but only by paying to Zila an amount
equal to one time the Minimum Royalties per Year then payable with respect to
such country.
9.6 After the Commencement of Sale in any country, Zila may
terminate this Agreement in such country upon ninety (90) days' notice to
Licensee if Licensee is not then marketing or selling in such country a Licensed
Product covered by a Licensed Patent then in effect in such country, unless
within such ninety (90) day period Licensee commences or renews such marketing
or sale.
- --------------------------------------------------------------------------------
* * * * Confidential Portion has been ommitted and filed separately with the
Commission.
8
<PAGE> 9
10. Patents.
10.1 When applicable, Licensee shall mark all Licensed
Products with appropriate reference to the Licensed Patents.
10.2 Zila covenants to diligently prosecute the pending patent
applications with respect to the Licensed Patents in the countries within the
Territory and those which may be added to the Territory and to properly maintain
those patents which issue.
10.3 Zila shall provide Licensee with copies of every notice
received by Zila which is related to renewals, maintenance and applications of
the Licensed Patents within twenty (20) days of Zila's receipt thereof, as well
as copies of Zila's responses to such notices.
10.4 In the event that either party shall learn of an
infringement of any Licensed Patents or Licensed Marks in the Territory, that
party shall call the other party's attention thereto in writing and shall
provide such other party with reasonable evidence of such infringement. Both
parties shall use their commercially reasonable efforts in cooperation with each
other to terminate such infringement without litigation. If the efforts of the
parties are not successful in abating the infringement within thirty (30) days
after the infringer has been formally notified of the infringement, Zila shall
have the right to:
10.4.1 Commence suit on Zila's own account for
infringement of rights owned by Zila, subject to Licensee's right to fully
participate in such suit in order to protect its rights as granted herein;
10.4.2 Join with Licensee in such suit if Licensee
brings suit pursuant to Section 10.5 below or;
10.4.3 Refuse to participate in such suit; and Zila
shall give notice in writing of its election to Licensee within thirty (30) days
after said thirty (30) day period.
10.5 Licensee may bring suit for infringement on its own
account, with the right to name Zila as nominal party plaintiff for violation of
rights owned by Zila, if Zila elects not to commence or join in any suit other
than as nominal party plaintiff.
10.6 Such legal action as is decided upon shall be at the
expense of the party bringing suit, and all recoveries recovered thereby shall
belong to such party; provided, however, that legal action brought jointly by
Zila and Licensee and fully participated in by both shall be at the joint
expense of the parties, and all recoveries up to the amount of such expense,
shall be shared jointly by them in proportion to the share of expense paid by
each party, and in the event such recoveries include damages or royalties in
excess of expenses, the amount in excess of expenses shall be shared by the
parties on a proportional basis as to their actual losses (for Licensee, lost
gross profit; for Zila lost royalties).
10.7 Each party agrees to cooperate, in all reasonable
respects as requested by the other party in litigation proceedings instituted
hereunder and, upon request of the party bringing suit, the other party shall
make available to the party bringing suit all relevant records, papers,
information, samples, specimens, and the like which may be relevant and in its
possession. The party bringing suit shall have the right to control such
litigation.
10.8 If infringement of the Licensed Patents covering the
product sold by Licensee continues in any country following the conclusion of
litigation proceedings, instituted hereunder, or the Licensed Patents covering
the product sold by Licensee are found to be invalid in such country, or if no
litigation is initiated hereunder and such
9
<PAGE> 10
infringement continues in such country for more than ninety (90) days after the
infringer has been formally notified of the infringement, the royalty for the
remainder of the term in such country shall be reduced to * * * * unless
otherwise agreed by Zila and Licensee.
11. Warranties and Representations of Zila.
Zila represents and warrants as of the date of this Agreement as
follows:
11.1 Zila, Inc. is a corporation duly organized, validly
existing and in good standing under the laws of Delaware and Zila
Pharmaceuticals, Inc. is a corporation, duly organized, validly existing and in
good standing under the laws of Nevada and each such corporation has the
corporate power to own or lease its properties and assets and to carry on its
business as now conducted. Zila is duly qualified, admitted or otherwise
authorized to transact business and in good standing as a foreign corporation in
all jurisdictions in which the conduct or nature of Zila's business or the
ownership or leasing of its properties or assets requires it to be so qualified,
admitted or otherwise authorized.
