<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE FISCAL YEAR ENDED JULY 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-17521
ZILA, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 86-0619668
(STATE OR OTHER JURISDICTION OF INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION NO.)
OR ORGANIZATION)
5227 NORTH 7TH STREET, PHOENIX, ARIZONA 85014-2800
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (602) 266-6700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- --------------------------------------------- ---------------------------------------------
<S> <C>
NONE N/A
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
(TITLE OF CLASS)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
At September 30, 1997, the aggregate market value of common stock held by
non-affiliates of the Registrant was approximately $238,077,500.
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [ ] No [ ] N/A
APPLICABLE ONLY TO CORPORATE REGISTRANTS
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date.
At September 30, 1997, the number of shares of common stock outstanding was
32,790,849.
DOCUMENTS INCORPORATED BY REFERENCE
Materials from the Registrant's 1997 Proxy Statement have been incorporated
by reference into Part III, Items 10, 11, 12 and 13.
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PART I
Item 1. Business............................................................ 2
Item 2. Properties.......................................................... 13
Item 3. Legal Proceedings................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders................. 15
Executive Officers of the Company................................... 15
PART II
Item 5. Market for the Company's Common Stock and Related Stockholder
Matters............................................................. 16
Item 6. Selected Financial Data............................................. 16
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 17
Item 8. Financial Statements and Supplementary Data......................... 20
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures............................................... 20
PART III
Item 10. Directors and Executive Officers of the Company..................... 21
Item 11. Executive Compensation.............................................. 21
Item 12. Security Ownership of Certain Beneficial Owners and Management...... 21
Item 13. Certain Relationships and Related Transactions...................... 21
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.... 22
SIGNATURES.............................................................................. 25
</TABLE>
1
<PAGE> 3
PART I
ITEM 1. BUSINESS
GENERAL
Zila, Inc., a Delaware corporation, has three operating groups. Zila
Pharmaceuticals, a Nevada corporation ("Zila Pharmaceuticals"), markets a
growing line of non-prescription oral healthcare products, including
Zilactin(R), Zilactin(R)-B, Zilactin(R)-L, Zilactin(R)-Lip, new Zilactin(R) Baby
and Quik Floss(R). Cygnus Imaging, Inc., an Arizona corporation ("Cygnus"),
manufactures and markets domestically and internationally Stylus and
OralVision(TM) intraoral video camera systems, and Sens-A-Ray(TM) digital x-ray
systems. The third operating group, Bio-Dental Technologies Corporation, a
California corporation ("Bio-Dental"), consists of Practice Works(TM) dental
practice management software and Zila Dental Supply, a nationwide dental
products distributor, marketing 15,000 items to the dental office through
extensive direct mail, catalog sales and telemarketing. The Company's
subsidiaries consist of Zila Pharmaceuticals, Cygnus, Zila, Ltd., Zila
International, and Bio-Dental. Bio-Dental has two subsidiaries: Ryker Dental,
dba Zila Dental Supply, a Kentucky corporation and Integrated Dental
Technologies, a California corporation. Unless the context otherwise indicates,
the term "Zila" and "Company" as used herein refers to Zila, Inc. and each of
its subsidiaries.
The Company is incorporated in the State of Delaware. The Company's
principal executive offices are located at 5227 North Seventh Street, Phoenix,
Arizona 85014-2800, and its telephone number is (602) 266-6700.
ZILA PHARMACEUTICALS
Products
Zilactin(R) Family of Products. The Company's primary emphasis has been
focused on the marketing of four over-the-counter, non-prescription products:
ZILACTIN(R), ZILACTIN(R)-L, ZILACTIN(R)-B AND ZILACTIN(R)-LIP. The Company's
products are used topically for the purposes described below:
ZILACTIN(R) -- a protective film for canker sores, cold sores and fever
blisters
ZILACTIN(R)-B -- a protective film with benzocaine for maximum pain relief
from mouth sores
ZILACTIN(R)-L -- a liquid for treating developing fever blisters and cold
sores
ZILACTIN(R)-LIP -- a lip balm for the prevention of sun blisters and the
treatment of cold sores and dry, chapped lips.
The ZILACTIN(R) treatment composition is covered by patents owned by the
Company. These patents cover the composition and the film-forming properties of
the product formula. See "Business -- Patents and Trademarks." ZILACTIN(R),
ZILACTIN(R)-B, AND ZILACTIN(R)-L formulas incorporate these proprietary
treatment compositions. ZILACTIN(R) and ZILACTIN(R)-B are packaged as gels in
.25 ounce plastic tubes. ZILACTIN(R)-L, a liquid, is packaged in a 10 cc plastic
bottle. The products are applied directly to affected areas in quantities large
enough to cover the lesion with the gel or liquid. The gels containing the
active ingredient form a thin, transparent, pliable film that holds the active
ingredient against the affected tissue and keeps the affected area clean. The
film can last up to six hours inside the mouth, a feature which makes the
formulation suitable for a variety of dental applications.
ZILACTIN(R) is being used by dentists to treat patients with canker sores
and other oral mucosal ulcers or lesions, and has been evaluated in dental
schools at selected major universities. ZILACTIN(R) was originally developed as
a treatment for herpes virus lesions. The most common form is Herpes Simplex
Type I, which is the cause of fever blisters and cold sores. Herpes Simplex Type
II is the cause of genital herpes. Other types of herpes infections include
chicken pox, shingles (herpes zoster), mononucleosis and the Epstein-Barr Virus.
Depending principally on the availability of resources, the Company may explore
the development of new products, including the addition of other medications
into the ZILACTIN(R) vehicle, and/or the approval of
2
<PAGE> 4
existing products as recognized treatments for such viruses. However, the
Company currently does not market ZILACTIN(R) as a treatment for genital herpes
or shingles.
ZILACTIN(R)-B is a medicated gel containing benzocaine with the
film-forming properties of ZILACTIN(R). ZILACTIN(R)-B has been formulated for a
segment of the market which prefers a film-forming application with a topical
anesthetic. ZILACTIN(R)-B quickly controls the pain associated with mouth sores
while shielding them from the environment of the mouth.
In July 1995, the Company began distributing a new lip balm in the Arizona
market. The product, called ZILACTIN(R)-LIP, is positioned to be a
premium-priced, effective alternative to existing lip balms. ZILACTIN(R)-LIP
prevents sun blisters and treats cold sores and dry, chapped lips. Most other
competing products only perform one or two of such applications.
The products comprising the ZILACTIN(R) Family of Products represented 97.2
percent of Zila Pharmaceuticals' gross sales during the 1997 fiscal year.
Zila Pharmaceuticals also distributes QUIK FLOSS which is the only
clinically proven dental flosser on the market. The patented Y-shape allows for
one-handed flossing and provides superior access to even the toughest spots,
like back teeth. QUIK FLOSS is being marketed in a manner similar to the
successful strategy that is employed by ZILACTIN(R).
ORATEST(TM). The Company is currently seeking government approval from the
Food and Drug Administration (the "FDA") and the countries of the European Union
(the "EU") to distribute ORATEST(TM) (formerly known as OraScan), in the United
States and Europe. ORATEST(TM), a diagnostic for oral cancer and site
delineation device for biopsy and surgical excision, has been approved for
distribution in the United Kingdom, Canada, Australia, Hungary, Taiwan, Bermuda,
the Barbados and the Bahamas.
Published reports indicate that approximately 32,000 new cases of oral
cancer are diagnosed each year in the United States, and that there are over
8,000 oral cancer-related deaths annually. In most people, by the time it is
diagnosed, oral cancer has usually metastasized, resulting in a poor prognosis.
Those who do survive frequently undergo significantly disfiguring surgery. Data
published in 1994 by a major dental publication quotes a Harvard University
economist as stating that the annual cost of treating oral cancer in the United
States is $3.7 billion; far higher than the $665 million previously estimated.
The economist further states that ORATEST(TM) has the potential of reducing this
cost by approximately 60% because of the product's ability to identify oral
cancer lesions far earlier than they are being found today. The earlier these
lesions are identified, the greater the chances of reducing morbidity and
mortality. The Company's licensee, Block Drug Company, Inc., is marketing
ORATEST(TM) under the name ORASCREEN(TM) in the UK and it is being marketed as
ORASCAN(TM) in Canada. The Company has chosen to use the name "ORATEST(TM)" in
the United States and other countries. See also "Business -- Zila
Pharmaceuticals -- Government Regulations" and "Business -- Zila
Pharmaceuticals -- Patents and Trademarks" and "Business -- Zila
Pharmaceuticals -- Licensing."
Sales of ORATEST(TM) represented less than one percent of the Company's
gross sales during the 1997 fiscal year.
New Products. Zilactin Baby teething gel was introduced in June 1997. It
contains a higher level of benzocaine and a cool grape flavor. Unlike other
teething gels, it does not contain sacharin or coloring dyes.
Government Regulations
General. The development, manufacture and sale of pharmaceutical products
are subject to comprehensive and increasing governmental regulation in the areas
of practice, safety and efficacy, testing, advertising and promotion, labeling
and other matters. To be marketed over-the-counter, a new drug must either be
approved by the FDA in response to a New Drug Application ("NDA") or be the
subject of an applicable FDA monograph designating the product generally
recognized and effective or, if no monograph exists, be "grandfathered" as a
result of the use of the product prior to December 5, 1975. The process of
obtaining approval of an NDA for a new drug usually takes years and involves the
expenditure of substantial resources. This approval process includes laboratory
testing of the product in animals to determine safety, efficacy and
3
<PAGE> 5
potential toxicity, the filing with the FDA of a Notice of Claimed
Investigational Exemption for use of a New Drug prior to the initiation of a
double-blind clinical testing of new drugs, and testing of the new drug in
humans.
ZILACTIN(R). ZILACTIN(R) is marketed by the Company as a treatment for the
symptomatic relief of canker sores (oral mucosal ulcers and lesions), cold sores
and fever blisters. The Company is not required to file an NDA covering these
uses of ZILACTIN(R); however, the Company may not market ZILACTIN(R) as a
treatment of genital herpes or shingles unless NDAs for such purposes are filed
and approved.
ORATEST(TM). In 1994, the FDA approved an Investigational New Drug
application ("IND") for the ORATEST(TM) product. This approval is the first step
in securing a New Drug Application ("NDA") which will enable the Company to
market the ORATEST(TM) product in the United States. The IND approval also
allows the Company to manufacture the ORATEST(TM) product domestically for use
in clinical studies and to market it in 21 specific countries overseas. Based on
continuing communications with the FDA, the Company is in the process of
updating and resubmitting the application. The NDA will include updated clinical
information and refinements in manufacturing. See also "Business -- Zila
Pharmaceuticals -- Manufacturing and Distribution."
All ORATEST(TM) related patents that have been issued, those that will be
issued upon pending applications and those to which the Company has gained
exclusive rights will have their lives extended as a result of the NDA. These
include the patent owned by the National Technical Information Service ("NTIS"),
a patent recently issued covering a more stable formula and two other patents
that are expected to be issued upon pending applications.
The Company received regulatory approval to market the ORATEST(TM) product
in Australia in 1993. Approval to market ORATEST(TM) in certain Caribbean
countries, Hungary and Taiwan has also been received. The Medicine Control
Agency ("MCA"), which is the regulatory authority in the UK, has also granted
approval for the ORATEST(TM) product to be marketed in the UK under the name
ORASCREEN. The Company is proceeding with additional regulatory approval by the
European Union ("EU"). The EU has developed a procedure to allow more rapid
approval of pharmaceutical products in all member countries. The procedure
requires one EU country to approve a product and then act as the product's
advocate to the rest of the EU. The MCA of the UK will be the Company's advocate
to the EU for the approval of the ORATEST product. Before the EU approval
process can begin, MCA has requested updating and modification of selected
segments of the UK product license which MCA believes will facilitate acceptance
in the other countries. The Company has submitted the updated information to MCA
and is awaiting acceptance from them.
The Canadian production facility that is currently producing ORATEST(TM) is
regulated and approved by the Canadian government's Health Protection Branch
("HPB"). The HPB has a working agreement with MCA, which permits the ORATEST(TM)
produced in Canada to be distributed in Australia, the UK and other European
countries.
Patents and Trademarks
Patents. The Company currently holds three US patents and two Canadian
patents for ZILACTIN(R). The ZILACTIN(R) formula was granted a US patent on
August 25, 1981, a US patent covering extended applications of the basic
ZILACTIN(R) formula was granted on April 26, 1983, and a US patent covering the
film-forming properties of the ZILACTIN(R) formula containing an added medicinal
ingredient was issued on January 14, 1992. Such patents were granted for periods
of seventeen years from the grant dates and give the Company the right to
exclude others from making, using or selling the patent-protected products in
the United States. The Canadian patent, which covers the composition and
extended applications, was granted on December 3, 1985. Patent applications are
currently pending in numerous foreign countries and patents are expected to be
issued on these applications in the near future.
In 1992, the Company acquired an exclusive license to the rights of the
Department of Commerce's patent regarding a certain method of substantially
eliminating false positive tests when using ORATEST(TM) for the detection of
oral cancer. In 1994, the Company acquired the rights to a second patent which
described a stable form of the liquid used in the oral cancer test. A third and
fourth patent have been applied for in the US and in numerous foreign countries
covering still other applications for the oral cancer test.
4
<PAGE> 6
Trademarks. The Company registered the trademark ZILACTIN(R) with the
United States Patent and Trademark Office effective July 9, 1985. The Company
has also registered the trademarks "ZILA(R)", ZILACTIN(R)-B, and ZILACTIN(R)-L
in the United States. The Company believes that widespread use of the "ZILA(R)"
trademark as a dominant prefix to several product names will afford reasonable
protection for the "ZILA(R)" trademark as well as other marks in which "ZILA(R)"
is a dominant prefix. The Company is also taking steps under applicable
international treaties to register the "ZILA(R)" trademark. The names "ZILA(R)"
and ZILACTIN(R) are registered in Canada.
The Company is marketing ORATEST(TM) under the name ORASCREEN(TM) in the UK
and as a result has registered ORASCREEN(TM) as a trademark in the EU. The
Company has selected the name OraTest(TM) when the product is introduced in the
United States and other countries. It is in the process of being protected
through trademarks in all countries where the product is planned for
introduction.
Marketing
The Company employs three strategies to market its Over-the-Counter ("OTC")
oral care products. The primary strategy has been to educate several key groups
of health professionals on the uniqueness and effectiveness of each of the
products. Targeted efforts to build awareness of the product line are made by
direct mailings and attending medical conventions. The second method is to
participate in retailer-driven activities designed to make the OTC products
available at more outlets and to offer value to consumers at the retail store
level. The third strategy is to build consumer awareness of the OTC products
through focused efforts like targeted advertising.
During fiscal year 1997, the Company participated in thirty-two meetings
geared to dental, pharmacy and medical professionals. At these meetings, Company
representatives have an opportunity to interact with and distribute information
to thousands of interested health professionals. The Company believes that
superior efficacy and targeted marketing efforts are the reason that three
independently conducted pharmacist research studies reported that ZILACTIN(R) is
the number one OTC product pharmacists recommend for treating canker sores and
cold sores.
Throughout 1997, members of management met with key customers to present
two new products to get feedback on the Company's marketing programs. These
meetings resulted in retailer acceptance of the new products and the development
of sales building programs that have been implemented. Clear sales objectives
were agreed to and distributed to the retail broker network at the beginning of
the year. The broker network was strengthened in two markets positioning the
Company for continued sales growth.
The Company nationally introduced ZILACTIN(R) BABY during the fourth
quarter of fiscal 1997. Initial feedback has been positive with a large number
of drug/food chains and wholesalers stocking the product. A major objective of
the next fiscal year is to expand the number of retailers carrying ZILACTIN(R)
BABY.
Several effective and efficient programs designed to build consumer
awareness of the product line were implemented in the 1997 fiscal year. Among
the most notable were a heavily-funded trade advertising campaign geared to
various health professionals and a comprehensive couponing program that offered
purchase incentives to consumers. The trade advertising generated thousands of
requests for patient samples and patient pamphlets on the products.
The ORATEST(TM) product was introduced in Canada during the third quarter
of 1993. The demographics of Canada enabled the Company to test various
marketing strategies in connection with the introduction of ORATEST(TM). Through
test marketing, the Company acquired information regarding insurance coverage,
training tapes, advertising, public relations and the perspective of dentists
and other professionals. Although sales have been minimal the Company believes
that the knowledge gained in Canada will be invaluable as the Company prepares
for the introduction of the ORATEST(TM) product in the EU and the United States.
The marketing effort for ORATEST(TM) in Canada has been a multilevel
strategy designed to educate patients, dentists, specialists and staff on the
accuracy of the ORATEST(TM) product and the strong benefits of the early
detection of oral cancer. Health professionals have become aware of ORATEST(TM)
through a synergistic approach which includes medical conventions, direct mail,
journal advertising and some timely (indepen-
5
<PAGE> 7
dently authored) articles on the impact of oral cancer and the benefits of early
intervention. The Company has also been able to place educational advertisements
discussing the ORATEST(TM) product adjacent to oral cancer articles in leading
Canadian dental publications.
Manufacturing and Distribution
The Company employs outside manufacturers to produce and package all of its
products. Arizona Natural Resources of Phoenix, Arizona manufactures
ZILACTIN(R), ZILACTIN(R)-L, ZILACTIN(R)-B, ZILACTIN(R)-LIP and ZILACTIN(R)-Baby
and Clinipad Corporation ("Clinipad") of Charlotte, North Carolina manufactures
all sample packets. The Company places orders with each supplier based on its
anticipated needs for the products. Packaging components are supplied to each
manufacturer by the Company.
In March 1993, the Company entered into an agreement with the Germiphene
Corporation ("Germiphene") of Brantford, Ontario, Canada, for the manufacture
and sale of the ORATEST(TM) product (called OraScan(TM) in Canada). Germiphene
produces and packages the ORATEST(TM) product at its facility and handles the
marketing to Canadian dentists and physicians. Fleet Laboratories of Watford,
Herts., United Kingdom, produces and packages the ORATEST(TM) product under the
ORASCREEN(TM) name for distribution in the UK by the Company's licensee, Block
Drug Company, Inc. ("Block"). The Company has also identified a US-based company
with the capacity to manufacture the ORATEST(TM) kits.
In order to ensure an available and stable supply of toluidine blue, the
active ingredient in the ORATEST(TM) product, the Company established its own
manufacturing facility. In 1995, the Company leased a facility and hired a
chemist to oversee the project. The FDA has visited the facility and will return
prior to final approval of ORATEST(TM). Several test batches of toluidine blue
have already been manufactured at the Company's facility and all have met the
specifications given the FDA with regard to the finished active ingredient.