11.2 Zila has full right, power and authority to execute and
deliver this Agreement and to carry out the transactions contemplated hereby.
Zila has duly authorized the execution and delivery of this Agreement and the
transactions contemplated hereby, and no other corporate action on the part of
Zila is necessary to authorize this Agreement and the transactions contemplated
herein. This Agreement has been duly executed and delivered by a duly authorized
officer of Zila and constitutes the valid and binding obligation of Zila
enforceable in accordance with its terms, except that the availability of the
remedy of specific performance may be limited by general principles of equity.
The execution, delivery and performance of this Agreement and the consummation
of the transactions contemplated hereby shall not result in a breach of the
terms or conditions of, or constitute a default under, or an event which with
notice or lapse of time or both would become a default, or violate, or require,
as the case may be: (i) any provision of any law, regulation or ordinance, (ii)
the Certificate or Articles of Incorporation or By-Laws of Zila, (iii) any
Contract, license, agreement, lease, mortgage or other instrument or
undertaking, to which Zila is subject or a party or by which any or their
property or assets is or may be bound or affected, and (iv) any judgment, order,
writ, injunction or decree of any court, administrative agency or governmental
body. Nor shall the execution, delivery and performance of this Agreement and
the consummation of the transactions contemplated hereby result in the
imposition of any Lien on any property or assets of Zila or the cancellation,
discontinuance or alteration of any Contract, license, permit, agreement or
commitment or of any business of Zila.
11.3 Except as described on Schedule 11.3, Zila: (i) is the
owner of, with all right, title and interest in and to, the Assets and has the
right to the use thereof; (ii) is not infringing any of the rights of third
parties concerning any of the Assets, nor are there any facts of which Zila is
aware on which any valid claim of such infringement can be based; and (iii) is
not a party to any agreement or license with any other party pursuant to which
Zila has the right to use the Assets with the exception of the Contracts listed
on Schedule 11.3.
11.4 There is no investment banker, broker, finder or other
intermediary which has been retained by, or is authorized to act on behalf of,
Zila nor shall any such person or entity be entitled to any fee or commission
from Licensee or any of its Affiliates upon the consummation of the transactions
contemplated hereby. Zila agrees to indemnify Licensee and hold Licensee
harmless from all liabilities, costs and expenses incurred by Licensee as a
result of any claim by any such person becoming entitled to any such fee or
commission with respect to the transactions contemplated hereby. Zila further
agrees to indemnify Licensee against any claim for payment by any party other
than Zila claiming ownership or license rights under Licensed Products.
- --------------------------------------------------------------------------------
* * * * Confidential Portion has been ommitted and filed separately with the
Commission.
10
<PAGE> 11
11.5 There is nothing in the Know-how or Zila's books and
records and nothing else to the knowledge of Zila, which suggests or concludes
that the Licensed Products are unsafe and/or ineffective for their intended use.
11.6 The representations and warranties made by Zila in this
Agreement and Schedules 1.8, 1.10, 1.11 and 1.12 attached hereto are (i) true,
correct and complete in all respects and (ii) do not contain any statement which
is false or misleading with respect to any material fact. Zila has not failed to
disclose to Licensee any materially adverse information relating to the Assets
which is in Zila's possession or control.
11.7 Zila is the owner of or is licensed under the Licensed
Patents, with full power and authority to license or sub-license the Licensed
Patents to Licensee as provided hereunder, without the consent or approval of
any third party. If Zila's ability to license the Licensed Patents to Licensee
on the terms provided herein is lost or impaired, Zila agrees to reimburse
Licensee for all of its unrecovered expenses incurred up to that time related to
the Licensed Products.
12. Representations and Warranties of Licensee.
Licensee hereby represents and warrants as follows:
12.1 Licensee is a corporation duly organized, validly
existing and in good standing under the laws of the State of Ohio.
12.2 Licensee has full corporate power and authority to
execute and deliver this Agreement and to carry out the transactions
contemplated hereby. This Agreement has been duly executed and delivered by a
duly authorized officer of Licensee and constitutes the valid and binding
obligation of Licensee, enforceable in accordance with its terms, except that
enforceability may be limited by general principles of equity and the exercise
of judicial discretion in particular cases. The execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated hereby will not result in a breach of the terms or conditions of,
or constitute a default under, or an event which with notice or lapse of time or
both would become a default or violate, or require, as the case may be, (i) any
provision of any law, regulation or ordinance, (ii) the Certificate or Articles
of Incorporation or By-laws of Licensee, (iii) any agreement, lease, mortgage or
other instrument or undertaking, oral or written, to which Licensee is a party
or by which it or any of its properties or assets is or may be bound or
affected, (iv) any judgment, order, writ, injunction or decree of any court,
administrative agency or governmental body or (v) any action of or by, or filing
with, any governmental body, agency or official.
12.3 The representations and warranties made by Licensee in
this Agreement are true, correct and complete in all material respects and do
not contain any statement which is false or misleading with respect to any
material fact.
13. Indemnification.
13.1 Zila shall indemnify and hold harmless Licensee and its
respective affiliates, directors, officers, employees and agents from and
against any liabilities or obligations, damages, losses, claims, encumbrances,
costs or expenses (including reasonable attorneys' fees) (any or all of the
foregoing herein referred to as "Loss") insofar as a Loss or actions in respect
thereof occurs after the date of this Agreement and arises out of or is based
upon any misrepresentation or breach of any of the warranties, covenants or
agreements made by Zila in this Agreement.
13.2 Licensee shall indemnify and hold harmless Zila and its
respective affiliates, directors, officers, employees and agents from and
against any Loss insofar as such Loss or actions in respect thereof occurs
subsequent to the date of this Agreement and arises out of or is based upon (i)
any misrepresentation or breach of any
11
<PAGE> 12
of the warranties, covenants or agreements made by Licensee in this Agreement,
or (ii) any action or omission by Licensee in connection with the manufacture,
use or sale of the Licensed Products in the Territory or the purchase or use by
third parties in the Territory after the date of this Agreement of any of the
Licensed Products sold by the Licensee.
13.3 No claim for indemnification thereunder shall be valid
unless notice of the matter which may give rise to such claim is given in
writing by the indemnitee (the "Indemnitee") to the persons against whom
indemnification may be sought (the "Indemnitor") as soon as reasonably
practicable after such Indemnitee becomes aware of such claim, provided that the
failure to notify the Indemnitor shall not relieve it from any liability which
it may have to the Indemnitee otherwise than under this Section 13. Such notice
shall state that the Indemnitor is required to indemnify the Indemnitee for a
Loss and shall specify the amount of Loss and relevant details thereof. The
Indemnitor shall notify Indemnitee no later than sixty (60) days from such
notice of its intention to assume the defense of any such claim. In the event
the Indemnitor fails to give such notice within that time the Indemnitor shall
no longer be entitled to assume such defense.
13.4 The Indemnitor shall have the right to settle and defend,
through counsel satisfactory to the Indemnitee at its expense, any action which
may be brought in connection with all indemnifiable matters (a "Third Party
Action"). In such event the Indemnitee of the Loss in question and any successor
thereto shall permit the Indemnitor full and free access to its books and
records and otherwise fully cooperate with the Indemnitor in connection with
such action, provided that this Indemnitee shall have the right fully to
participate in such defense at its own expense. The defense by the Indemnitor of
any such actions shall not be deemed a waiver by the Indemnitor of its right to
assert a claim with respect to the responsibility of the Indemnitor with respect
to the Loss in question. The Indemnitor shall have the right to settle or
compromise any claim against the Indemnitee without the consent of the
Indemnitee provided that the terms thereof provide for the unconditional release
of the Indemnitee and require the payment of monetary damages only. No
Indemnitee shall pay or voluntarily permit the determination of any liability
which is subject to any such action while the Indemnitor is negotiating the
settlement thereof or contesting the matter, except with the prior written
consent of the Indemnitor, which consent shall not be unreasonably withheld or
delayed. If the Indemnitor fails to give Indemnitee notice of its intention to
defend any such action as provided herein, the Indemnitee involved shall have
the right to assume the defense thereof with counsel of its choice, at the
Indemnitor's expense, and defend, settle or otherwise dispose of such action.
With respect to any such action which the Indemnitor shall fail to promptly
defend, the Indemnitor shall not thereafter question the liability of the
Indemnitor hereunder to the Indemnitee for any Loss (including counsel fees and
other expenses of defense).
12
<PAGE> 13
14. Notices.
14.1 Any notice or report provided for in this Agreement shall
be deemed sufficiently given when sent by certified or registered mail, postage
prepaid, or by facsimile transmission if it is for Zila to:
Zila Inc.