With respect to the ingredients for the Company's products other than
ORATEST(TM), the Company does not anticipate any difficulty in obtaining the
ingredients necessary for the manufacture of such products because such
ingredients are readily available from numerous sources. In the event that any
vendor is unable to continue the manufacture of the Company's products, the
Company has other qualified manufacturers who are prepared to assist the Company
with its manufacturing needs.
In general, all the Company's products are shipped by the respective
manufacturers to the Company's facilities in Phoenix, Arizona where they are
warehoused and distributed to pharmaceutical wholesalers, drug and food store
chains, dentists and other customers. Because the Company maintains an inventory
of the products from which the Company fills orders, the Company does not have
and has not had a backlog of customer orders.
The Company has engaged the services of twenty-two independent sales
representatives to handle the solicitation of orders for its products primarily
from pharmaceutical wholesalers and chains, food wholesalers and chains, rack
jobbers and convenience stores. These representatives are compensated solely on
a commission basis, receiving a 7 1/2% commission on their sales of the products
as compensation for their sales efforts. Company personnel periodically
accompany these representatives on calls to key accounts. The Company has a
salaried Director of Sales to manage and coordinate the independent sales
representatives.
Competition
The pharmaceutical industry is highly competitive. A number of companies,
almost all of which have greater financial resources, marketing capabilities and
research and development capacities than the Company, are actively engaged in
the development of products that may compete with the Company's products. The
pharmaceutical industry is characterized by extensive and ongoing research
efforts, which may result in development by other companies of products
comparable or superior to any that are now on the market including those sold by
the Company.
The Company is unaware of any products currently on the market that provide
treatment as effective as ZILACTIN(R), ZILACTIN(R)-B and ZILACTIN(R)-L for the
treatment of their indicated uses. Although there can be no assurance in this
regard, management of the Company believes that there is a substantial potential
demand for
6
<PAGE> 8
products that are effective in the treatment of these conditions. Based upon
clinical studies and comments received by the Company from physicians and
dentists, management believes that its products will be able to meet much of
that demand.
Numerous products exist for treatment of HSV I symptoms (i.e., cold sores,
fever blisters), including the following products: Orajel and Tanac by Commerce
Drug Company, Herpicin-L by Campbell Laboratories, Inc., Proxigel by Reed and
Carnrick, and Carmex by Carma Lab, Inc. The Company does not believe that any of
these treatments have achieved a dominant market share. Based upon clinical
studies and clinical observations, the Company believes that ZILACTIN(R),
ZILACTIN(R)-B and ZILACTIN(R)-L will provide more effective symptomatic relief
of HSV I infections than the treatments of the Company's competitors.
ORATEST(TM), which the Company believes to be the world's first commercial
oral cancer detection system, was introduced in Canada in May 1993 and in
Australia in August 1993. During the 1995 fiscal year, the Company entered into
a license agreement for the distribution of the ORATEST(TM) product in the
United Kingdom (under the name ORASCREEN(TM)) and in other countries in the EU
plus Australia and New Zealand. The introduction of the ORATEST(TM) product in
the United States will begin as soon as FDA approval is obtained.
The Company relies on outside sources for its research and development
needs in much the same manner as its outside manufacturers. The research takes
one of two forms: clinical or laboratory development. Clinical studies currently
are under way at nine facilities on the use of the ORATEST(TM) product as an
oral cancer detection system and a site delineation stain for biopsy and
surgical excision. These studies are being conducted by universities and public
and Veteran Administration facilities.
Licensing
In certain instances the Company has expanded the distribution of its
products by licensing certain of its patents to other companies. In 1990, the
Company licensed Bausch & Lomb to distribute the Company's entire oral care line
(except for ORATEST(TM)) in markets outside of the United States with the right
to use the same names, formulas and packaging used by the Company. ZILACTIN(R)
was introduced by Bausch & Lomb in Canada in January 1991 and, under the terms
of the licensing agreement, the Company receives royalty payments based upon a
percentage of the licensed products' net sales. Since 1990, the Company and
Bausch & Lomb have amended this agreement in a manner that limits Bausch &
Lomb's distribution rights to Canada. The Company and Bausch & Lomb have agreed
to terminate this agreement effective December 31, 1997.
In 1991, the Company acquired ownership of certain exclusive rights to the
patents, technology and processes embodying the formulation and the application
of the ORATEST(TM) product. The Company is obligated to pay royalties to the
NTIS based upon certain usages of the ORATEST(TM) product. During the 1995
fiscal year, the Company entered into a licensing agreement with Block pursuant
to which Block was given the right to manufacture and sell ORATEST(TM) in
certain markets not previously pursued by the Company. The Company receives from
Block royalties equal to a set percentage of the net sales of ORATEST(TM) by
Block. Although sales to date in the United Kingdom have been minimal, the
Company has presented marketing strategies to Block which the Company believes
will have a positive impact on Block's sales of ORASCREEN(TM) in the United
Kingdom.
On January 18, 1996, the Company entered into an agreement in which The
Procter & Gamble Company ("P&G") agreed to market and distribute ORATEST(TM) in
the United States and 55 other countries worldwide, pending needed regulatory
approvals. On April 3, 1996, P&G informed the Company that it was exercising its
rights to terminate such agreement. Such termination was effective on July 1,
1996. P&G informed the Company that its decision to terminate the agreement was
based upon P&G's decision to refocus its resources on its core product line.
BIO-DENTAL
Operations -- Zila Dental Supply. Ryker Dental of Kentucky, one of
Bio-Dental's operating subsidiaries, operates under the trade name "Zila Dental
Supply". Zila Dental Supply is a national distributor of professional dental
supplies, carrying brand names such as Eastman Kodak, Dentsply, Hu-Friedy,
Premier and 3M. Most of Zila Dental Supply's sales are through telemarketing and
direct mail, as opposed to deploying the
7
<PAGE> 9
more traditional outside sales force. As a result, Zila Dental Supply believes
it can operate more efficiently than its major competitors.
Currently, Zila Dental Supply represents the products of over 400 dental
manufacturers. It is believed that these products constitute the vast majority
of supplies used in the day-to-day operations of a dental practice. For example,
Zila Dental Supply carries a broad line of dental alloys, x-ray film, composite
filling materials, impression materials, latex gloves, diamond and carbide
cutting instruments, anesthetics, asepsis and infection control products,
operative, hygiene and surgical instruments, and a variety of other widely used
items.
Zila Dental Supply distributes consumable supplies and very small equipment
as well as a select group of large items of dental equipment, such as
compressors, sterilizers, dental lights and chairs in limited geographical
markets.
Traditionally, dentists have purchased their supplies from local
full-service supply companies, or from mail-order firms. Zila Dental Supply is
attempting to combine the level of service typically associated with the local
dealer with the convenience and competitive prices found with most mail-order
firms. Zila Dental Supply can do this partially as a result of the increased
efficiencies brought about by telemarketing. Where a traditional outside sales
person might call on 10 to 15 accounts per day, a telemarketer can reach 50 to
70 offices. Additionally, telemarketing has been shown to significantly increase
the response to direct mail pieces (like catalogs). Zila Dental Supply believes
that this gives it an advantage over mail order firms which do not follow-up by
phone.
Competition -- Zila Dental Supply. There are approximately 200 dental
supply dealers and mail order supply houses in the United States, some of which
have significantly greater financial resources than the Company. Zila Dental
Supply's sales make up less than 2% of the total market for dental supplies.
Zila Dental Supply's position with respect to its competitors is difficult to
determine since most of the companies are privately-held and do not disclose
financial information. However, the Company believes that approximately 50
percent of the market is dominated by three public companies: Patterson Dental
Company, Sullivan Dental, and Henry Schein, Inc. Two of these companies, Henry
Schein, Inc. and Sullivan Dental are scheduled to merge as of November 1, 1997,
indicative of the consolidation currently taking place within the industry.
Integrated Dental Technologies, Inc. ("IDT") is Bio-Dental's other
wholly-owned operating subsidiary. IDT was made up of two distinct product
lines; PracticeWorks(TM) dental practice management software and OralVision(TM)
intra-oral cameras. With the Company's acquisition of Cygnus in April 1997,
IDT's Oral Vision product line was transferred from Rancho Cordova, California
to Cygnus' facility in Scottsdale, Arizona (see "Cygnus" below)
IDT's other product line, PracticeWorks(TM), continues to be operated out
of the Company's Rancho Cordova, California facility. The Company believes that
Practice Works is one of the most advanced dental practice management software
systems on the market. Written to be compatible with the popular Windows and
Windows 95 formats, PracticeWorks helps dental practices improve their operating
efficiency in areas such as patient scheduling, treatment planning, insurance
processing, accounts receivable management, patient charting, and marketing
communications.
The Company believes that PracticeWorks' main competitors are Dentrix(TM),
sold by Henry Schein, Inc., and EagleSoft(TM), now owned by Patterson Dental
Company. Both of these companies possess greater financial resources than the
Company. However, the Company believes that PracticeWorks' unique product
features, expanded selling organization and increasingly experienced support
staff make it well positioned to compete with these larger competitors.
CYGNUS
On April 4, 1997, the Company acquired Cygnus, a privately held company
located in Scottsdale, Arizona that manufactures and distributes intra-oral
camera systems and other dental imaging products to
8
<PAGE> 10
domestic and international markets. The acquisition was accounted for as a
purchase and resulted in the issuance of approximately 260,000 shares of Zila
common stock.
Cygnus' products include the STYLUS 2000 and ORALVISION 6000 intra-oral
camera systems and the GEMINI, a video digitizer. In addition, Cygnus markets,
through an OEM license, SENS-A-RAY, a digital x-ray system. The products are
distributed and marketed through a network of domestic and international dental
dealers, and at trade shows and seminars. The Company believes that Cygnus' main
competitors are the AcuCam(TM), Insight(TM), Ultracam(TM), Reveal(TM) and
VistaCam(TM) intra-oral cameras. Several of these companies possess greater
financial resources than the Company. However, the Company believes that with
the unique features of Cygnus' products, its manufacturing expertise and
commitment to product development, Cygnus is well positioned to compete with
these larger competitors.
EMPLOYEES
As of July 31, 1997, the Company and its operating subsidiaries employed
one hundred and thirty-eight (138) people. Of these employees, six (6) are
executive officers and fifty-three (53) employees are involved in sales
functions. The accounting and administration departments employ thirty-eight
(38) people, with twenty-eight (28) employees in the purchasing and distribution
departments. There are thirteen (13) employees in manufacturing functions. No
employees are represented by a labor union, nor are there any current labor
relations complaints on file with any agency. The Company believes its
relationship with its employees are good.
RISKS AND UNCERTAINTIES
No Assurance of Profitable Operations. For the fiscal years ended July 31,
1997, 1996, 1995, 1994 and 1993, the Company had net income (loss) of
($6,458,377), $1,217,298, ($1,282,357), $558,748, and $1,338,826, respectively.
The Company has had profitable operations in three of its last five fiscal
years. There can be no assurance that the Company will, in the future, return to
profitability or that the Company's plan for expanded operations will be
successful.
Introduction of OraTest(TM) In the United States; Uncertainties of
Regulatory Approval. Zila has not yet received Food and Drug Administration
("FDA") approval for OraTest(TM), a detection system for oral cancer and site
delineation stain for biopsy and surgical excision. The production and marketing
of the Company's OraTest(TM) and related products are subject to regulation by
numerous governmental authorities in the United States and other countries.
Prior to marketing, any drug developed by the Company must undertake rigorous
clinical testing and an extensive regulatory approval process mandated by the
FDA and equivalent foreign authorities. These processes can take a number of
years and require the expenditure of substantial resources. Obtaining such
approvals and completing such testing is a costly and timeconsuming process, and
approval may not be ultimately obtained. The length of the FDA review period
varies considerably, as does the amount of clinical data required to demonstrate
the safety and efficacy of a specific product. The Company may also decide to
replace the compounds in testing with modified or optimized compounds, thus
extending the testing process. In addition, delays or rejections may be
encountered based upon changes in FDA policy during the period of product
development and FDA regulatory review of each submitted new drug application or
product license application. Similar delays may also be encountered in other
countries. There can be no assurance that even after such time and expenditures,
regulatory approval will be obtained for any products developed by the Company.
If the FDA does not approve OraTest(TM) for the United States market, it could
have a material adverse effect on the business of Zila, and the market price for
Common Stock would likely be materially adversely affected as well. As of July
31, 1997, Zila has invested approximately $3,200,000 in the development of
OraTest(TM) and has also made a significant financial investment to secure FDA
approval of OraTest(TM) and to prepare for the introduction of OraTest(TM) to
the United States market. The failure of the FDA to approve OraTest(TM) would
make it impossible for Zila to recoup this investment through sales of
OraTest(TM) in the United States. Management of the Company believes that the
necessary approvals for the sale of OraTest(TM) in the United States will be
received; however, there can be no assurances in this regard. If regulatory
approval of a product is granted, such approval may entail limitations on the
indicated uses for which the product may be marketed. Further, even if such
regulatory approval is obtained, the FDA will require post-marketing
9
<PAGE> 11
reporting, and may require surveillance programs to monitor the usage or side
effects of each drug product. A marketed product, its manufacturer and its
manufacturing facilities are subject to continual review and periodic
inspections, and later discovery of previously unknown problems with a product,
manufacturer or facility may result in restrictions on such product or
manufacturer, potentially including withdrawal of the product from the market.
Potential Difficulty in Implementing Marketing Strategy. If FDA approval
of OraTest(TM) is received, the Company must establish a marketing and sales
force with technical expertise to market directly to the dental professional or
it must obtain the assistance of a pharmaceutical company with a large sales
force. There can be no assurance that the Company may do this or be successful
in gaining market acceptance of OraTest(TM).
Competition; Research and Development. The pharmaceutical industry is
highly competitive. A number of companies, many of which have greater financial
resources, marketing capabilities and research and development capacities than
the Company, are actively engaged in the development of products similar to
those products produced and marketed by the Company. The Company relies on
outside sources for its ongoing research and development needs in much the same
manner as the Company relies on outside sources for manufacturing. The
pharmaceutical industry is characterized by extensive and ongoing research
efforts. Other companies may succeed in developing products superior to those
marketed by the Company. Such companies may even succeed in developing a cure
for herpes simplex virus, which would substantially reduce the potential market
for symptomatic treatments such as ZILACTIN(R). In addition, Bio-Dental, a
wholly-owned subsidiary of Zila, faces significant competition, primarily from a
various number of dental supply dealers and mail order supply houses in the
United States. Bio-Dental and Cygnus also face significant competition from
providers of dental practice management software and intra-oral camera systems.
Many of the competing providers of these products have significantly greater
market share and financial resources than Bio-Dental and Cygnus. In addition,
new competitors may enter into Bio-Dental's markets from time to time. It may be
difficult for Bio-Dental and Cygnus to maintain or increase sales volume and
market share due to such competition.
Dependence on Proprietary Rights. Zila relies on a combination of patent,
copyright, trademark and trade secret protection, nondisclosure agreements and
licensing arrangements to establish and protect its proprietary rights. Zila
owns and has exclusive licenses to a number of United States and foreign patents
and patent applications, and intends to seek additional patent applications as
it deems appropriate. There can be no assurance that patents will issue from any
of these pending applications or, if patents do issue, that any claims allowed
will be sufficiently broad to cover Zila's products or to effectively limit
competition against Zila. In addition, there can be no assurance that any
patents that may be issued to Zila will not be challenged, invalidated or
circumvented, or that any rights granted thereunder would provide proprietary
protection to, or effectively limit competition against, Zila. Zila also has a
number of trademarks. There can be no assurance that litigation with respect to
trademarks will not result from the use of registered or common law marks, or
that, if litigation against Zila were successful, any resulting loss of the
right to use a trademark would not reduce sales of Zila's products in addition
to the possibility of a significant damages award. Although Zila intends to
defend the proprietary rights, policing unauthorized use of proprietary
technology and products is difficult, and there can be no assurance that Zila's
efforts will be successful. In addition, the laws of certain foreign countries
may not protect the proprietary rights of Zila to the same extent as do the laws
of the United States.
Government Regulation. The approval and sale of pharmaceutical products is
heavily regulated by the FDA and other federal and state regulatory agencies.
Such regulation encompasses pricing, safety and efficacy, testing, advertising
and promotion, labeling of pharmaceutical products and other matters. Compliance
with such regulations is both costly and time consuming. In order to be legally
marketed over-the-counter ("OTC"), a product must either be the subject of a New
Drug Application ("NDA") approved by the FDA, be the subject of an applicable
FDA monograph designating the product generally recognized as safe and effective
or, if no FDA monograph exists, the FDA may designate a product as
"grandfathered" (i.e., the sale of such product is permissible because of the
safe use of such product or similar products prior to December 5, 1975).
ZILACTIN(R) and its family of products have been "grandfathered" and a letter
has been received by the Company from the FDA confirming that status.
ZILACTIN(R) is currently being marketed for the
10
<PAGE> 12
symptomatic relief of canker sores (oral mucosal ulcers or lesions), cold sores,
and fever blisters. ZILACTIN(R)-L (for the treatment of fever blisters and cold
sores before they erupt) is also marketed as a "grandfathered" product. Neither
of these products may be marketed as a treatment for genital herpes or herpes
zoster (commonly known as "shingles") without an effective new drug application.
Depending principally on the time and expense involved, NDAs seeking approval
for marketing ZILACTIN(R) and/or ZILACTIN(R)-L as topical applications for the
treatment of shingles and genital herpes may be filed by the Company. There can
be no assurance that any NDA will be filed with/or approved by the FDA. Any
challenge by the FDA of the Company's sale of or claims for ZILACTIN(R) would
materially adversely affect the business and prospects of the Company. The
Company is also seeking FDA and EU approval of OraTest(TM), an oral cancer
diagnostic. There can be no assurance that FDA or EU approval of OraTest(TM)
will be obtained.
Dependence on Key Personnel. The operations of the Company depend to a
great extent on the technical expertise and management efforts of Mr. Joseph
Hines, President of the Company, Mr. Clarence Baudhuin, Executive Vice President
of the Company, Mr. Edwin Pomerantz, Vice President of Regulatory and Technical
Affairs, Ms. Janice Backus, Vice President and Corporate Secretary, Mr. Bradley
C. Anderson, Vice President and Treasurer, Mr. Rocco Anselmo, President of Zila
Pharmaceuticals, and Curtis M. Rocca, III, President of Bio-Dental. The loss of
Messrs. Hines, Baudhuin, Anderson, Anselmo, Rocca or Pomerantz or Ms. Backus
could materially adversely affect the Company's business. The Company maintains
key person life insurance coverage on Messrs. Hines, Baudhuin, and Pomerantz.