5227 North 7th Street
Phoenix, Arizona 85014 USA
Attn: Joseph Hines, President
FAX No.: (602) 234-2264
and if it is for Licensee, to:
The Procter & Gamble Company
One Procter & Gamble Plaza
Cincinnati, Ohio 45201
Attn: General Manager Procter & Gamble
Oral Care Products
FAX No: _______________
The parties may, from time to time, specify in writing other addresses for this
purpose. Any notice, consent or other communication required or permitted to be
given hereunder shall be deemed to have been given on the date of mailing,
personal delivery or facsimile thereof and shall be conclusively presumed to
have been received on the second business day following the date of mailing or,
in the case of personal delivery, the actual day of personal delivery thereof,
or, in the case of facsimile delivery, when such facsimile is confirmed as
transmitted or has been actually received, except that a change of address shall
not be effective until actually received.
15. Integration.
15.1 This Agreement supersedes all pre-existing agreements and
negotiations between the parties respecting their subject matter and shall not
be varied, amended or supplemented except by a writing of subsequent or even
date executed by the authorized representatives of the parties.
16. Successors and Assigns.
16.1 This Agreement and the rights and obligations arising
here from are binding upon the successors or permitted assigns of the parties
hereto.
16.2 Licensee (including its Affiliates) may not assign this
Agreement in whole or in part by operation of law or otherwise to a third party
without the prior written consent of Zila which consent shall not be
unreasonably withheld. Any attempted assignment in derogation of this provision
shall be null and void.
17. Authorized Representatives.
17.1 The individuals signing this Agreement represent and
warrant that they are authorized to execute this Agreement by and on behalf of
their respective corporations and to bind such corporations to the terms and
conditions hereof.
13
<PAGE> 14
18. Governing Law.
18.1 This agreement is made under and shall be governed by and
construed in accordance with the internal laws of the State of Arizona, without
reference to conflict of law principles.
19. Dispute Resolution.
19.1 All disputes relating to or arising out of this Agreement
or its subject matter shall be resolved by the parties as set forth in this
Section 19.
19.2 Notice of demand for a meeting of the parties to discuss
and settle a dispute(s) ("Notice of Meeting") may be given by either Zila or
Licensee. Such notice shall be in writing, and shall set a date no more than ten
(10) business days from the date of the Notice of Meeting on which the parties
shall meet during normal business hours at Zila's offices in Phoenix, Arizona.
If within five (5) days after the date of the meeting the parties have not
resolved their dispute(s) then the parties shall proceed as provided below.
Notwithstanding anything in this Section 19 to the contrary, Licensee and Zila
shall have the ability to seek equitable and injunctive remedies in any state or
federal court in Phoenix, Arizona.
19.3 Any Dispute not resolved pursuant to 19.2 shall be
resolved by means of an arbitration proceeding conducted in accordance with the
rules of the American Arbitration Association before an arbitrator selected in
accordance with such rules.
19.4 Notice of a demand for resolution of a dispute hereunder
(a "Notice of Dispute") given by either party shall be in writing specifying the
issue or issues in dispute.
19.5 The arbitration proceeding shall be held at a neutral
location within the United States selected by the arbitrator and shall commence
no later than forty (40) days after the Notice of Dispute is given.
19.6 The fees payable to the arbitrator shall be the usual
hourly rate of such arbitrator for consulting or dispute resolution services.
All fees and expenses associated with the arbitration proceeding incurred by the
parties, including the arbitrator fees, attorneys' fees and disbursements, shall
be paid by the party against whom the decision is rendered.
20. Miscellaneous.
20.1 The headings and captions contained in this Agreement are
for reference purposes only and shall not affect the meaning or interpretation
of the Agreement.
20.2 This Agreement may be executed in counterparts, each of
which shall be deemed to be an original but all of which together shall
constitute but one and the same instrument.
20.3 If any section, subsection or provision of this
Agreement, or the application of such section, subsection or provision, is held
illegal, invalid or unenforceable under present or future laws effective during
the term of this Agreement, it is the intention of the parties hereto that the
remainder of this Agreement shall not be affected thereby, and it is also the
intention of the parties that in lieu of any such illegal, invalid or
unenforceable clause or provision, there be added to this Agreement by the Court
or other party making such determination a clause or provision as similar in
terms and substance to such clause or provision as may be legal, valid and
enforceable.
20.4 The Exhibits and Schedules are part of this Agreement as
if set forth fully herein.
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<PAGE> 15
20.5 Subject to the terms and conditions of this Agreement,
each of the parties will use all reasonable efforts to take, or cause to be
taken, all action, and to do, or cause to be done, all things necessary, proper
or advisable, under applicable laws and regulations or otherwise, to fulfill its
obligations under this Agreement and to consummate the transactions contemplated
by this Agreement.
20.6 Except as required by applicable law or judicial order,
neither Zila nor Licensee, nor any of their respective representatives,
successors or assigns, shall issue any press release or make any public
announcement or disclosure with respect to this Agreement or the transactions
contemplated hereby without the prior written consent of the other party hereto.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed in duplicate originals by its duly authorized representative as of the
date first written above.
ZILA, INC. THE PROCTER & GAMBLE COMPANY
By:/s/ Joseph Hines By: /s/ Thomas A. Moore
-------------------------- ---------------------------
Joseph Hines Thomas A. Moore
Name - typed or printed Name - typed or printed
President Group Vice President
- ----------------------------- ------------------------------
Title Title
ZILA PHARMACEUTICALS, INC.
By:/s/ Joseph Hines
--------------------------
Joseph Hines
Name - typed or printed
President
- -----------------------------
Title
15
<PAGE> 16
Schedule 1.8
Licensed Know-how
All technical information (including trade secrets, unpatented inventions,
research and/or development data), clinical /regulatory information and data,
business information (including sources of supply, manufacturing costs) and
marketing information (including customer lists, trade and professional
contacts, sales pricing, advertising and promotional materials) that Zila has
developed or acquired and that relate to the Territory and the Licensed
Products.
16
<PAGE> 17
Schedule 1.10
Licensed Marks
There are presently no trade marks registered for the Licensed Products with the
exception of "Orascreen" in Austria. Zila has pending applications for the
Licensed Products to register the following trademarks:
<TABLE>
<CAPTION>
Trademark Country Application Serial Number
- --------- ------- -------------------------
<S> <C> <C>
Blu scan United States 74/635,844
Orascreen Australia 657,157
Austria AM1959/95
Canada 790,533
France 95576451
Germany 395148197
Ireland 94/3245
Italy Rm95C/002007
Japan 45607/95
Spain 1964376
Switzerland 7080/1995.2
United Kingdom 2017179
United States 74/635,840
Oratest United States 74/635,841
Tol Scan United States 74/635,842
Tol Blu United States 74/635,843
</TABLE>
17
<PAGE> 18
Schedule 1.11
Licensed Patents
1. U.S. Patent No. 4,321,251 issued March 23, 1982, entitled "Detection of
Malignant Lesions of the Oral Cavity Utilizing Toluidine Blue Rinse."
2. Canadian Patent No. 1,180,648 issued January 8, 1985, entitled "Toluidine
Blue Rinse for the Detection of Squamous Cell Carcinoma of the Oral
Cavity."
3. United States Patent No. 5,372,801 issued December 13, 1994, entitled
"Biological Stain Composition, Method of Preparation and Method of Use" and
the following corresponding patent applications):
<TABLE>
<CAPTION>
Country Application Serial Number
- ------- -------------------------
<S> <C>
PCT PCT/US92/0872
Australia Patent Office 27,788/92
European Patent Office 92921881.6
(Designated Countries)
Austria Belgium
Denmark Germany
Greece Ireland
France Italy
Luxembourg Monaco
Netherlands Portugal
Spain Switzerland
Sweden United Kingdom
Canada 2097695
India 977/DEL/94
Japan 508430/93
Korea 701988/93
</TABLE>
4. The following patent applications entitled "Method and Kit for Epithelial
Cancer Screening":
<TABLE>
<CAPTION>
Country Application Serial Number
- ------- -------------------------
<S> <C> <C>
PCT PCT/US93/00352
Australia Patent Office 34,740/93
European Patent Office 9393503.6
(Designated Countries)
Austria Belgium
Denmark Germany
Greece Ireland
France Italy
Luxembourg Monaco
Netherlands Portugal
Spain Switzerland
Sweden United Kingdom
Canada
Japan 516458/94
Korea
United States 07/978,670
</TABLE>
18
<PAGE> 19
Schedule 1.18
Territory
* * * *
- --------------------------------------------------------------------------------
* * * * Confidential Portion has been ommitted and filed separately with the
Commission.