Litigation. In July 1995, one of Zila's subsidiaries, Bio-Dental, was
named as a defendant, along with Bio-Dental's transfer agent and a shareholder
of Bio-Dental ("Shareholder"), in a lawsuit. The lawsuit alleges that Bio-Dental
wrongfully failed to register 200,000 Bio-Dental shares in the name of the
plaintiffs which were pledged as security by the Shareholder for a debt owed by
the Shareholder to the plaintiffs. Bio-Dental denied all of the material
allegations of the lawsuit against it and has asserted various affirmative
defenses. Bio-Dental accrued a liability of $450,000 in September 1996 because
it believed a loss was probable at that time. This amount was Bio-Dental's best
estimate of the loss in the event the outcome of the litigation was unfavorable
to Bio-Dental. In November 1996, Bio-Dental was granted a summary judgment in
which the court ruled in favor of Bio-Dental. The plaintiffs filed a motion to
reconsider the summary judgment ruling, which was denied by the court in January
1997. Having lost the summary judgment ruling and later having this ruling
upheld, the plaintiffs have now filed an appeal. Bio-Dental will continue to
vigorously defend against the claims set forth in the lawsuit. If the appeal is
successful, it could have an adverse impact on the Company.
Upon consummation of the Company's merger with Bio-Dental, each of the
outstanding shares of Bio-Dental common stock was converted into .825 shares of
the Company's Common Stock. Subsequent to the merger with Bio-Dental, the
Company's stock transfer agent was presented with a certificate purporting to
represent 220,000 shares of Bio-Dental common stock which did not appear on the
records of Bio-Dental's stock transfer agent as of the closing date. The Company
is currently investigating this matter and has not determined whether any shares
of the Company's common stock are required to be issued in exchange for the
shares purportedly represented by this certificate.
Possible Claims Relating to Products. The Company could be exposed to
possible claims for personal injury resulting from allegedly defective products
manufactured by third parties with which it has entered into manufacturing
agreements. The Company maintains product liability insurance coverage for
claims arising from the use of all its products. However, there can be no
assurance that the Company will not be subject to product liability claims in
excess of its insurance coverage. Any significant product liability claims not
within the scope of the Company's insurance coverage could have a material
adverse effect on the Company.
No Cash Dividends. Although the Company is not restricted in its ability
to pay cash dividends, the Company has never paid cash dividends on its Common
Stock and does not contemplate paying cash dividends in the foreseeable future.
Charter and Bylaw Provisions. The Company's Certificate of Incorporation,
as amended, and Bylaws contain provisions that limit or eliminate director
liability for certain actions. These provisions could, in some instances,
prevent redress by stockholders for certain actions taken by the Company's
directors.
11
<PAGE> 13
Warrants and Options. As of July 31, 1997, 3,182,357 shares of Common
Stock are issuable upon the exercise of outstanding options and warrants to
purchase shares of Common Stock. For the life of such options and warrants, the
option and warrant holders will have the opportunity to profit from a rise in
the price of the Common Stock, with a resulting dilution in the interest of
other holders of the Common Stock. The existence of such options and warrants
may adversely affect the terms on which the Company can obtain additional
financing. Further, the warrant and option holders can be expected to exercise
their warrants and options at a time when the Company would, in all likelihood,
be able to obtain additional capital by an offering of its unissued Common Stock
on terms more favorable to the Company than those provided by such options and
warrants.
Shares Eligible for Future Sale. As of July 31, 1997, the Company had
32,326,581 shares of Common Stock outstanding. An additional 3,182,357 shares of
Common Stock are issuable upon exercise of outstanding options and warrants to
purchase Common Stock. Such shares, subject to certain limitations, may be
available in the future for resale in the open market pursuant to Rule 144
promulgated under the Securities Act, as amended or pursuant to registration of
such shares under the Securities Act. The foregoing resales, if any, may have an
adverse effect on the market price of the Common Stock.
Possible Volatility of Common Stock Price. The market price for Common
Stock has fluctuated significantly in the past. Management of Zila believes that
such fluctuations may have been caused by announcements of new products,
quarterly fluctuations in the results of operations and other factors, including
changes in conditions of the pharmaceutical industry in general. Stock markets
have experienced extreme price volatility in recent years. This volatility has
had a substantial effect on the market prices of securities issued by Zila and
other pharmaceutical and health care companies, often for reasons unrelated to
the operating performance of the specific companies. Zila anticipates that the
market price for Common Stock may continue to be volatile.
Future Capital Requirements and Uncertainty of Future Funding; Dilutive and
Other Effects of Equity Line Agreement. The development of the Company's
products will require the commitment of substantial resources to conduct the
time-consuming research and development, clinical studies and regulatory
activities necessary to bring any potential product to market and to establish
production, marketing and sales capabilities. The Company may need to raise
substantial additional funds for these purposes. The Company may seek such
additional funding through collaborative arrangements and through public or
private financings, including equity financings. Under the terms of the Equity
Line Agreement, the Company has secured an equity line that allows the Company
to raise up to $22 million from investors over a 13-month period beginning
August 20, 1997. Other than this equity line, however, the Company currently has
no commitments for any additional financings, and there can be no assurance that
any such financings will be available to the Company or that adequate funds for
the Company's operations, whether from financial markets, collaborative or other
arrangements with corporate partners or from other sources, will be available
when needed or on terms attractive to the Company. The inability to obtain
sufficient funds may require the Company to delay, scale back or eliminate some
or all of its research and product development programs, to limit the marketing
of its products or to license third parties the rights to commercialize products
or technologies that the Company would otherwise seek to develop and market
itself.
While the equity line arrangement discussed above will help provide the
Company with additional future financing, the sale of Common Stock thereunder
will have a dilutive impact on other stockholders of the Company. As a result,
the Company's net income (loss) per share could be materially decreased in
future periods, and the market price of the Common Stock could be materially and
adversely affected. In addition, the Common Stock to be issued under the Equity
Line Agreement will be issued at a discount to the then-prevailing market price
of the Common Stock. These discounted sales could have an immediate adverse
effect on the market price of the Common Stock.
Issuance of Preferred Stock. The Company's Board of Directors has the
authority, without any further vote by the Company's stockholders, to issue up
to 2,500,000 shares of Preferred Stock in one or more series and to determine
the designations, powers, preferences and relative, participating, optional or
other rights thereof, including without limitation, the dividend rate (and
whether dividends are cumulative), conversion
12
<PAGE> 14
rights, voting rights, rights and terms of redemption, redemption price and
liquidation preference. On October 17, 1997, the Company issued, into escrow,
30,000 shares of its Series A Convertible Preferred Stock as well as warrants to
purchase 360,000 shares of common stock. Such securities will be released from
escrow, as well as the purchase price of such securities, upon the completion of
the Company's acquisition of Oxycal Laboratories, Inc.
Environment and Controlled Use of Hazardous Materials. The Company is
subject to federal, state and local laws and regulations governing the use,
generation, manufacture, storage, discharge, handling and disposal of certain
materials and wastes used in its operations, some of which are classified as
"hazardous." There can be no assurance that the Company will not be required to
incur significant costs to comply with environmental laws and regulations as its
research activities are increased or that the operations, business and future
profitability of the Company will not be adversely affected by current or future
environmental laws and regulations. Although the Company believes that its
safety procedures for handling and disposing materials comply with such laws and
regulations, the risk of accidental contamination or injury from these materials
cannot be eliminated. In the event of such an accident, the Company could be
held liable for any damages that result and any such liability could exceed the
resources of the Company.
ADDITIONAL INFORMATION
On October 17, 1997, the Company entered into an agreement pursuant to
which the Company agreed to issue 30,000 share of Series A Convertible Preferred
Stock (the "Series A Preferred Stock") and warrants to purchase 360,000 shares
of the Company's Common Stock (the "Warrants") for $30,000,000 (the "Preferred
Stock Proceeds"). The shares of Series A Preferred Stock, the Warrants and the
Preferred Stock Proceeds were deposited into escrow. The Warrants expire on
October 17, 2000 and have a per-share exercise price of $9.915. Concurrent with
the completion of the merger (the "Oxycal Merger") between a subsidiary of the
Company and Oxycal Laboratories, Inc. ("Oxycal"), the Preferred Stock Proceeds,
the Series A Preferred Stock and the Warrants will be released from escrow. In
the event the merger with Oxycal is not completed prior to November 13, 1997,
the escrow will terminate and the Series A Preferred Stock will be returned to
Zila and the Preferred Stock Proceeds will be returned to the investors along
with Warrants to purchase 210,000 shares of the Company's Common Stock. The
balance of the Warrants will be returned to the Company. The parties have
reserved the right to extend the escrow termination date beyond November 13,
1997. Zila intends to use a significant portion of the Preferred Stock Proceeds
to consummate the Oxycal Merger, the balance of the Preferred Stock Proceeds
will be used by the Company for working capital and to pay the fees and expenses
associated with the sale of the Series A Preferred Stock.
By an agreement dated October 28, 1997, the Company and Oxycal have agreed
to a merger whereby Oxycal will be merged into a wholly owned subsidiary of
Zila, with Oxycal being the surviving corporation. Upon the consummation of the
Oxycal Merger, Oxycal will become a wholly-owned subsidiary of Zila. Under the
terms of the Merger Agreement, Oxycal shareholders will receive cash
consideration for their shares of Oxycal capital stock. The Oxycal Merger is
subject to approval of the Oxycal shareholders.
There can be no assurance that the Oxycal shareholders will approve the
Oxycal Merger or, if the Oxycal Merger is approved, that the merger will be
consummated. Subsequent to year end, Zila has deposited $1,000,000 into escrow,
which amount will be delivered to Oxycal in the event the Oxycal Merger is not
consummated and reason for the failure is due to the actions or inactions of
Zila, Inc.
ITEM 2. PROPERTIES
On January 4, 1991, the Company purchased a 16,000 square foot building
located at 5227 North Seventh Street, Phoenix, Arizona 85014-2800. The Company
moved its corporate headquarters to this location on February 8, 1991. The
purchase price of the building was approximately $600,000. The Company paid 25%
of the purchase price in cash and obtained a loan for the balance of the
purchase price. The Company has refinanced the mortgage which matured April 1,
1996 with Bank One, Arizona (the "Bank"). The terms of the refinancing include
interest to be payable monthly on the unpaid balance at the Bank's prime
13
<PAGE> 15
rate plus two and one quarter percent (2.25%), to move with prime on a daily
basis. The refinanced mortgage loan is amortized over 20 years and is due on
April 1, 2001.
The Company also leases 3,502 square feet for a manufacturing facility in
Phoenix, Arizona. This facility will produce toluidine blue which will be used
in the manufacture of ORATEST(TM). The facility is leased under a three year
agreement which expires April 30, 1999, and is located in an area with property
available for expansion. The agreement has an option to renew for an additional
five years. Monthly lease payments are $1,922. The Company does not currently
intend to invest in any other plants or manufacturing facilities. The Company's
products are currently manufactured by Clinipad, Arizona Natural Resources and
Germiphene. Together with the Company's laboratory facilities, the Company
believes that these manufacturers are capable of performing all necessary
production functions. See "Item 1. Business -- Manufacturing and Distribution."
The Company's subsidiaries holds additional leases on four separate
facilities. Bio-Dental leases 25,000 square feet of office/warehouse space in a
concrete building located at 11291 Sunrise Park Drive, Rancho Cordova,
California. The current lease rate for the Rancho Cordova facility is $9,837 per
month, and is constant for the duration of the lease. The lease for the Rancho
Cordova facility expires on November 30, 2001, however Bio-Dental has an option
to renew the lease for two subsequent five-year terms. Bio-Dental's
administrative offices are located in the Rancho Cordova facility. Zila Dental
Supply leases 19,200 square feet in an office/warehouse complex at 172 Lisle
Industrial Avenue, Lexington, Kentucky. The current lease rate is $2,800 per
month, and expires on October 31, 1998. On May 31, 1996, IDT entered into a
three year lease for 2,000 square feet beginning July 15, 1996 in an office
complex at 6021-A West 71st Street, Indianapolis, Indiana. The current lease
rate is $1,783 per month, and expires on July 14, 1999. Bio-Dental is a
guarantor of this lease. On April 1, 1997, Cygnus entered into a five year lease
for 6,042 square feet of office/warehouse space located at 8240 E. Gelding Suite
101, Scottsdale, Arizona. The current lease rate is $3,927 per month and
increases every twelve months with the monthly lease payment to be $4,350 in the
final year.
ITEM 3. LEGAL PROCEEDINGS
In July 1995, one of Zila's subsidiaries, Bio-Dental, was named as a
defendant, along with Bio-Dental's transfer agent and a shareholder of
Bio-Dental ("Shareholder"), in a lawsuit. The lawsuit alleges that Bio-Dental
wrongfully failed to register 200,000 Bio-Dental shares in the name of the
plaintiffs which were pledged as security by the Shareholder for a debt owed by
the Shareholder to the plaintiffs. Bio-Dental denied all of the material
allegations of the lawsuit against it and has asserted various affirmative
defenses. Bio-Dental accrued a liability of $450,000 in September 1996 because
it believed a loss was probable at that time. This amount was Bio-Dental's best
estimate of the loss in the event the outcome of the litigation was unfavorable
to Bio-Dental. In November 1996, Bio-Dental was granted a summary judgment in
which the court ruled in favor of Bio-Dental. The plaintiffs filed a motion to
reconsider the summary judgment ruling, which was denied by the court in January
1997. Having lost the summary judgment ruling and later having this ruling
upheld, the plaintiffs have now filed an appeal. Bio-Dental will continue to
vigorously defend against the claims set forth in the lawsuit. If the appeal is
successful, it could have an adverse impact on the Company.
Upon consummation of the Company's merger with Bio-Dental, each of the
outstanding shares of Bio-Dental common stock was converted into .825 shares of
the Company's Common Stock. Subsequent to the merger with Bio-Dental, the
Company's stock transfer agent was presented with a certificate purporting to
represent 220,000 shares of Bio-Dental common stock which did not appear on the
records of Bio-Dental's stock transfer agent as of the closing date. The Company
is currently investigating this matter and has not determined whether any shares
of the Company's common stock are required to be issued in exchange for the
shares purportedly represented by this certificate.
Colgate-Palmolive. On April 13, 1994, Zila filed a complaint in the United
States District Court for the District of Arizona, titled Zila Pharmaceuticals,
Inc. v. Colgate-Palmolive Company ("Colgate"), CIV No. 94-0756 PHX-EHC. The
complaint was served on Colgate on May 10, 1994. The complaint alleges that
Colgate's Orabase Gel product infringes the Company's U.S. Patent No. 5,081,158
(the "'158 Patent") which covers Zila's non-prescription, film-forming,
bioadhesive medications sold in food and drug stores nationwide. The complaint
sought to enjoin Colgate's manufacture and distribution of Orabase Gel and
requested an
14
<PAGE> 16
award of damages in an appropriate amount. The case was settled on March 6, 1997
and had no material impact on the Company's financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matter to a vote of its security holders
during the fourth quarter of the fiscal year covered by this report.
EXECUTIVE OFFICERS OF THE COMPANY
The following sets forth the information regarding the executive officers
of the Company that are not otherwise disclosed in the Company's definitive
Proxy Statement for the Annual Meeting of Shareholders on December 11, 1997.
Edwin Pomerantz joined the Company in March 1984 as Vice President of
Marketing. In 1995, his title was changed to Vice President -- Regulatory &
Technical Affairs in order to better describe the duties performed by Mr.
Pomerantz. From 1982 until 1984, Mr. Pomerantz was a partner and half-owner of
Golden Memories, Inc., a company engaged in the photographic business. From 1975
to 1982, Mr. Pomerantz was Vice President for Family Record Plan, Inc., a
photography business. Prior to 1975, Mr. Pomerantz held senior marketing
management positions at Viviane Woodward Cosmetics, Chas. Pfizer & Company,
Inc., Avon Products, Inc., and Rexall Drug and Chemical Company.
Janice L. Backus has served as Secretary of the Company since April 1989
and in 1993 she was named a Vice President of the Company. From 1983 until April
1989, Ms. Backus served as Assistant Secretary of the Company. Ms. Backus has
also served as the Assistant to the President since 1983. Prior to joining the
Company, Ms. Backus held administrative and secretarial positions with the
American Heart Association, Arizona Division, BX International and Century
Capital Corporation.
Bradley C. Anderson joined the Company as Vice President and Treasurer in
November 1996. Prior to joining the Company, from 1985 to 1996, Mr. Anderson was
employed by Deloitte & Touche LLP, most recently as an Audit Senior Manager, in
which capacity Mr. Anderson provided auditing, planning, and other assistance
and consulting to numerous privately and publicly held companies, including the
Company. Mr. Anderson received his B.S. in Accountancy from Brigham Young
University. Mr. Anderson is a Certified Public Accountant.
Rocco Anselmo joined the Company as the Executive Vice President and
General Manager of Zila Pharmaceuticals since 1993 and in 1997 became President
of Zila Pharmaceuticals. From 1983 to 1993, Mr. Anselmo held various positions
with Oral-B Laboratories, Inc., most recently as General Manager of Oral-B Labs
International from 1991 to 1993. From 1972 to 1983, Mr. Anselmo held various
sales and marketing positions with S.C. Johnson and Sterling Drug Company.
15
<PAGE> 17
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Information regarding the market for Zila, Inc.'s common stock (the "Common
Stock") and related stockholder matters is set forth below. The following table
sets forth, for the fiscal periods shown, the high and low quotations in dollars
per share for the Common Stock as reported by the National Association of
Securities Dealers Automated Quotation System ("NASDAQ").
<TABLE>
<CAPTION>
HIGH LOW
---- -----
<S> <C> <C>
FISCAL YEAR ENDED JULY 31, 1997
First Quarter.......................................................... 7 7/8 6 1/4
Second Quarter......................................................... 8 3/8 6 3/8
Third Quarter.......................................................... 9 3/8 6 7/16
Fourth Quarter......................................................... 8 1/8 6 7/16
FISCAL YEAR ENDED JULY 31, 1996
First Quarter.......................................................... 4 1/2 3 3/4
Second Quarter......................................................... 5 7/8 3 3/4
Third Quarter.......................................................... 10 1/4 3 5/8
Fourth Quarter......................................................... 9 1/8 6 3/8
</TABLE>
The number of stockholders of record of the Common Stock as of July 31,
1997 and September 30, 1997 were approximately 3,565 and 3,504, respectively. As
of July 31, 1997 there are no shares of the Company's preferred stock
outstanding (See "Item 1 -- Additional Information").
The Company has not paid dividends on the Common Stock. It is the present
policy of the Company's Board of Directors to retain future earnings to finance
the growth and development of the Company's business. Any future dividends will
be at the discretion of the Company's Board of Directors and will depend upon
the financial condition, capital requirements, earnings and liquidity of the
Company as well as other factors the Company's Board of Directors may deem
relevant.
ITEM 6. SELECTED FINANCIAL DATA
The following tables summarize selected financial information derived from
the Company's audited financial statements. The information set forth below is
not necessarily indicative of results of future operations and should be read in
conjunction with the Company's Consolidated Financial Statements and related
Notes and with "Management's Discussion and Analysis of Financial Condition and
Results of Operations" included elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JULY 31
---------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA 1997 1996 1995 1994 1993
- ------------------------------ ------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Net Sales..................... $ 38,592,252 $ 37,479,546 $35,064,245 $22,474,672 $13,445,944
Licensing Fees and Royalty
Revenue..................... 72,640 2,100,484 1,956,654 1,732,277 1,846,492
Net Income (Loss)............. (6,458,377) 1,217,298 (1,282,357) 558,748 1,338,826
Net Income (Loss) Per Share... (0.20) 0.04 (0.04) 0.02 0.05
</TABLE>
<TABLE>
<CAPTION>
AT JULY 31
---------------------------------------------------------------------
BALANCE SHEET DATA 1997 1996 1995 1994 1993
- ------------------------------ ------------ ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Current Assets................ $ 10,779,049 $ 13,251,960 $12,010,497 $11,011,202 $ 7,055,906
Current Liabilities........... 5,804,965 6,672,497 6,401,072 5,557,594 1,885,012
Total Assets.................. 23,604,032 25,309,781 16,691,859 15,085,434 9,833,481
Long-Term Debt................ 375,908 382,006 1,136,239 437,586 469,959
Total Liabilities............. 6,180,873 7,054,503 7,537,311 5,995,180 2,354,971
Shareholders' Equity.......... 17,423,159 18,255,278 9,154,548 9,090,254 7,478,510
</TABLE>
16
<PAGE> 18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Forward Looking Statements. The following discussion contains
forward-looking statements which involve risks and uncertainties. The Company's
actual results may differ materially from the results discussed in the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to those items described below and those described in Item 1
of this Annual Report on Form 10-K under the heading "Risks and Uncertainties,"
"Additional Information" and in Item 3 "Legal Proceedings."
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto.
On January 8, 1997, the Company completed a merger with Bio-Dental. On
December 30, 1996, Bio-Dental's shareholders approved the all-stock transaction
which provided for a per share exchange of .825 shares of the Company's common
stock for each share of Bio-Dental common stock outstanding. As of January 8,
1997, Bio-Dental had 6,565,300 shares of common stock outstanding.
The merger has been accounted for as a pooling of interests, and
accordingly, the consolidated financial statements give retroactive effect to
the Bio-Dental merger and include the combined operations of Zila and Bio-Dental
for all periods presented. Prior to the combination, Bio-Dental's year-end was
March 31. Effective August 1, 1995, Bio-Dental's results are reported on a July
31, 1996 basis along with the results of Zila, Inc. Bio-Dental's net loss for
the four-month period ended July 31, 1995 is reflected as an adjustment to the
deficit during the year ended July 31, 1996. For the four-month period ended
July 31, 1995, Bio-Dental had revenues of $11,056,774, operating costs and
expenses of $11,631,735, and a net loss of $416,817. Certain adjustments and
reclassifications have been made to conform previously issued Bio-Dental
financial statements to classifications and accounting policies used by Zila.
On April 4, 1997, the Company acquired Cygnus Imaging, Inc., a privately
held company located in Scottsdale, Arizona that manufactures and distributes
intra-oral camera systems and other dental imaging products. The acquisition was
accounted for as a purchase and resulted in the issuance of approximately
260,000 shares of Zila common stock and the recording of approximately
$2,101,000 of goodwill.
COMPANY OVERVIEW
Zila has three operating groups. Zila Pharmaceuticals markets a growing
line of non-prescription oral healthcare products, including Zilactin,
Zilactin-B, Zilactin-L, Zilactin-Lip, new Zilactin Baby and Quik Floss. Cygnus
Imaging manufactures and markets internationally CygnaScope and OralVision
intraoral video camera systems, and Sens-A-Ray digital x-ray systems. The third
operating group, Bio-Dental Technologies, consists of Practice Works dental
practice management software and Zila Dental Supply, a nationwide dental
products distributor, marketing 15,000 items to the dental office through
extensive direct mail, catalog sales and telemarketing.
OPERATING RESULTS
Fiscal year ended July 31, 1997. For the fiscal year ended July 31, 1997,
the Company had a net loss of $6,458,377 compared to net income of $1,217,298
for 1996.
Net sales during the 1997 fiscal year totaled $38,592,252 compared to net
sales of $37,479,546 for the prior fiscal year, an increase of 3.0%. The growth
in net sales was attributable mainly to the Company's distribution subsidiary,
Zila Dental Supply. Sales for Zila Dental Supply rose to $26,531,761, up 5.8%
from $25,077,638 in the prior year. Additional growth came from one of the
Company's other subsidiaries, Zila Pharmaceuticals, which had net sales of
$6,719,228 in fiscal year 1997 compared to $5,978,131 in 1996, a 12.4% increase.
The increase at Zila Pharmaceuticals was primarily due to the sales of
ZILACTIN-B(R) which have continued to increase since its introduction in the
first quarter of fiscal year 1995. These increases were partially offset by
decreased sales in certain discontinued product lines associated with the
restructuring of Bio-Dental's IDT subsidiary, which occurred in prior periods.
17
<PAGE> 19
Licensing fees and royalty revenues were $72,640 for fiscal year 1997
compared to $2,100,484 for the prior fiscal year. Approximately $1,235,000 in
royalty revenues earned in fiscal 1996 were related to the licensing agreement
between Bio-Dental and Denticator International, Inc. ("DII"). In July 1996,
Bio-Dental disposed of its rights to receive future royalty payments from DII in
exchange for a lump sum payment of approximately $7,500,000. In addition,
amounts were recorded in fiscal 1996 attributable to the licensing of OraTest
for markets in the United Kingdom and the United States by the Stafford-Miller
Company and The Procter & Gamble Company, respectively. Of these amounts,
$625,000 was paid by Procter & Gamble as a one-time licensing fee required in
connection with the termination of its licensing agreement with the Company.
Cost of products sold were $23,542,342 for the fiscal year ended July 31,
1997, a 5.0% decrease from $24,771,193 for the fiscal year ended July 31, 1996.
Cost of sales as a percentage of net sales decreased to 61.0% during fiscal year
1997 as compared to 66.1% in fiscal 1996. These decreases are primarily due to
lower costs resulting from the restructuring of IDT.
The Company incurred $20,161,319 of selling, general and administrative
expenses during the fiscal year ended July 31, 1997, an increase of $1,672,080
over the fiscal year ended July 31, 1996. Approximately $1,423,000 of the
increases were attributable to costs associated with the funding of OraTest
research, start-up manufacturing costs and staffing. The Company also incurred
approximately $364,000 of additional amortization costs related to purchased
technology rights as compared to the previous fiscal year. The Company also
incurred increased legal, shareholder, audit, salary, and insurance expenses as
compared to the previous fiscal year. These increases were partially offset by
decreases in marketing, selling, product development and administrative expenses
at Bio-Dental resulting from the restructuring of IDT, which occurred in prior
periods.
Merger related expenses increased $225,190 from $146,675 in the prior
fiscal year to $371,865 and are directly related to the Bio-Dental merger.
Impairment charges during fiscal year 1997 of $587,659 relate to an impairment
loss recognized to reduce the carrying value of IDT's long-lived assets which
include goodwill and software rights. Restructuring charges of $271,631 during
fiscal year 1996, are directly attributable to the restructuring of IDT.
Litigation costs, related to the Colgate and the Shareholder suits,
increased $807,785 to $1,147,363 from the same period in the prior fiscal year.
These increases were due to the accrual of a liability in the event that the
outcome of the Shareholder litigation would be unfavorable to Bio-Dental and
also due to legal expenses arising out of the Company's efforts to prevent
infringements on the Zilactin patents (See "Part I -- 3 -- Legal Proceedings").
Interest and other income increased $53,782 from $147,848 in the prior
fiscal year to $201,630 during fiscal 1997. Interest expense decreased from
$471,607 in fiscal year 1996 to $79,450 in fiscal year 1997. The decrease was
attributable to lower debt obligations during fiscal year 1997 as compared to
fiscal year 1996.
Fiscal year ended July 31, 1996. For the fiscal year ended July 31, 1996,
the Company had net income of $1,217,298 compared to a net loss of $1,282,357
for 1995.
Net sales during the 1996 fiscal year totaled $37,479,546 compared to net
sales of $35,064,245 for the prior fiscal year, an increase of 6.9%. The growth
in net sales was attributable mainly to the Company's distribution subsidiary,
Zila Dental Supply which was able to increase its average volume per customer.
Sales for Zila Dental Supply rose to $25,077,638, up 22.0% from $20,551,803 in
fiscal year 1995. Additional growth came from one of the Company's other
subsidiaries, Zila Pharmaceuticals, which had net sales of $5,978,131 in fiscal
year 1996 compared to $5,147,667 in 1995, a 16.1% increase. The increase at Zila
Pharmaceuticals was primarily due to the sales of ZILACTIN(R)-B which have
continued to increase since its introduction in the first quarter of fiscal year
1995. These increases were partially offset by a decline in net sales at
Integrated Dental Technologies (IDT), a wholly owned subsidiary of Bio-Dental.
The decline at IDT resulted mainly as a result of IDT's launch of the
"paperless" dental office which was met with little initial demand. Previously,
IDT had sold only dental practice management software systems and intra-oral
cameras on a stand-alone basis. When the Company began focusing on these larger,
"integrated" systems, sales of the individual
18
<PAGE> 20
components declined. In December 1995, IDT announced that it was discontinuing
its "paperless" dental office offering, and returning to its previous strategy
of selling just intra-oral cameras and practice management software. In
connection with this restructuring, the Company recorded $271,631 in
restructuring charges in fiscal year 1996. There were no such charges in fiscal
year 1995.
Licensing fees and royalty revenues were $2,100,484 for fiscal year 1996
compared to $1,956,654 for the prior fiscal year. This increase was attributable
to licensing of OraTest in the United States to The Procter & Gamble Company
("P&G"). Included in such amounts for the fiscal year ended July 31, 1996, are
$750,000 of non-refundable licensing fees that the Company received from P&G in
connection with a licensing agreement between P&G and the Company, which
agreement was terminated on April 3, 1996. The increase was partially offset by
a decrease in royalty revenues from Denticator International, Inc. (DII), a
wholly owned subsidiary of Bio-Dental. This reduction came mainly as a result of
lower levels of profitability at DII, which had a resulting effect on royalties
payable to Bio-Dental. On July 22, 1996, Young Innovations, Inc. (Young)
acquired substantially all of the assets and certain liabilities of DII.
Bio-Dental received approximately $7.5 million in lieu of future royalties that
Bio-Dental was entitled to receive in connection with its licensing agreement
with DII. In addition, Young issued Bio-Dental a "product credit" against future
purchases from Young equal to the amounts due Bio-Dental at the time of closing.
Included in other receivables and other assets at July 31, 1996 is $600,249 and
$355,103, respectively, of product credits due from Young.
Cost of products sold were $24,771,193 for the fiscal year ended July 31,
1996, a 12.1% increase from $22,093,228 for the fiscal year ended July 31, 1995.
This increase is primarily due to increased sales volume during fiscal year 1996
as compared to fiscal year 1995. Cost of sales as a percentage of net sales
increased to 66.1% during fiscal year 1996 as compared to 63.0% in fiscal 1995.
The increase is attributable primarily to the write-off of inventory associated
with the IDT restructuring program and reserves established in recognition of a
degradation of inventory value of older model intra-oral camera inventory, as
IDT released its newer model camera. The inventory write down and the reserves
were not included as "restructuring charges," but rather were taken against cost
of products sold.
The Company incurred $18,489,239 of selling, general and administrative
expenses during the fiscal year ended July 31, 1996, an increase of $2,295,160
over the fiscal year ended July 31, 1995. The bulk of this increase related to
the higher than expected costs of marketing, selling and supporting the various
products of IDT, including IDT's filmless x-ray and computer hardware products.
Additionally, administrative expenses during the fiscal year ended July 31, 1996
increased primarily due to travel and business expense, legal, shareholder
expense, and amortization of purchased technology rights. The Company also had
increases in internal funding of product development during the fiscal year
ended July 31, 1996 as compared to the previous fiscal year. Product development
increases were mainly due to start-up manufacturing costs related to OraTest,
and staffing and legal expenses arising out of the Company's efforts to prevent
infringement of the ZILACTIN patents.
Interest and other income for the fiscal year ended July 31, 1996 decreased
$104,824 from $252,672 in the prior fiscal year due primarily to the scheduled
termination of lease revenues from DII in March 1995. Interest expense increased
from $211,544 in fiscal year 1995 to $471,607 in fiscal year 1996. In April
1996, Bio-Dental borrowed $1.25 million by issuing term notes to provide
additional working capital. Amortization of issuance costs and note discounts
(associated with warrants issued to the lenders) are included in interest
expense. These term notes were repaid in July 1996 and the remaining unamortized
issuance costs were written off to interest expense at that time.
INFLATION
Inflation has had no material effect on the operations or financial
condition of the Company.
19
<PAGE> 21
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1997, the Company had net working capital of $4,974,084, and
its current ratio (the ratio of current assets to current liabilities) was 1.86
to 1. At July 31, 1996, the Company had net working capital of $6,579,463 and
its current ratio was 2.0 to 1.
Trade accounts receivable at July 31, 1997 were $2,822,687 compared to
trade accounts receivable at July 31, 1996 of $2,821,440. Trade accounts
receivable as a percentage of quarterly net sales of $9,712,162 were 29.1% at
July 1997 as compared to 31.2% at July 31, 1996 which had quarterly net sales of
$9,043,556.
At July 31, 1997, the Company had inventories of $4,286,627, an increase of
$86,185 from inventories at July 31, 1996. The Company believes current
inventories are at levels necessary to support market expansion and to maintain
adequate liquidity.
Management believes that continued growth in the Company's sales of its
products will provide sufficient funding for the Company's current operating
divisions for the next twelve months. However, the Company will require
additional financing to fund future OraTest manufacturing and marketing costs.
In anticipation of these potential requirements, effective April 30, 1997, Zila
entered into an investment agreement (the "Investment Agreement") with Deere
Park Capital Management (the "Investor") which allows the Company to sell up to
$25 million of Zila's common stock with the proceeds to be used to fund OraTest
marketing and general corporate purposes. The option to sell stock to the
Investor will remain available for a period of twelve months following the
effective date of the registration statement discussed below (the "Twelve Month
Period"). As part of the Investment Agreement, Zila sold $3 million of stock on
April 30, 1997, and has committed to sell an additional $10 million of common
stock to the Investor over the Twelve Month Period.
The Investment Agreement provides that Zila can obtain up to $2,000,000 at
any one time through the sale of the Company's common stock. All shares sold
will be at a 7% discount to the average low trading price of the Company's
common stock over a specified period of time, subject to a maximum purchase
price calculation. Sales under the Investment Agreement are subject to the
satisfaction of certain conditions, including registration of the shares, a
minimum market volume, and certain limitations on the number of shares of the
Company's common stock outstanding.
As a commitment fee for keeping the equity line available for the Twelve
Month Period, the Company has issued warrants dated May 7, 1997 (the "Warrants")
to the Investor exercisable for 300,000 shares of common stock at an exercise
price of $8.6125 per share. The Warrants are exercisable for a three-year period
commencing October 31, 1997. A registration statement pertaining to the shares
issued and to be issued under the Investment Agreement and the warrants was
filed and became effective in August 1997. During October 1997, the Company sold
$8,000,000 of the Company's common stock under the Investment Agreement to the
Investor. The proceeds from the sale are intended for potential acquisitions and
general corporate purposes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Consolidated financial statements, together with the related notes and the
report of Deloitte & Touche LLP, independent certified public accountants, are
set forth hereafter. Other required financial information and schedules are set
forth herein, as more fully described in Item 14 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
20
<PAGE> 22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Information respecting the directors of the Company is incorporated herein
by reference to the "Election of Directors" and the "Section 16(a) Beneficial
Ownership Reporting Compliance" sections of the Company's definitive Proxy
Statement for the Annual Meeting of Stockholders on December 11, 1997.
Information respecting the executive officers of the Company is set forth at
Part I of this Form 10-K Report.
ITEM 11. EXECUTIVE COMPENSATION
Information responsive to this Item is incorporated herein by reference to
the "Executive Compensation" section of the Company's definitive Proxy Statement
for the Annual Meeting of Stockholders on December 11, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning the Common Stock beneficially owned by each director
of the Company, by all officers and directors of the Company as a group, and by
each shareholder known by the Company to be the beneficial owner of more than 5%
of the outstanding Common Stock is incorporated herein by reference to the
"Principal Stockholders and Stockholdings of Management" section of the
Company's definitive Proxy Statement for the Annual Meeting of Stockholders on
December 11, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information responsive to this Item is incorporated herein by reference to
the "Certain Transactions" section of the Company's definitive Proxy Statement
for the Annual Meeting of Stockholders on December 11, 1997.
21
<PAGE> 23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
PAGE OR
METHOD OF FILING
----------------
<S> <C> <C>
Financial Statements
(a)
(1) Report of Deloitte & Touche LLP................................ Filed herewith
(2) Report of Grant Thorton LLP.................................... Filed herewith
(3) Consolidated Financial Statements and Notes thereto of the
Company including Consolidated Balance Sheets as of July 31,
1997 and 1996 and related Consolidated Statements of Operations,
Shareholders' Equity, and Cash Flows for each of the years in
the three-year period ended July 31, 1997...................... Filed herewith
(1) Report of Deloitte & Touche LLP as to Financial Statement
Schedules for fiscal years ended July 31, 1997, 1996, and 1995..... Filed herewith
(2) Schedule II -- Valuation and Qualifying Accounts............... Filed herewith
Exhibits. The following exhibits are filed as part of this Report.
(c)
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT PAGE OR
NUMBER DESCRIPTION METHOD OF FILING
- ------- ------------------------------------------------------------------- ----------------
<S> <C> <C>
2 Merger Agreement dated August 8, 1996 among Zila, Inc. Bio-Dental
Technologies Corporation and Zila Merger Corporation............... A
3-A Certificate of Incorporation, as amended........................... B
3-B Bylaws............................................................. B
4-A Specimen Stock Certificate......................................... B
4-B Certificate of Designations, Preferences and Rights of Series A
Convertible Preferred Stock........................................ *
4-C Specimen Warrant Certificate....................................... C
4-D Form Stock Purchase Warrant re Series A Preferred Stock............ *
4-E Deere Park Capital Management Warrant.............................. J
4-F Bartholomew Investment, L.P. Warrant............................... J
10-A Revolving Line of Credit Loan Agreement dated April 8, 1991 between
Zila, Inc. and Banc One, Arizona................................... D
10-B# Stock Option Award Plan (as amended through April 10, 1991)........ E
10-C# Non-Employee Directors Stock Option Plan (as amended through April
10, 1991).......................................................... E
10-D# Bio-Dental Technologies Corporate Stock Option Plan................ I
10-E# 1997 Stock Option Award Plan....................................... *
10-F License Agreement dated February 5, 1990 between Zila
Pharmaceuticals, Inc. and Bausch and Lomb Ireland.................. F
10-G Manufacturing and Distribution Agreement dated March 12, 1993
between Zila, Inc. and Germiphene Corporation...................... G
10-H Agreement dated November 26, 1996 between Cheseborough Ponds USA Co
and Zila Pharmaceuticals, Inc...................................... H
</TABLE>
22
<PAGE> 24
<TABLE>
<CAPTION>
EXHIBIT PAGE OR
NUMBER DESCRIPTION METHOD OF FILING
- ------- ------------------------------------------------------------------- ----------------
<S> <C> <C>
10-I Private Equity Line of Credit between Deere Park Capital Management
and Zila, Inc. Dated as of April 30, 1997.......................... J
10-J Amendment to Private Equity Line of Credit Agreement............... J
10-K Registration Rights Agreement dated as of May 9, 1997 between Zila,
Inc. and Deere Park Capital Management............................. J
10-L Registration Rights Agreement dated as of May 9, 1997 between Zila,
Inc. and Bartholomew Investment, L.P............................... J
10-M Merger Agreement dated as of April 3, 1997 among Zila, Inc., Cygnus
Imaging, Inc., Cygnus Merger Corporation, and Egidio Cianciosi,
James Jenson and Kenneth Kirk...................................... J
10-N Securities Purchase Agreement dated as of October 17, 1997 by and
among Zila, Inc. and certain investors............................. *
10-O Registration Rights Agreement dated October 17, 1997 by and among
Zila, Inc. and certain investors................................... *
11 Statement re: Computation of Net Income (Loss) Per Common Share.... *
21 Subsidiaries of Registrant......................................... *
23-A Consent of Deloitte & Touche LLP (regarding Form S-8 and Form S-3
Registration Statements)........................................... *
23-B Consent of Grant Thornton (regarding Form S-8 and Form S-3
Registration Statements)........................................... *
24-A Power of Attorney of Joseph Hines.................................. *
24-B Power of Attorney of Clarence J. Baudhuin.......................... *
24-C Power of Attorney of Douglas Ayer.................................. *
24-D Power of Attorney of Patrick M. Lonergan........................... *
24-E Power of Attorney of Michael S. Lesser............................. *
24-F Power of Attorney of Carl A. Schroeder............................. *
24-G Power of Attorney of Curtis M. Rocca............................... *
27 Financial Data Schedule............................................ *
99 The Company's 1997 Proxy Statement for the Annual Meeting of
Stockholders to be held on December 11, 1997....................... K
</TABLE>
- ---------------
<TABLE>
<C> <S>
# Management contract or compensation plan or arrangement
* Filed herewith
A Incorporated by reference to Exhibit 2 to the Company's Form S-4 Registration Statement
No. 333-10107, as amended
B Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal
year ended July 31, 1988, as amended
C Incorporated by reference to the Company's Annual Report on Form 10-K for the fiscal
year ended July 31, 1994, as amended
D Incorporated by reference to the Company's Form S-3 Registration Statement No. 33-46239
E Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the
quarterly period ended January 31, 1996, as amended
F Incorporated by reference to Exhibit 10-C to Post-Effective Amendment No. 3 to Form S-1
Registration Statement No. 33-27739
</TABLE>
23
<PAGE> 25
<TABLE>
<C> <S>
G Incorporated by reference to Exhibit 10-L to the Company's Annual Report on Form 10-K
for the fiscal year ended July 31, 1993, as amended
H Incorporated by reference to the Company's Quarterly Report for the quarterly period
ended October 31, 1996, as amended
I Incorporated by reference to the Company's Current Report dated February 11, 1997
J Incorporated by reference to the Company's Form S-3 Registration Statement No.
333-31651
K Filed by amendment
</TABLE>
(d) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K dated July 21, 1997, to
report certain information regarding the effect of the merger with Bio-Dental,
including financial statements that gave retroactive effect to the Bio-Dental
merger and include the combined operations of Zila and Bio-Dental.
24
<PAGE> 26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, this 28th
day of October, 1997.
ZILA, INC., a Delaware corporation
By /s/ CLARENCE J. BAUDHUIN
------------------------------------
Clarence J. Baudhuin
Executive Vice President of
Administration
and Chief Financial Officer
(Principal
Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report on Form 10-K has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ -------------------------------- -----------------
<C> <S> <C>
/s/ JOSEPH HINES Chairman of the Board, October 28, 1997
- ------------------------------------------ President, Chief Executive
Joseph Hines Officer
/s/ CLARENCE J. BAUDHUIN Executive Vice President of October 28, 1997
- ------------------------------------------ Finance and Administration,
Clarence J. Baudhuin Treasurer and Director
* Director October 28, 1997
- ------------------------------------------
Douglas Ayer
* Director October 28, 1997
- ------------------------------------------
Patrick M. Lonergan
* Director October 28, 1997
- ------------------------------------------
Carl A. Schroeder
* Director October 28, 1997
- ------------------------------------------
Curtis M Rocca III
* Director October 28, 1997
- ------------------------------------------
Michael S. Lesser
*By /s/ CLARENCE J. BAUDHUIN October 28, 1997
- ------------------------------------------
Clarence J. Baudhuin
Attorney-in-Fact
</TABLE>
25
<PAGE> 27
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Zila, Inc.
Phoenix, Arizona
We have audited the consolidated balance sheets of Zila, Inc. and
subsidiaries (the "Company") as of July 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended July 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The consolidated financial statements give retroactive effect to the
merger of the Company and Bio-Dental Technologies Corporation ("Bio-Dental") on
January 8, 1997, which has been accounted for as a pooling of interests as
described in Note 1 to the consolidated financial statements. We did not audit
the consolidated statements of operations, shareholders' equity and cash flows
of Bio-Dental for the eight months ended March 31, 1996 and for the years ended
March 31, 1996 and 1995, which statements reflect total revenues of $22,034,442
for the eight months ended March 31, 1996 and $33,091,216 and $31,582,277 for
the years ended March 31, 1996 and 1995, respectively. Those financial
statements were audited by other auditors whose report has been furnished to us,
and our opinion, insofar as it relates to the amounts included for Bio-Dental as
of such dates and for such periods, is based solely on the report of such other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Zila, Inc. and subsidiaries at July
31, 1997 and 1996, and the results of their operations and their cash flows for
each of the three years in the period ended July 31, 1997 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
October 28, 1997
F-1
<PAGE> 28
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
BIO-DENTAL TECHNOLOGIES CORPORATION
AND SUBSIDIARIES
We have audited the consolidated statements of operations, stockholders'
equity and cash flows of BIO-DENTAL TECHNOLOGIES CORPORATION AND SUBSIDIARIES
for the eight months ended March 31, 1996 and for each of the two years ended
March 31, 1996 (not presented separately herein). These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements of BIO-DENTAL TECHNOLOGIES
CORPORATION AND SUBSIDIARIES referred to above present fairly, in all material
respects, the consolidated results of their operations and their consolidated
cash flows for the eight months ended March 31, 1996 and for each of the two
years ended March 31, 1996 in conformity with generally accepted accounting
principles.
As discussed in note A, the Company merged with Zila, Inc. on January 8,
1997.
GRANT THORNTON LLP
Sacramento, California
April 11, 1997
F-2
<PAGE> 29
ZILA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................................... $ 2,071,563 $ 3,491,904
Short-term investments......................................... 711,470
Trade accounts receivable -- less allowance for doubtful
accounts of $349,021 (1997) and $183,877 (1996)............. 2,822,687 2,821,440
Other receivables.............................................. 319,127 620,378
Income tax receivable.......................................... 494,757
Inventories.................................................... 4,286,627 4,200,442
Prepaid expenses and other current assets...................... 538,360 444,913
Deferred income taxes.......................................... 245,928 961,413
----------- -----------
Total current assets................................... 10,779,049 13,251,960
PROPERTY AND EQUIPMENT -- Net.................................... 1,865,385 1,928,778
PURCHASED TECHNOLOGY RIGHTS -- Net............................... 6,910,293 7,346,733
GOODWILL -- Net.................................................. 2,693,139 836,729
OTHER INTANGIBLE ASSETS -- Net................................... 1,228,542 1,449,492
OTHER ASSETS..................................................... 127,624 496,089
----------- -----------
TOTAL.................................................. $ 23,604,032 $25,309,781
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................... $ 3,262,904 $ 2,934,123
Accrued liabilities............................................ 2,106,572 1,546,662
Deferred revenue............................................... 395,594 187,561
Income taxes payable........................................... 1,976,369
Current portion of long-term debt.............................. 39,895 27,782
----------- -----------
Total current liabilities.............................. 5,804,965 6,672,497
LONG-TERM DEBT -- Net of current portion......................... 375,908 382,006
----------- -----------
Total liabilities...................................... 6,180,873 7,054,503
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 10, 12, 13, 16 and 18)
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, 32,326,581 shares (1997) and 31,077,329 shares
(1996)...................................................... 32,327 31,078
Capital in excess of par value................................. 30,360,446 24,760,269
Unrealized loss on securities available-for-sale............... (24,832)
Deficit........................................................ (12,969,189) (6,510,812)
----------- -----------
Total.................................................. 17,423,584 18,255,703
----------- -----------
Less common stock held by wholly-owned subsidiary -- 42,546
shares (at cost)............................................ (425) (425)
----------- -----------
Total shareholders' equity............................. 17,423,159 18,255,278
----------- -----------
TOTAL.................................................. $ 23,604,032 $25,309,781
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 30
ZILA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JULY 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Net sales......................................... $38,592,252 $37,479,546 $35,064,245
Licensing fees and royalty revenue................ 72,640 2,100,484 1,956,654
----------- ----------- -----------
Total revenues............................ 38,664,892 39,580,030 37,020,899
----------- ----------- -----------
OPERATING COSTS AND EXPENSES:
Cost of products sold............................. 23,542,342 24,771,193 22,093,228
Selling, general and administrative............... 20,161,319 18,489,239 16,194,079
Merger-related expenses........................... 371,865 146,675
Impairment charges................................ 587,659
Litigation expenses............................... 1,147,363 339,578 276,633
Restructuring charges............................. 271,631
----------- ----------- -----------
Total operating costs and expenses........ 45,810,548 44,018,316 38,563,940
----------- ----------- -----------
LOSS FROM OPERATIONS................................ (7,145,656) (4,438,286) (1,543,041)
----------- ----------- -----------
OTHER INCOME (EXPENSES):
Interest income................................... 201,630 147,848 252,672
Interest expense.................................. (79,450) (471,607) (211,544)
Gain on disposition of royalty rights............. 7,519,529
Realized (loss) gain on short-term investments.... (24,832) (1,668) 9,611
----------- ----------- -----------
Total other income........................ 97,348 7,194,102 50,739
----------- ----------- -----------
(LOSS) INCOME BEFORE BENEFIT (PROVISION) FOR INCOME
TAXES AND CUMULATIVE EFFECT OF ACCOUNTING
CHANGE............................................ (7,048,308) 2,755,816 (1,492,302)
BENEFIT (PROVISION) FOR INCOME TAXES................ 589,931 (1,538,518) 180,000
----------- ----------- -----------
(LOSS) INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING
CHANGE............................................ (6,458,377) 1,217,298 (1,312,302)
CUMULATIVE EFFECT OF ACCOUNTING CHANGE.............. 29,945
----------- ----------- -----------
NET (LOSS) INCOME................................... $(6,458,377) $ 1,217,298 $(1,282,357)
=========== =========== ===========
(LOSS) INCOME PER COMMON SHARE:
(Loss) income before cumulative effect of
accounting change.............................. $ (.20) $ .04 $ (.04)
Cumulative effect of accounting change............
----------- ----------- -----------
NET (LOSS) INCOME PER COMMON SHARE.................. $ (.20) $ .04 $ (.04)
=========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING..................... 31,530,096 30,401,236 29,134,901
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 31
ZILA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED JULY 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
COMMON STOCK UNREALIZED
COMMON STOCK HELD BY LOSS ON TOTAL
-------------------- CAPITAL IN WHOLLY-OWNED SECURITIES COMMON
PAR EXCESS OF SUBSIDIARY AVAILABLE- SHAREHOLDERS'
SHARES VALUE PAR VALUE DEFICIT (AT COST) FOR-SALE EQUITY
----------- ------- ----------- ------------ ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, AUGUST 1, 1994........ 28,915,859 $28,916 $15,090,699 $ (6,028,936) $ (425) $ 9,090,254
Private placement of common
stock -- net of expenses of
$30,000.................... 316,875 317 1,115,487 1,115,804
Exercise of common stock
warrants................... 98,775 99 37,310 37,409
Exercise of common stock
options.................... 71,819 72 120,113 120,185
Issuance of stock............ 43,213 43 101,171 101,214
Unrealized loss on securities
available-for-sale......... $(27,961) (27,961)
Net loss..................... (1,282,357) (1,282,357)
---------- ------- ----------- ----------- ----- -------- -----------
BALANCE, JULY 31, 1995......... 29,446,541 29,447 16,464,780 (7,311,293) (425) (27,961) 9,154,548
Issuance of common stock..... 1,076,299 1,076 7,227,975 7,229,051
Exercise of common stock
warrants................... 140,138 141 179,368 179,509
Exercise of common stock
options.................... 414,351 414 753,146 753,560
Common stock warrants issued
for debt discount.......... 135,000 135,000
Change in unrealized loss on
securities
available-for-sale......... 3,129 3,129
Adjustment to conform year-
end of Bio-Dental.......... (416,817) (416,817)
Net income................... 1,217,298 1,217,298
---------- ------- ----------- ----------- ----- -------- -----------
BALANCE, JULY 31, 1996......... 31,077,329 31,078 24,760,269 (6,510,812) (425) (24,832) 18,255,278
Issuance of common stock..... 810,094 810 4,550,171 4,550,981
Exercise of common stock
warrants................... 153,665 154 478,211 478,365
Exercise of common stock
options.................... 285,493 285 571,795 572,080
Change in unrealized loss on
securities
available-for-sale......... 24,832 24,832
Net loss..................... (6,458,377) (6,458,377)
---------- ------- ----------- ----------- ----- -------- -----------
BALANCE, JULY 31, 1997......... 32,326,581 $32,327 $30,360,446 $(12,969,189) $ (425) $ -- $17,423,159
========== ======= =========== =========== ===== ======== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 32
ZILA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income....................................................... $(6,458,377) $ 1,217,298 $(1,282,357)
Cumulative effect of accounting change.................................. (29,945)
Adjustments to reconcile net (loss) income to net cash used in operating
activities:
Depreciation and amortization......................................... 1,154,428 763,664 520,681
Loss on disposals of property and equipment........................... 3,055 33,084 1,955
Gain on disposition of royalty rights................................. (7,519,529)
Compensation paid in stock............................................ 19,494 18,573 30,642
Note discount paid with stock warrants................................ 135,000
Realized loss (gain) on short-term investments........................ 24,832 1,668 (9,611)
Impairment of assets.................................................. 587,659
Change in assets and liabilities:
Trade accounts receivable............................................. 52,462 100,122 49,238
Other receivables..................................................... 301,251 (72,147) (44,304)
Inventories........................................................... 129,965 1,621,034 (267,507)
Prepaid expenses and other current assets............................. (80,379) 319,813 (223,060)
Deferred income taxes................................................. 715,485 (283,831) (180,000)
Other assets.......................................................... 368,465 (438,760) 3,652
Accounts payable and accrued expenses................................. 593,105 (346,575) 380,883
Income taxes receivable/payable....................................... (2,471,126) 2,543,689 (718,741)
Deferred revenue...................................................... 208,033 12,404 (9,431)
---------- ---------- ----------
Net cash used in operating activities............................. (4,851,648) (1,894,493) (1,777,905)
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments..................................... (222,615) (214,150) (270,985)
Proceeds from sale of short-term investments............................ 934,085 197,878 564,761
Purchases of property and equipment..................................... (601,172) (880,024) (557,095)
Proceeds from sale of property and equipment............................ 8,916 474
Proceeds from disposition of royalty rights............................. 7,890,047
Purchases of intangible assets.......................................... (118,465) (226,117) (254,196)
Acquisitions............................................................ 18,142 (125,000)
Loans to related parties................................................ (8,836)
Collections of notes receivable......................................... 32,801 131,956
---------- ---------- ----------
Net cash provided by (used in) investing activities............... 9,975 6,684,351 (393,921)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from borrowings............................................ 41,298 1,000,000
Net (payments) proceeds on short-term borrowings........................ (2,727,460) 207,383
Net proceeds from issuance of common stock.............................. 3,833,755 933,068 1,273,398
Principal payments on long-term debt.................................... (453,721) (12,509) (51,507)
---------- ---------- ----------
Net cash provided by (used in) financing activities............... 3,421,332 (1,806,901) 2,429,274
---------- ---------- ----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS...................... (1,420,341) 2,982,957 257,448
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR.............................. 3,491,904 508,947 524,414
---------- ---------- ----------
CASH AND CASH EQUIVALENTS, END OF YEAR.................................... $ 2,071,563 $ 3,491,904 $ 781,862
========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest.................................................. $ 79,450 $ 483,297 $ 211,544
========== ========== ==========
Cash paid for income taxes.............................................. $ 1,165,710 $ 3,000 $ 691,000
========== ========== ==========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of 259,398 shares of common stock in connection with the
acquisition of Cygnus................................................. $ 1,725,000
==========
Assumption of liabilities in connection with the acquisition of
Cygnus................................................................ $ 737,200
==========
Fair value of Cygnus assets acquired other than cash and cash
equivalents........................................................... $ 342,567
==========
Goodwill recorded in connection with the acquisition of Cygnus.......... $ 2,101,491
==========
Issuance of 869,118 shares of common stock in connection with the
acquisition of CTM.................................................... $ 7,170,223
==========
Assumption of liabilities in connection with the acquisition of CTM..... $ 70,000
==========
Fair value of assets acquired other than cash and cash equivalents...... $ 273,399
==========
Assumption of liabilities in connection with the acquisition of Oral
Vision................................................................ $ 202,827
==========
Issuance of 39,189 shares of common stock in connection with the
acquisition of Crown.................................................. $ 70,572
==========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 33
ZILA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1997, 1996 AND 1995
1. NATURE OF BUSINESS ACTIVITIES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business Activities -- Zila, Inc. and subsidiaries (the
"Company") is involved in the acquisition, development and marketing of
over-the-counter, non-prescription products. In addition, through its
wholly-owned subsidiaries, the Company sells professional dental products
domestically and internationally. It markets consumable dental merchandise and
supplies and equipment via telemarketing and catalog sales and markets
high-technology dental products such as intra-oral cameras and practice software
to dentists.
Principles of Consolidation -- The consolidated financial statements
include the accounts of Zila, Inc. and its wholly-owned subsidiaries, Zila
Pharmaceuticals, Inc., Zila International Inc., Zila Ltd., Bio-Dental
Technologies Corporation ("Bio-Dental") and Cygnus Imaging, Inc. ("Cygnus").
Zila International Inc. has no operations and its assets at July 31, 1997 and
1996 consist of 42,546 shares of common stock of the Company. All significant
intercompany balances and transactions are eliminated in consolidation.
On January 8, 1997, the Company completed a merger with Bio-Dental. On
December 30, 1996, Bio-Dental's shareholders approved the all-stock transaction
which provided for a per share exchange of .825 shares of the Company's common
stock for each share of Bio-Dental common stock outstanding. As of January 8,
1997, Bio-Dental had 6,565,300 shares of common stock outstanding.
The merger has been accounted for as a pooling of interests, and
accordingly, the accompanying consolidated financial statements give retroactive
effect to the Bio-Dental merger and include the combined operations of the
Company and Bio-Dental for all periods presented. Prior to the combination,
Bio-Dental's year-end was March 31. Effective August 1, 1995, Bio-Dental's
results are reported on a July 31, 1996 basis along with the results of Zila,
Inc. Bio-Dental's net loss of $416,817 for the four-month period ended July 31,
1995 is reflected as an adjustment to the deficit during the year ended July 31,
1996. For the four-month period ended July 31, 1995, Bio-Dental had revenues of
$11,056,774, operating costs and expenses of $11,631,735, and a net loss of
$416,817. Certain adjustments and reclassifications have been made to conform
previously issued Bio-Dental financial statements to classifications and
accounting policies used by the Company.
The following table shows the effect on the results of operations as
restated for the periods prior to the combination of Bio-Dental.
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Sales:
Zila, Inc................................. $ 3,153,812 $ 5,978,131 $ 5,147,667
Bio-Dental................................ 16,944,215 31,501,415 29,916,578
----------- ----------- -----------
Combined sales.............................. $20,098,027 $$37,479,546 $35,064,245
=========== =========== ===========
Net income (loss):
Zila, Inc................................. $ (135,528) $ (827,337) $ (862,920)
Bio-Dental................................ (976,356) 2,044,635 (419,437)
----------- ----------- -----------
Combined net income (loss).................. $(1,111,894) $ 1,217,298 $(1,282,357)
=========== =========== ===========
</TABLE>
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles necessarily requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
F-7
<PAGE> 34
ZILA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash Equivalents -- The Company considers highly liquid investments
purchased with original maturities of three months or less to be cash
equivalents.
Short-Term Investments -- The Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, Accounting for Certain Investments in
Debt and Equity Securities, on August 1, 1994. SFAS No. 115 requires the
classification of securities at acquisition into one of three categories:
available-for-sale, held to maturity or trading. All the Company's investments
are classified as available-for-sale.
Inventories, which consist of finished goods and raw materials, are stated
at the lower of cost (first-in, first-out method) or market.
Property and equipment are stated at cost and are depreciated using
straight-line methods over their respective estimated useful lives, ranging from
2 to 20 years. Leasehold improvements are depreciated over the lease term or the
estimated useful life, whichever is shorter.
Goodwill is being amortized on a straight-line basis over 15 to 40 years.
The Company assesses the recoverability of goodwill based on undiscounted
projections of future cash flows.
Other intangible assets consist of deferred patent and licensing costs,
software rights, organizational costs, and covenants not to compete. Deferred
patent and licensing costs incurred in connection with the acquisition of patent
rights, obtaining Food and Drug Administration ("FDA") regulatory approvals and
obtaining other licensing rights for treatment compositions are capitalized and
amortized over the estimated benefit period not exceeding 17 years. Covenants
not to compete are amortized over the term of the agreement. Research and
development costs totaling approximately $2,270,000, $626,000 and $711,000 in
1997, 1996 and 1995, respectively, were expensed. The Company assesses the
recoverability of its intangible assets based on undiscounted projections of
future cash flows.
Net (loss) income per common share is computed based on the weighted
average number of common shares outstanding during each period after giving
effect for any dilutive stock options, warrants and convertible preferred stock,
all of which are considered to be common stock equivalents. For the years ended
July 31, 1997 and 1995, options and warrants that would otherwise qualify as
common stock equivalents are excluded because their inclusion would have the
effect of decreasing the loss per share. Fully diluted net (loss) income per
common share is not materially different from primary net (loss) income per
common share.
New Accounting Pronouncements -- In March 1995, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 121, Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. This Statement
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles and goodwill related to those assets to be held
and used and long-lived assets and certain identifiable intangibles to be
disposed of. The Statement requires that long-lived assets and certain
identifiable intangibles to be held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In addition, the Statement
requires that certain long-lived assets and intangibles to be disposed of be
reported at the lower of carrying amount or fair value less costs to sell. The
Company adopted this accounting standard effective August 1, 1996, as required
and adoption of this Statement had no material impact on the financial
Statements.
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation. As permitted by SFAS No. 123, the Company uses the intrinsic
value-based method prescribed by the Accounting Principles Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations in
accounting for its stock-based employee compensation plans. Accordingly, no
compensation expense has been recognized for such plans. A summary of the pro
forma effects on reported income (loss) from continuing operations and income
(loss) per share for fiscal 1997 and 1996 as if the fair
F-8
<PAGE> 35
ZILA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
value-based method of accounting defined in SFAS No. 123 had been applied is
included in Note 9 to these consolidated financial statements.
Beginning the second quarter of fiscal 1998, the Company will be required
to implement SFAS No. 128, Earnings per Share, which requires, among other
matters, presentation of basic earnings per share, which is calculated utilizing
only weighted average common shares outstanding. SFAS No. 128 is not expected to
materially impact previously reported earnings (loss) per share.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income,
and SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information. SFAS No. 130 requires that an enterprise (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional capital in the equity section of a statement of
financial position. SFAS No. 131 establishes standards for the way that public
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports to shareholders. It also
establishes standards for disclosures about products and services, geographic
areas and major customers. Both statements are effective for fiscal years
beginning after December 15, 1997. The Company has not completed evaluating the
impact of implementing the provisions of SFAS Nos. 130 and 131.
Financial Instruments -- The following disclosure of the estimated fair
value of financial instruments is made in accordance with the requirements of
SFAS No. 107, Disclosures About Fair Value of Financial Instruments. The
carrying amounts and estimated fair value of the Company's financial instruments
are as follows:
The carrying values of cash and cash equivalents, receivables,
accounts payable and accrued expenses approximate fair values due to the
short-term maturities of these instruments.
The carrying amount of long-term debt is estimated to approximate fair
value as the actual interest rate is consistent with the rate estimated to
be currently available for debt of similar term and remaining maturity.
Financial instruments which potentially subject the Company to credit risk
consist principally of trade receivables. The Company provides credit, in the
normal course of business, to pharmaceutical wholesalers and chains, food
wholesalers and chains, rack jobbers, convenience stores, and dentists. The
Company performs ongoing credit evaluations of its customers and maintains an
allowance for credit losses.
Certain reclassifications have been made to the 1996 and 1995 financial
statements to conform to the classifications used in 1997.
2. ACQUISITIONS
On April 4, 1997, the Company acquired Cygnus, a privately-held company
located in Scottsdale, Arizona that manufactures and distributes intra-oral
camera systems and other dental imaging products. The acquisition was accounted
for as a purchase and resulted in the issuance of 259,398 shares of the
Company's common stock with a market value of $1,725,000 and the recording of
approximately $2,101,000 of goodwill. The goodwill will be amortized on a
straight-line basis over 15 years.
The accompanying consolidated statements of operations reflect the
operating results of Cygnus since the effective date of the acquisition. Pro
forma unaudited consolidated operating results of the Company and
F-9
<PAGE> 36
ZILA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cygnus for the years ended July 31, 1997 and 1996, assuming the acquisition had
been made at the beginning of the period presented, are summarized below:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Total revenues.................................... $40,150,865 $40,598,224
=========== ===========
Net (loss) income................................. $(6,717,275) $ 1,124,910
=========== ===========
Net (loss) income per common share................ $ (0.20) $ 0.04
=========== ===========
</TABLE>
These pro forma results have been prepared for comparative purposes only
and include certain adjustments such as the increase in amortization expense
associated with goodwill as a result of applying the purchase method of
accounting for the acquisition. The pro forma financial information is not
necessarily indicative of the results of operations as they would have been had
the transaction been affected on the assumed date.
On March 7, 1996, the Company purchased one-third of the outstanding common
stock of CTM Associates, Inc. ("CTM") from one of the three directors and
shareholders of CTM. On June 3, 1996, the Company acquired the remaining
two-thirds of the outstanding shares of CTM. The only significant asset of CTM
was the technology rights it held related to OraTest (a diagnostic for oral
cancer and site delineation device for biopsy and surgical excision) and its
right to receive certain royalties from sales of OraTest from the Company.
Accordingly, the acquisition of CTM eliminates the Company's obligation to pay
royalties to CTM on revenues generated from sales of OraTest. As consideration
for the acquisition of all of the CTM common stock, the Company issued a total
of 869,118 shares of the Company's common stock with a value of $7,170,223, paid
$125,000, and assumed certain liabilities of approximately $70,000. The
acquisition was accounted for as an acquisition of assets and the purchase price
was recorded as purchased technology rights. The purchased technology rights are
being amortized on a straight-line basis over the expected period of benefit of
17 years which is based on the remaining life of the related patents.
On November 14, 1994, Bio-Dental signed an agreement and purchased the
assets and certain liabilities of Crown Systems, Inc. ("Crown"), effective
November 1, 1994. In connection with this purchase, Bio-Dental issued 29,858
shares of common stock to Crown. The assets acquired consisted primarily of
accounts receivable and dental practice management software rights. The assets
and liabilities are held in Integrated Dental Technologies, Inc. ("IDT"), a
wholly-owned subsidiary of Bio-Dental. As part of the transaction, Bio-Dental
retired approximately $205,000 of assumed liabilities. On October 25, 1995,
Bio-Dental issued an additional 9,331 shares of common stock to the previous
owners of Crown due to a change in the calculated purchase price. The
transaction was accounted for as a purchase. The software rights which were
acquired were being amortized over a period of five years. In October 1996,
Bio-Dental recorded an impairment write-down against all such software rights as
described in Note 15.
In 1994, Bio-Dental purchased the assets and certain liabilities of Oral
Vision, Inc. In connection with this purchase, the Company issued 225,000 shares
of restricted common stock. The transaction was accounted for as a purchase.
F-10
<PAGE> 37
ZILA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. SHORT-TERM INVESTMENTS
Short-term investments consisted of the following at July 31, 1996:
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-------- ------- ------- --------
<S> <C> <C> <C> <C>
Mutual and money market funds............. $449,718 $10,971 $24,702 $435,987
Corporate fixed income securities......... 111,186 284 3,506 107,964
Government fixed income securities........ 175,399 7,880 167,519
-------- ------- ------- --------
Total short-term investments.............. $736,303 $11,255 $36,088 $711,470
======== ======= ======= ========
</TABLE>
All of the above short-term investments that are being held for indefinite
periods of time, including those which may be sold in response to needs for
liquidity or changes in interest rates, are accounted for as securities
available-for-sale and are carried at fair value, with the net, after-tax,
unrealized holding gain or loss reported as a separate component of
shareholders' equity with no effect on current results of operations. The change
in the unrealized loss on securities available-for-sale for the years ended July
31, 1997 and 1996 is as follows:
<TABLE>
<S> <C>
Unrealized loss on securities available-for-sale at August 1, 1995........ $(27,961)
Net decrease in unrealized loss, due principally to decrease in interest
rates................................................................... 3,129
--------
Unrealized loss on securities available-for-sale at July 31, 1996......... (24,832)
Realized loss............................................................. 24,832
--------
Unrealized loss on securities available-for-sale at July 31, 1997......... $ --
========
</TABLE>
4. INVENTORIES
Inventories consist of the following at July 31:
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
Finished goods..................................... $4,381,339 $ 5,168,486
Raw materials...................................... 451,563 290,771
Inventory reserves................................. (546,275) (1,258,815)
---------- ----------
Total inventories.................................. $4,286,627 $ 4,200,442
========== ==========
</TABLE>
Amounts charged to cost of products sold to increase inventory reserves
during fiscal 1997, 1996 and 1995 were $396,996, $1,117,065 and $54,750,
respectively.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at July 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Land................................................ $ 216,731 $ 216,731
Building and improvements........................... 651,034 517,628
Furniture and equipment............................. 2,234,889 2,086,511
Leasehold improvements and other assets............. 387,631 390,302
Production and warehouse equipment.................. 118,553 111,339
---------- ----------
Total property and equipment 3,608,838 3,322,511
Less accumulated depreciation and amortization...... 1,743,453 1,393,733
---------- ----------
Property and equipment -- net....................... $1,865,385 $1,928,778
========== ==========
</TABLE>
F-11
<PAGE> 38
ZILA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. INTANGIBLE ASSETS
Intangible assets consist of the following at July 31:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Purchased technology rights -- net of accumulated
amortization of $509,180 (1997) and $72,740
(1996)............................................ $6,910,293 $7,346,733
========== ==========
Goodwill -- net of accumulated amortization of
$162,070 (1997) and $132,908 (1996)............... $2,693,139 $ 836,729
========== ==========
Patents............................................. $ 570,494 $ 466,978
Licensing costs..................................... 1,086,509 1,063,636
Software rights..................................... 287,982
Organizational costs................................ 84,544 113,626
Covenants not to compete............................ 120,000 120,000
---------- ----------
Total other intangible assets....................... 1,861,547 2,052,222
Less accumulated amortization....................... 633,005 602,730
---------- ----------
Other intangible assets -- net...................... $1,228,542 $1,449,492
========== ==========
</TABLE>
Deferred licensing costs consist primarily of certain costs associated with
obtaining FDA approval for a new product, OraTest (formerly OraScan). The
recoverability of the deferred licensing costs and purchased technology rights
is dependent upon both FDA approval and sufficient revenues generated from sales
of OraTest; management believes that they will receive FDA approval and generate
revenues sufficient to recover such costs. Purchased technology rights relate to
the acquisition of CTM (Note 2).
Amortization of the Company's intangible assets during fiscal 1997, 1996
and 1995, was $656,086, $335,214 and $153,463, respectively.
7. LONG-TERM DEBT
At July 31, 1997, long-term debt consists of a mortgage note bearing
interest at the bank's prime rate (8.25% at July 31, 1997) plus 2.25% per year
due in monthly principal installments of $2,315, through March 2001 with a
balloon payment due April 1, 2001. The Company has the option through March 1998
to convert to a fixed interest rate of 4.25% over the United States Treasury
rate. The note is collateralized by the Company's land and building.
Aggregate annual maturities of long-term debt for the years ending July 31
are as follows:
<TABLE>
<S> <C>
1998.............................................................. $ 39,895
1999.............................................................. 41,098
2000.............................................................. 36,151
2001.............................................................. 298,659
--------
Total............................................................. 415,803
Less current portion.............................................. 39,895
--------
Long-term portion................................................. $375,908
========
</TABLE>
Under the mortgage note, the Company is required to comply with financial
covenants based on certain financial ratios. At July 31, 1997, the Company was
not in compliance with two of these covenants. The Company has received a waiver
from the bank with respect to these covenants at July 31, 1997 and the covenants
have been modified for measurement dates subsequent to July 31, 1997. Management
believes it
F-12
<PAGE> 39
ZILA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
will comply with the modified covenants at future measurement dates.
Accordingly, the Company's mortgage note is classified as long-term.
8. LICENSING FEE INCOME AND ROYALTIES
The Company has entered into various licensing agreements (the
"Agreements"). Under the terms of the Agreements, the licensees acquire the
right to manufacture and sell the Company's products in markets previously not
pursued by the Company. In return, the Company will receive non-refundable
license fees and/or royalties equal to a fixed percentage of the net sales by
the licensees of the Company's products. One of the Agreements provides that the
royalty payments will meet certain minimum annual levels irrespective of the
volume of sales subject to the Agreement.
During the year ended July 31, 1996, the Company received $750,000 in
non-refundable licensing fees from The Procter & Gamble Company ("P&G") in
connection with a licensing agreement between P&G and the Company, which was
subsequently terminated on April 3, 1996. Additionally, under the licensing
agreement with P&G, the Company received $265,330 in reimbursements for costs
associated with obtaining FDA approval for OraTest. At July 31, 1996, the
Company had a receivable of approximately $130,000 from P&G which was received
after year-end.
In March 1991, Bio-Dental incorporated a wholly-owned subsidiary,
Denticator International, Inc. ("DII") and transferred Bio-Dental's
manufacturing operations into DII in exchange for the issuance of a $600,282
note to Bio-Dental with monthly principal payments of $10,005 plus interest at
150% of Bio-Dental's cost of funds from April 1, 1994 through March 31, 1999.
Interest only payments were made from March 1991 through March 31, 1994.
Effective with the date of incorporation, Bio-Dental entered into a licensing
agreement with DII for the manufacture and sale of certain dental products owned
by Bio-Dental. Under this agreement, DII paid Bio-Dental a monthly royalty equal
to the greater of $30,000 or 17% of net sales of DII. In addition, the agreement
provided for further royalties to be paid to Bio-Dental if DII achieved certain
levels of profitability. On March 31, 1991, Bio-Dental sold all of the
outstanding capital stock of DII to DII's former operations manager. The sales
agreement incorporated the licensing agreement described above.
During 1996 and 1995, Bio-Dental earned royalties under the DII licensing
agreement totaling $1,235,069 and $1,665,699, respectively, which are included
in licensing fees and royalty revenue and interest on the note receivable
totaling $66,739 and $69,418, respectively, which is included in interest
income.
On July 22, 1996, Young Innovations, Inc. ("Young") acquired substantially
all of the assets and certain liabilities of DII. Bio-Dental received
approximately $7,500,000 in lieu of future royalties that Bio-Dental was
entitled to receive in connection with its licensing agreement with DII. In
addition, Young issued Bio-Dental a product credit against future purchases from
Young equal to the amounts due Bio-Dental at the time of closing. Included in
other receivables at July 31, 1997 and 1996 is $319,127 and $600,249,
respectively, of product credits due from Young. Additionally, at July 31, 1996,
product credits due from Young of $355,103 are included in other assets.
Concurrent with the closing of the transaction, Bio-Dental canceled options to
purchase 50,000 shares of Bio-Dental's restricted common stock that were held by
DII.
9. STOCK OPTIONS AND WARRANTS
As a result of the merger described in Note 1, each Bio-Dental stock option
or stock purchase warrant that was outstanding at the merger date can be used to
purchase .825 shares of Zila, Inc. common stock. The exercise price of
outstanding Bio-Dental options and warrants was also adjusted at the merger
date. The new exercise prices are calculated by dividing the original exercise
price by .825. The summary of activity related to options and warrants below
includes Bio-Dental options and warrants adjusted for the terms of the merger.
a. Options -- The Company adopted the 1997 Stock Option Award Plan which
became effective on February 5, 1997, authorizing the Board of Directors to
grant options to employees and certain employee
F-13
<PAGE> 40
ZILA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
directors of the Company to purchase up to 1,000,000 shares of the Company's
common stock. The options will be issued with an exercise price no less than
market value at the date of grant. Options may be exercised up to five to ten
years from the date of grant. At July 31, 1997, 872,519 shares were available
for grant under this plan.
The Company adopted a Stock Option Award Plan which became effective on
September 1, 1988, authorizing the Board of Directors to grant options to
employees and certain employee-directors of the Company to purchase up to
4,000,000 shares of the Company's common stock. The plan was amended December 8,
1995 to increase the authorized number of shares to 5,000,000. The options will
be issued with an exercise price no less than the market value at the date of
grant. Options may be exercised at any time up to five to ten years from the
date of grant. At July 31, 1997, 15,355 shares were available for grant under
this plan.
The Company adopted a Non-Employee Directors Stock Option Plan which became
effective October 20, 1989, authorizing the Board of Directors to grant options
to 100,000 shares to non-employee members of the Board of Directors in
increments of 2,500 shares per director each year. The plan was amended December
8, 1995 to increase the authorized number of shares to 200,000. The options will
be issued with an exercise price equal to the market value at the date of grant.
All options may be exercised at any time up to five years from the date of
grant. At July 31, 1997, 80,000 shares were available for grant under this plan.
A summary of the status of the option plans as of July 31, 1997, 1996 and
1995 and changes during the years then ended is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------- --------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- -------- ---------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year... 1,906,575 $ 2.81 2,040,936 $ 2.35 1,817,596 $ 2.26
Granted............................ 712,558 6.98 354,242 4.26 318,580 3.50
Exercised.......................... (285,493) 1.90 (414,351) 2.28 (71,819) 1.78
Forfeited.......................... (181,694) 3.93 (74,252) 3.51 (23,421) 3.06
---------- ---------- ----------
Outstanding at end of year......... 2,151,946 4.03 1,906,575 2.81 2,040,936 2.35
========== ========== ==========
Options exercisable at year-end.... 1,703,267 1,851,575
========== ==========
Weighted average fair value of
options granted during the
year............................. $ 2.54 $ 1.90
========== ==========
</TABLE>
The following table summarizes information about fixed stock options
outstanding at July 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------- --------------------------
NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
OUTSTANDING AVERAGE AVERAGE EXERCISABLE AVERAGE
RANGE OF AT REMAINING EXERCISE AT EXERCISE
EXERCISE PRICES JULY 31, 1997 CONTRACTUAL LIFE PRICE JULY 31, 1997 PRICE
- ---------------- ------------- ---------------- -------- ------------- --------
<S> <C> <C> <C> <C> <C>
$0.12 - $1.31 397,712 3.36 $ 1.25 397,712 $ 1.25
2.42 - 3.94 714,080 6.18 2.91 711,580 2.91
4.24 - 6.06 466,696 8.34 4.51 418,517 2.42
6.78 - 8.18 573,458 9.32 7.00 175,458 5.83
--------- ---------
0.12 - 8.18 2,151,946 1,703,267
========= =========
</TABLE>
The Company applies APB Opinion No. 25 and related interpretations in
accounting for its stock-based employee compensation plans. Accordingly, no
compensation cost has been recognized for its stock-based
F-14
<PAGE> 41
ZILA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
employee compensation plans. Had compensation cost been computed based on the
fair value of awards on the date of grant, utilizing the Black-Scholes
option-pricing model, consistent with the method stipulated by SFAS No. 123, the
Company's net income (loss) and income (loss) per share for the years ended July
31, 1997 and 1996 would have been reduced (increased) to the pro forma amounts
indicated below, followed by the model assumptions used:
<TABLE>
<CAPTION>
JULY 31,
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
Net income (loss):
As reported..................................... $(6,458,000) $1,217,000
Pro forma....................................... $(7,791,000) $862,000
Net income (loss) per weighted average number of
common and common equivalent shares outstanding:
As reported..................................... $(.20) $.04
Pro forma....................................... $(.25) $.03
Black-Scholes model assumptions:
Risk-free interest rate......................... 5.5 - 6.0% 5.5 - 6.0%
Expected volatility............................. 39% 39%
Expected term................................... 2 - 6 years 3 - 6 years
Dividend yield.................................. 0% 0%
</TABLE>
b. Warrants -- The Company has issued warrants to various investors,
shareholders and other third parties in connection with services provided and
purchases of the Company's stock. Activity related to such warrants, which
expire at various dates through October 2000, is summarized as follows:
<TABLE>
<CAPTION>
NUMBER OF WARRANT PRICE
SHARES PER SHARE
--------- ------------------
<S> <C> <C> <C>
Outstanding, August 1, 1994.................... 1,143,197 $ .60 - $ 3.77
Issued....................................... 50,000 2.50
Exercised.................................... (98,775) .60 - 2.41
Expired...................................... (137,520) 3.00
---------
Outstanding, July 31, 1995..................... 956,902 .60 - 3.77
Issued.......................................
Exercised.................................... (140,138) 2.41 -
Expired...................................... (46,092) 3.13
---------
Outstanding, July 31, 1996..................... 770,672 .60 - 3.77
Issued....................................... 300,000 8.6125
Exercised.................................... (153,665) .60 - 3.00
Expired...................................... (14,992) .75 - 2.41
---------
Outstanding, July 31, 1997................... 902,015 $ .60 - $8.6125
=========
</TABLE>
10. RELATED PARTY TRANSACTIONS
In connection with the acquisition of patent rights in 1980, the Company
agreed to pay to Dr. James E. Tinnell, the inventor of one of the Company's
treatment compositions and a director of the Company, a royalty of 5% of gross
sales of the treatment composition. Royalty expense to Dr. Tinnell for the years
ended July 31, 1997, 1996 and 1995 was $310,827, $300,078 and $263,311,
respectively.
F-15
<PAGE> 42
ZILA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company advanced $129,338 in fiscal year 1994 to certain of its
officers for withholding taxes due upon exercise of common stock options. The
outstanding advances were $16,167 at July 31, 1996. The notes bore interest at
4.16% per year and were payable in full on December 31, 1996. During fiscal year
1997, the note balance was paid down to $11,167 and the remaining amount was
forgiven. Included in interest income is $962 and $1,609 for the years ended
July 31, 1996 and 1995, respectively, related to these notes.
11. INCOME TAXES
The consolidated income tax (benefit) provision consists of the following
for the years ended July 31:
<TABLE>
<CAPTION>
1997 1996 1995
--------- ---------- ---------
<S> <C> <C> <C>
Current:
Federal............................... $(312,000) $1,524,000
State................................. -- 455,000
--------- ----------
Total current........................... (312,000) 1,979,000
--------- ----------
Deferred:
Federal............................... (304,000) (245,000) $(124,200)
State................................. (26,000) (195,000) (55,800)
--------- ---------- ---------
Total deferred.......................... (278,000) (440,000) (180,000)
--------- ---------- ---------
Total consolidated income tax (benefit)
provision............................. $(590,000) $1,539,000 $(180,000)
========= ========== =========
</TABLE>
The reconciliation of the federal statutory rate to the effective income
tax rate for the years ended July 31 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate................................ (34)% 34% (34)%
Adjustments:
State income taxes -- net of federal benefit........ (6) 6 (6)
Non-deductible meal, entertainment and other
expenses......................................... 2 2 3
Increase in valuation allowance..................... 30 14 25
--
--- ---
Effective tax rate.................................... (8)% 56% (12)%
=== == ===
</TABLE>
F-16
<PAGE> 43
ZILA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the Company's deferred income tax assets and liabilities
for the years ended July 31 are shown below:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Current deferred income tax assets:
Net operating loss carryforwards........................ $ 6,810,000 $ 5,840,400
Allowance for obsolete or discontinued inventory........ 219,000 404,000
Impairment of assets.................................... 235,000
Reserve for litigation.................................. 180,000
Product warranty allowance.............................. 173,000 114,000
Allowance for doubtful accounts......................... 140,000 70,000
Accrued vacation........................................ 40,000 28,000
Other................................................... 20,000 15,000
----------- -----------
Total current deferred income tax assets.................. 7,817,000 6,471,400
Non-current deferred income tax liabilities:
Federal depreciation.................................... (8,000) (8,000)
Valuation allowance....................................... (7,563,000) (5,502,000)
----------- -----------
Net deferred income tax asset............................. $ 246,000 $ 961,400
=========== ===========
</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 $1,966,000 of the deferred tax asset before valuation
allowance relates to deductions generated by the exercise of stock options,
which, if realized, will result in an increase in capital in excess of par
value. Management believes the valuation allowance reduces deferred tax assets
to an amount that represents management's best estimate of the amount of such
deferred tax assets that more likely than not will be realized.
At July 31, 1997, the Company had federal net operating loss carryforwards
totaling approximately $18,346,000 which expire, if not previously utilized,
from 1998 through 2012. Net operating loss carryforwards for state income tax
purposes, totaling approximately $9,534,000, must be utilized within five years
of the date of their origination, and expire from 1999 through 2003.
12. DALECO ZILA PARTNERS II, L.P.
In June 1992, the Company entered into an agreement with Daleco Capital
Corporation to form a limited partnership known as Daleco Zila Partners II, L.P.
(the "Partnership"). The Company and its officers have no partnership interest
in the Partnership. The purpose of the Partnership was to provide the Company
with a means to fund the marketing program for certain new products. The
original Partnership agreement provided for a minimum of $150,000 and a maximum
of $1,562,500 to be raised by the sale of partnership units. Under the original
agreement, the Partnership will expend up to 80% of the gross partnership
proceeds for marketing and sales-related expenditures on behalf of the Company.
In 1994, the Partnership agreement was amended to increase the maximum amount of
marketing funds potentially available to the Company to be raised to $2,250,000.
In addition, the Company issued to Daleco Capital Corporation and the
Partnership warrants to purchase 100,000 and 300,000 shares, respectively, of
the Company's common stock at $3.00 a share subject to a vesting schedule. As a
part of the amendment to the original agreement, Daleco Capital Corporation and
the Partnership were issued an additional 80,000 and 240,000 warrants,
respectively. The warrants vest at the rate at which the Partnership expends the
net partnership proceeds on the Company's marketing program.
F-17
<PAGE> 44
ZILA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At July 31, 1997, approximately $1,820,000 has been spent. The Company is
committed to pay the Partnership a commission equal to 5% to 10% of the gross
sales of certain of the Company's new products, until such time as three times
the amount of funds expended on the Company's marketing program by the
Partnership has been paid to the Partnership.
Included in selling, general and administrative expense for the years ended
July 31, 1997, 1996 and 1995 is approximately $64,000, $15,000 and $25,000,
respectively, of commissions paid to the Partnership.
During the year ended July 31, 1995, the Partnership funded or accrued
approximately $10,500 in marketing costs. The Company had no funding of
marketing programs by the Partnership after July 31, 1995 and anticipates no
further funding. Accordingly, 137,520 warrants expired as a result of the
Partnership raising less than the maximum level of marketing funds.
13. COMMITMENTS AND CONTINGENCIES
The Company has a New Drug Application pending with the FDA for OraTest.
The initiation of the marketing of OraTest in the United States is dependent
upon the approval of the New Drug Application by the FDA. During 1994, the FDA
approved the Company's application for an Investigational New Drug for OraTest,
which allows the Company to manufacture the product in the United States for
clinical studies and export to certain foreign countries. The Company believes
that the FDA will approve the New Drug Application and the production and
marketing of OraTest (Note 6).
The Company leases a manufacturing facility in Phoenix, Arizona under a
three year agreement which expires April 30, 1999. The agreement has an option
to renew for an additional five years. Additionally, the Company leases offices,
warehouse facilities and certain equipment, under operating leases which expire
through 2002. Future minimum lease payments under these noncancellable leases
are as follows:
<TABLE>
<S> <C>
1998.............................................. $252,592
1999.............................................. 210,950
2000.............................................. 168,792
2001.............................................. 169,276
2002.............................................. 55,748
--------
Total............................................. $857,358
========
</TABLE>
Rent expense for the years ended July 31, 1997, 1996 and 1995 totaled
$209,110, $171,096 and $170,936, respectively.
The Company filed a complaint against Colgate-Palmolive Company ("Colgate")
alleging that one of Colgate's products infringes upon one of the Company's
patents. Colgate answered the Company's complaint, denying the infringement and
asserting that the Company's patent is invalid and unenforceable. The case was
settled on March 6, 1997 and had no material impact on the Company's
consolidated financial statements.
In July 1995, Bio-Dental was named as a defendant, along with Bio-Dental's
transfer agent and a shareholder of Bio-Dental (the "Shareholder"), in a
lawsuit. The lawsuit alleges that Bio-Dental wrongfully failed to register
200,000 Bio-Dental shares of stock in the name of the plaintiffs which were
pledged as security by the Shareholder for a debt owed by the Shareholder to the
plaintiffs.
Bio-Dental denies all of the material allegations of the lawsuit against it
and asserts various affirmative defenses. Bio-Dental will vigorously defend
against the claims set forth in the lawsuit. In September 1996, Bio-Dental
accrued a liability of $450,000 because it decided to attempt a settlement of
this litigation. Bio-Dental's settlement attempt was not successful. In January
1997, a judgment by the court in favor of Bio-Dental and against the plaintiffs
was filed. In February 1997, the plaintiffs started the process to appeal the
judgment.
F-18
<PAGE> 45
ZILA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Upon consummation of the Company's merger with Bio-Dental, each of the
outstanding shares of Bio-Dental common stock was converted into .825 shares of
the Company's common stock. Subsequent to the merger, the Company's stock
transfer agent was presented with a certificate purporting to represent 220,000
shares of Bio-Dental common stock which did not appear on the records of
Bio-Dental's stock transfer agent as of the closing date. The Company is
currently investigating this matter and has not determined whether any shares of
the Company's common stock are required to be issued in exchange for the shares
purportedly represented by this certificate.
The Company is subject to other legal proceedings and claims which arise in
the ordinary course of business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial position or results of operations of the Company.
14. EMPLOYEE BENEFIT PLAN
The Company has adopted the Zila, Inc. 401(k) Savings and Retirement Plan
(the "Plan") for the benefit of eligible employees. Employees may elect to defer
receipt of a portion of their compensation to future years. The Company may make
matching or profit sharing contributions to the Plan. During 1997, 1996, and
1995, the Company contributed approximately $19,000, $14,000 and $11,000,
respectively, to the Plan.
Bio-Dental adopted an Employee Stock Ownership Plan ("ESOP") in fiscal year
1991. The benefits allocated to each participant are in direct proportion to
that person's annual compensation. All employees who meet the following criteria
are eligible for benefits: 1) must be 18 years of age or older; 2) must have
worked at least 1,000 hours in the given plan (fiscal) year; and 3) must be
employed on the last day of the plan year. All participants become fully vested
after 5 years of continuous employment with Bio-Dental.
Once vested, a person may receive benefits under the plan:
a. no later than six years from the date of termination of employment
with Bio-Dental; or
b. upon reaching the age of 60.
In June 1997, the assets of the plan were frozen.
15. RESTRUCTURING
During the year ended July 31, 1996, the Company recorded a charge of
$271,631 for the restructuring of IDT. As a result of the restructuring, IDT no
longer sells computer hardware or filmless x-ray systems. Costs included in the
restructuring charge include contract costs and other costs.
As a result of management's decision to restructure its operations, an
inventory valuation allowance of approximately $300,000 was recorded, and
management reserved approximately $250,000 for sales returns related to
discontinued items.
In connection with assessing the recoverability of goodwill and other
intangible assets in the first quarter of fiscal 1997, the Company determined
that such assets that are associated with IDT would not likely be recoverable as
defined by SFAS No. 121. This determination was the result of IDT failing to
achieve original projections of operating results subsequent to the
restructuring of IDT in early 1996. As a result, a $587,659 impairment loss was
recognized to reduce the carrying value of these long-lived assets to fair
value. Fair value was estimated based on management's best estimate of
discounted future cash flows.
16. EQUITY LINE INVESTMENT AGREEMENT
Effective April 30, 1997, the Company entered into an investment agreement
(the "Investment Agreement") with Deere Park Capital Management (the "Investor")
which allows the Company to sell up to $25,000,000 of the Company's common stock
with the proceeds to be used to fund OraTest marketing and
F-19
<PAGE> 46
ZILA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
general corporate purposes. The option to sell stock to the Investor will remain
available for a period of 12 months beginning August , 1997 (the "12 Month
Period"). As part of the Investment Agreement, the Company sold $3,000,000 of
stock on April 30, 1997, and has committed to sell an additional $10,000,000 of
common stock to the Investor over the 12 Month Period.
The Investment Agreement provides that the Company can obtain up to
$2,000,000 at any one time through the sale of the Company's common stock. All
shares sold will be at a 7% discount to the average low trading price of the
Company's common stock over a specified period of time, subject to a maximum
purchase price calculation. Sales are subject to the satisfaction of certain
conditions, including registration of the shares, a minimum market volume, and
certain limitations on the number of shares of the Company's common stock
outstanding.
As a commitment fee for keeping the equity line available for the 12 Month
Period, the Company has issued warrants dated May 7, 1997 (the "Warrants") to
the Investor exercisable for 300,000 shares of common stock at an exercise price
of $8.6125 per share. The Warrants are exercisable for a three year period
commencing October 31, 1997.
During October 1997, the Company sold $8,000,000 of the Company's common
stock under the Investment Agreement to the Investor. The proceeds from the sale
are intended for potential acquisitions and general corporate purposes.
17. SEGMENTS OF BUSINESS
The Company aligns its business into two segments, Consumer and
Professional. The Consumer segment's principal products are over-the-counter,
non-prescription oral care products. Major brands include Zilactin(R),
Zilactin(R)-L, (formerly Zilactol(R)), Zilactin(R)-B and Zilactin(R)-Lip. These
products are distributed primarily through pharmaceutical wholesalers and
chains, food wholesalers and chains, rack jobbers and convenience stores. The
Professional segment includes dental supplies, dental equipment, dental practice
management software, digital x-ray devices, intra-oral cameras and OraTest
product development costs. These products are used principally in the
professional fields by dentists and other oral care health professionals and are
sold directly to the professional.
Intersegment sales are not significant.
<TABLE>
<CAPTION>
CONSUMER PROFESSIONAL TOTAL
---------- ----------- -----------
<S> <C> <C> <C>
Net sales:
1997....................................... $6,719,228 $31,873,024 $38,592,252
1996....................................... 5,978,131 31,501,415 37,479,546
1995....................................... 5,147,667 29,916,578 35,064,245
(Loss) income before income taxes:
1997....................................... (1,871,098) (5,177,210) (7,048,308)
1996....................................... (443,038) 3,198,854 2,755,816
1995....................................... (213,040) (1,279,262) (1,492,302)
Identifiable assets:
1997....................................... 3,834,527 19,769,504 23,604,031
1996....................................... 3,135,973 22,173,808 25,309,781
1995....................................... 3,353,565 13,338,294 16,691,859
Capital expenditures:
1997....................................... 168,299 432,873 601,172
1996....................................... 256,175 623,849 880,024
1995....................................... 51,364 505,731 557,095
</TABLE>
F-20
<PAGE> 47
ZILA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
CONSUMER PROFESSIONAL TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
Depreciation and amortization:
1997....................................... 157,527 996,900 1,154,427
1996....................................... 136,925 626,739 763,664
1995....................................... 111,941 408,740 520,681
</TABLE>
18. SUBSEQUENT EVENTS
On October 17, 1997, the Company entered into an agreement pursuant to
which the Company agreed to issue 30,000 shares of Series A Convertible
Preferred Stock (the "Series A Preferred Stock") and warrants to purchase
360,000 shares of the Company's Common Stock (the "Warrants") for $30,000,000
(the "Preferred Stock Proceeds"). The shares of Series A Preferred Stock, the
Warrants and the Preferred Stock Proceeds were deposited into escrow. The
Warrants expire on October 17, 2000 and have a per-share exercise price of
$9.915. Concurrent with the completion of the merger (the "Oxycal Merger")
between a subsidiary of the Company and Oxycal Laboratories, Incorporated
("Oxycal"), the Preferred Stock Proceeds, the Series A Preferred Stock and the
Warrants will be released from escrow. In the event the merger with Oxycal is
not completed prior to November 13, 1997, the escrow will terminate and the
Series A Preferred Stock will be returned to Zila and the Preferred Stock
Proceeds will be returned to the investors along with Warrants to purchase
210,000 shares of the Company's Common Stock. The balance of the Warrants will
be returned to the Company. The parties have reserved the right to extend the
escrow termination date beyond November 13, 1997. The Company intends to use a
significant portion of the Preferred Stock Proceeds to consummate the Oxycal
Merger, the balance of the Preferred Stock Proceeds will be used by the Company
for working capital and to pay the fees and expenses associated with the sale of
the Series A Preferred Stock.
By an agreement dated October 28, 1997, the Company and Oxycal have agreed
to a merger whereby Oxycal will be merged into a wholly-owned subsidiary of
Zila, Inc., with Oxycal being the surviving corporation. Upon the consummation
of the Oxycal Merger, Oxycal will become a wholly-owned subsidiary of the
Company. Oxycal develops, manufactures and markets a patented, enhanced form of
Vitamin C under the trademark Ester-C(R). Under the terms of the Merger
Agreement, Oxycal shareholders will receive cash consideration for their shares
of Oxycal capital stock. The Oxycal Merger is subject to approval of the Oxycal
shareholders. There can be no assurance that the Oxycal shareholders will
approve the Oxycal Merger, or, if the Oxycal Merger is approved, that the merger
will be consummated. The Company has deposited $1,000,000 into escrow, which
amount will be delivered to Oxycal in the event the Oxycal Merger is not
consummated due to the actions or inactions of Zila, Inc.
F-21
<PAGE> 1
Exhibit 4.B
CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RIGHTS OF SERIES A CONVERTIBLE PREFERRED STOCK
OF
ZILA, INC.
Zila, Inc. (the "COMPANY"), a corporation organized and existing under the
General Corporation Law of the State of Delaware, does hereby certify that,
pursuant to authority conferred upon the Board of Directors of the Company by
the Certificate of Incorporation, as amended, of the Company, and pursuant to
Section 151 of the General Corporation Law of the State of Delaware, the Board
of Directors of the Company at a meeting duly held, adopted resolutions (i)
authorizing a series of the Company's previously authorized preferred stock, par
value $.001 per share, and (ii) providing for the designations, preferences and
relative, participating, optional or other rights, and the qualifications,
limitations or restrictions thereof, of Thirty Thousand (30,000) shares of
Series A Redeemable Convertible Preferred Stock of the Company, as follows:
RESOLVED, that the Company is authorized to issue 30,000 shares of Series
A Redeemable Convertible Preferred Stock (the "PREFERRED SHARES"), par value
$.001 per share, which shall have the following powers, designations,
preferences and other special rights:
(1) Dividends. The Preferred Shares shall not bear any dividends.
<PAGE> 2
(2) Holder's Conversion of Preferred Shares. A holder of Preferred Shares
shall have the right, at such holder's option, to convert the Preferred Shares
into shares of the Company's common stock, $.001 par value per share (the
"COMMON STOCK"), on the following terms and conditions:
(a) Conversion Right. Subject to the provisions of Sections 2(i) and
2(l) below, at any time or times on or after the date of the initial issuance of
any of the Preferred Shares (the "ISSUANCE DATE"), any holder of Preferred
Shares shall be entitled to convert any whole number of Preferred Shares into
fully paid and nonassessable shares (rounded to the nearest whole share in
accordance with Section 2(i) below) of Common Stock, at the Conversion Rate (as
defined below); provided, however, that in no event shall any holder be entitled
to convert Preferred Shares in excess of that number of Preferred Shares which,
upon giving effect to such conversion, would cause the aggregate number of
shares of Common Stock beneficially owned by the holder and its affiliates to
exceed 4.99% of the outstanding shares of the Common Stock following such
conversion. For purposes of the foregoing proviso, the aggregate number of
shares of Common Stock beneficially owned by the holder and its affiliates shall
include the number of shares of Common Stock issuable upon conversion of the
Preferred Shares with respect to which the determination of such proviso is
being made, but shall exclude the number of shares of Common Stock which would
be issuable upon (i) conversion of the remaining, nonconverted Preferred Shares
beneficially owned by the holder and its affiliates and (ii) exercise or
conversion of the unexercised or unconverted portion of any other securities of
the Company (including, without limitation, any warrants) subject to a
limitation on conversion or exercise analogous to the limitation contained
herein beneficially owned by the holder and its affiliates. Except as set forth
in the preceding sentence, for purposes of this paragraph, beneficial ownership
shall be calculated in accordance with Section 13(d) of the Securities Exchange
Act of 1934, as amended. The holder may waive the foregoing limitations by
written notice to the Company upon not less than 61 days prior notice (with such
waiver taking effect only upon the expiration of such 61 day notice period).
(b) Conversion Rate. The number of shares of Common Stock issuable
upon conversion of each of the Preferred Shares pursuant to Sections (2)(a) and
2(i) shall be determined according to the following formula (the "CONVERSION
RATE"):
1,000 + Repricing Shares (if applicable)
Conversion Price
(c) Repricing. The number of Repricing Shares to be included in
the Conversion Rate is as follows:
-2-
<PAGE> 3
(i) First Repricing Period. If the First Repricing Price is
less than 116% of the Conversion Price, and if a holder gives notice to the
Company as provided in paragraph (vii) below of the number of its Preferred
Shares (subject to the limitation in Section 2(l)) it elects to convert subject
to the First Repricing Event, then the number of Repricing Shares per converted
Preferred Share for the First Repricing Period shall be as determined according
to the following formula (the "FIRST REPRICING FORMULA"):
[(1.16 x Conversion Price) - First Repricing Price] x 1,000
First Repricing Price Conversion Price
(ii) Second Repricing Period. If the Second Repricing Price is
less than 117.5% of the Conversion Price, and if a holder gives notice to the
Company as provided in paragraph (vii) below of the number of its Preferred
Shares (subject to the limitation in Section 2(l)) it elects to convert subject
to the Second Repricing Event, then the number of Repricing Shares per converted
Preferred Share for the Second Repricing Period shall be as determined according
to the following formula (the "SECOND REPRICING FORMULA"):
[(1.175 x Conversion Price) - Second Repricing Price] x 1,000
Second Repricing Price Conversion Price
(iii) Third Repricing Period. If the Third Repricing Price is
less than 119% of the Conversion Price, and if a holder gives notice to the
Company as provided in paragraph (vii) below of the number of its Preferred
Shares (subject to the limitation in Section 2(l)) it elects to convert subject
to the Third Repricing Event, then the number of Repricing Shares per converted
Preferred Share for the Third Repricing Period shall be as determined according
to the following formula (the "THIRD REPRICING FORMULA"):
[(1.19 x Conversion Price) - Third Repricing Price] x 1,000
Third Repricing Price Conversion Price
(iv) Fourth Repricing Period. If the Fourth Repricing Price is
less than 120.5% of the Conversion Price, and if a holder gives notice to the
Company as provided in paragraph (vii) below of the number of its Preferred
Shares (subject to the limitation in Section 2(l)) it elects to convert subject
to the Fourth Repricing Event, then the number of Repricing Shares per converted
Preferred Share for the Fourth Repricing Period shall be as determined according
to the following formula (the "FOURTH REPRICING FORMULA"):
-3-
<PAGE> 4
[(1.205 x Conversion Price) - Fourth Repricing Price] x 1,000
Fourth Repricing Price Conversion Price
(v) Fifth Repricing Period. If the Fifth Repricing Price is
less than 122% of the Conversion Price, and if a holder gives notice to the
Company as provided in paragraph (vii) below of the number of its Preferred
Shares (subject to the limitation in Section 2(l)) it elects to convert subject
to the Fifth Repricing Event, then the number of Repricing Shares per converted
Preferred Share for the Fifth Repricing Period shall be as determined by the
following formula (the "FIFTH REPRICING FORMULA"):
[(1.22 x Conversion Price) - Fifth Repricing Price] x 1,000
Fifth Repricing Price Conversion Price
(vi) Optional Repricing Period. During the Optional Repricing
Period, if the Optional Repricing Price is less than 122% of the Conversion
Price, and if a holder gives the Company notice as provided in paragraph (vii)
below, then the number of Repricing Shares per converted Preferred Share for
such conversion shall be as determined by the following formula (the "OPTIONAL
REPRICING FORMULA"):
[(1.22 x Conversion Price) - Optional Repricing Price] x 1,000
Optional Repricing Price Conversion Price
(vii) Notices. A holder may give the Company notice of its
election to convert Preferred Shares subject to repricing at the principal
corporate office of the Company during the period commencing on the first day of
the applicable Initial Repricing Period and ending at midnight, New York time,
on the fourth day of the Initial Repricing Period. During the Optional Repricing
Period a holder may give such notice at any time. Such notices, together with
all notices provided for in Section 2(c) or elsewhere in this Certificate of
Designations, shall be given by facsimile transmission or courier delivery. Any
such notice shall be deemed received (i) in the case of facsimile transmission,
on the date and at the time indicated by the transmitting machine that the
facsimile has been received, and (ii) in the case of courier delivery, on the
date and at the time that (a) the delivery receipt is signed, (b) such delivery
is refused or (c) the courier otherwise reports that it is unable to make such
delivery.
(viii) Election to Pay Repricing Shares in Cash. The Company
may, at its election, pay the holders cash in lieu of delivering the Repricing
Shares upon a conversion subject to repricing in the manner described in this
paragraph. If the Company elects to pay the holders cash in lieu of Repricing
Shares as set forth below,
-4-
<PAGE> 5
such cash shall be paid simultaneously with the delivery to the holders of the
certificates representing the Common Stock issuable upon conversion as provided
in Section 2(a).
(A) First Five Repricing Periods. With respect to
the Initial Repricing Periods, the Company may, on or prior to the Trading Day
next preceding the commencement of the applicable Determination Period, give the
Buyers a notice that it elects to pay for any Repricing Shares in cash in lieu
of Common Stock in the event that any holder should convert subject to a
Repricing Event during that Repricing Period. The cash payment in lieu of each
Repricing Share shall be in an amount equal to the applicable Repricing Price.
Unless otherwise agreed to by the Company and the applicable holder, if the
Company fails to give such notice by the date specified above, payment with
respect to the Repricing Shares shall be in Common Stock.
(B) Optional Repricing Period. With respect to the
Optional Repricing Period, when and if any holder delivers to the Company a
conversion notice, the Company may, by 5:00 p.m. Mountain Time of the Trading
Day next following receipt of such notice, notify such holder in writing that it
elects to pay for the Repricing Shares related to such conversion notice in cash
in lieu of Common Stock. If the Company fails to deliver such notice to such
holder, the Company shall deliver the Repricing Shares in Common Stock and not
in cash. At the written request of a holder, the Company shall advise such
holder in writing, by 5:00 p.m. Mountain Time of the Trading Day next following
receipt of the holder's request, as to whether, during the next succeeding
six-Trading Day period, if the holder were to convert Preferred Shares subject
to repricing during said period, the Company would elect to pay for the
Repricing Shares in cash in lieu of Common Stock. Failure of the Company to
respond to the holder by 5:00 p.m. Mountain Time of the Trading Day next
following receipt of the holder's request shall be deemed an election to pay for
the Repricing Shares in Common Stock, and the Company shall be bound by such
election during that six-Trading Day period. Unless otherwise agreed to by the
Company and the applicable holder, if the Company makes a valid election to pay
for Repricing Shares in cash in lieu of Common Stock during the Optional
Repricing Period, the Company must deliver cash in lieu of Repricing Shares and
the cash payment in lieu of each Repricing Share shall be an amount equal to the
Closing Bid Price of the Repricing Share on the date of the conversion notice.
(d) Definitions:
For purposes of this Certificate of Designations, the following
terms shall have the following meanings:
"APPLICABLE PRICE" is defined in Section 2(f)(i).
-5-
<PAGE> 6
"APPLICABLE REPRICING PERIOD" is defined in Section 2(l).
"APPROVED STOCK PLAN" is defined in Section 2(f)(i)(D)(I).
"AVERAGE MARKET PRICE" means, with respect to any security for any
period, that price which shall be computed as the arithmetic average of the
Closing Bid Prices for such security for each Trading Date in such period.
"CLOSING BID PRICE" means, for any security as of any date, the last
closing bid price for such security on The Nasdaq National Market, or, if The
Nasdaq National Market is not the principal trading market for such security,
the last closing bid price of such security on the principal securities exchange
or trading market where such security is listed or traded as reported by
Bloomberg, or if the foregoing do not apply, the last closing bid price of such
security in the over-the-counter market on the electronic bulletin board for
such security as reported by Bloomberg, or, if no closing bid price is reported
for such security by Bloomberg, the last closing trade price of such security as
reported by Bloomberg, or, if no last closing trade price is reported for such
security by Bloomberg, the average of the bid prices of any market makers for
such security as reported in the "pink sheets" by the National Quotation Bureau,
Inc. If the Closing Bid Price cannot be calculated for such security on such
date on any of the foregoing bases, the Closing Bid Price of such security on
such date shall be the fair market value as mutually determined by the Company
and the holders of Preferred Shares. If the Company and the holders of Preferred
Shares are unable to agree upon the fair market value of the Common Stock, then
such dispute shall be resolved pursuant to Section 2(h)(iii) below with the term
"Closing Bid Price" being substituted for the term "Market Price." (All such
determinations to be appropriately adjusted for any stock dividend, stock, split
or other similar transaction during such period).
"COMMON STOCK" is defined in Section 2.
"COMMON STOCK DEEMED OUTSTANDING" is defined in Section
2(f)(i)(D)(II).
"COMPANY" is defined in the recital hereto.
"CONVERSION DATE" is defined in Section 2(h)(i).
"CONVERSION NOTICE" is defined in Section 2(h)(i).
-6-
<PAGE> 7
"CONVERSION PRICE" means the Closing Bid Price of the Common Stock
on the date immediately preceding the Issuance Date, subject to adjustment as
provided herein.
"CONVERSION RATE" is defined in Section 2(b).
"CONVERSION RESTRICTION ELECTION NOTICE" is defined in Section
2(m).
"CONVERSION RESTRICTION NOTICE" is defined in Section 2(m).
"CONVERSION RESTRICTIONS" is defined in Section 2(m).
"CONVERSION SHARES" means shares of Common Stock received upon a
conversion of Preferred Shares, including, without limitation, Repricing Shares.
"CONVERTIBLE SECURITIES" is defined in Section 2(f)(i)(A).
"EXCHANGE CAP" is defined in Section 11.
"FIFTH DETERMINATION PERIOD" means the period commencing four
Trading Days prior to the Fifth Target Date and concluding five Trading Days
after the Fifth Target Date.
"FIFTH REPRICING EVENT" means the Fifth Repricing Price being less
than 122% of the Conversion Price.
"FIFTH REPRICING FORMULA" is defined in Section 2(c)(v).
"FIFTH REPRICING PERIOD" means the period commencing 241 days
following the Issuance Date and concluding 270 days following the Issuance Date.
"FIFTH REPRICING PRICE" means the average Closing Bid Price of
the Common Stock during the Fifth Determination Period.
"FIFTH TARGET DATE" means the day 240 days following the Issuance
Date or, if such day is not a Trading Day, the next succeeding Trading Day.
"FIRST DETERMINATION PERIOD" means the period commencing four
Trading Days prior to the First Target Date and concluding five Trading Days
after the First Target Date.
-7-
<PAGE> 8
"FIRST REPRICING EVENT" means the First Repricing Price being less
than 116% of the Conversion Price.
"FIRST REPRICING FORMULA" is defined in Section 2(c)(i).
"FIRST REPRICING PERIOD" means the period commencing 120 days
following the Issuance Date and concluding 150 days following the Issuance Date.
"FIRST REPRICING PRICE" means the average Closing Bid Price of
the Common Stock during the First Determination Period.
"FIRST TARGET DATE" means the day 120 days following the