19
<PAGE> 20
Schedule 5.5.3 Minimum Royalties
<TABLE>
<CAPTION>
=================================================================
Year United States
<S> <C>
- -----------------------------------------------------------------
1 $ * * * *
- -----------------------------------------------------------------
2 $ * * * *
- -----------------------------------------------------------------
3 and thereafter $ * * * *
=================================================================
</TABLE>
Minimum royalties for all countries in the Territory will be based upon
the following formula:
Estimated Market Potential x Minimum Royalty Percentage x Applicable
Royalty Rate.
"Estimated Market Potential" is to be calculated as follows:
Population of the country x % of population with access to health care
x % who smoke x % over age forty x % who visit their dentist at least once a
year x gross selling price per unit. The statistics required for the calculation
of Estimated Market Potential in countries in the territory other than the U.S.
will be provided by Licensee based upon a good faith review of the best
available sources. Such figures will be subject to Zila's approval, which shall
not be unreasonably withheld.
Minimum Royalty would be based upon * * * *, * * * *, and * * * * of the
estimated market potential in the U.S. for the first, second and third and
subsequent years after introduction, respectively, and * * * *, * * * * and * *
* * of the estimated market potential for such years in other areas within the
Territory.
The "Applicable Royalty Rate" would be either * * * * or * * * * for each
country in the Territory, as specified in Section 5.5.1.
<TABLE>
<CAPTION>
Estimated Market Potential Calculation For The U.S.
================================================================================================================================
Country Total % Pop Tot. Pop. % of Tot. Pop. % of Tot. Pop. Pop. Visit Mkt. Pot. Cost Per Market
Pop. w/Access w/Access Pop. Smokers Pop. Smokers Dentist/Health Pop. O.S. Exam Pot.
MM to Health MM Smokers Smokers Over 40 Ser. MM $MM
Care Over 40
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. 258 98% 252.8 20% 60.57 40.5% 20.48 60% 12.29 $17.00 $208.90
================================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
* * * * Confidential Portion has been ommitted and filed separately with the
Commission.
20
<PAGE> 21
<TABLE>
<CAPTION>
Mimimum Royalty Calculation For U.S.
=============================================================================================================================
Country Year Est. Mkt. Min. Royalty Applicable Minimum
Potential Percent Royalty Rate Royalty
$MM $MM
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. 1 $208.896 * * * * * * * * $* * * *
U.S. 2 $208.896 * * * * * * * * $* * * *
U.S. 3 $206.896 * * * * * * * * $* * * *
=============================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
* * * * Confidential Portion has been ommitted and filed separately with the
Commission.
21
<PAGE> 22
Schedule 11.3
Asset Licenses and Agreements
1. Zila has the right to use U.S. Patent No. 5,372,801 (and corresponding
foreign patents) under an exclusive sublicense from CTM Associates, Inc.
("CTM"), as set forth in the First Amendment to Assignment and Royalty Agreement
between Zila and CTM dated as of October 31, 1992 (the "First Amendment"). CTM
has the exclusive license to use the foregoing patents under a License Agreement
between CTM and National Technical Information Service, dated September 30,
1992.
2. Zila obtained its rights to the Assets pursuant to and subject to the terms
of the Assignment and Royalty Agreement dated December 31, 1991, between Zila
and CTM, as amended by the First Amendment and the Second Amendment to
Assignment and Royalty Agreement dated July 1, 1994.
22
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-START> NOV-01-1995
<PERIOD-END> JAN-31-1996
<CASH> 240,767
<SECURITIES> 739,295
<RECEIVABLES> 1,027,177
<ALLOWANCES> (20,000)
<INVENTORY> 382,746
<CURRENT-ASSETS> 2,575,634
<PP&E> 1,224,350
<DEPRECIATION> (342,447)
<TOTAL-ASSETS> 4,464,415
<CURRENT-LIABILITIES> 679,444
<BONDS> 407,916
0
0
<COMMON> 24,577
<OTHER-SE> 3,352,498
<TOTAL-LIABILITY-AND-EQUITY> 4,464,415
<SALES> 3,046,255
<TOTAL-REVENUES> 3,153,812
<CGS> 433,080
<TOTAL-COSTS> 433,080
<OTHER-EXPENSES> 2,861,394
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 25,989
<INCOME-PRETAX> (135,528)
<INCOME-TAX> 0
<INCOME-CONTINUING> (135,528)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (135,528)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
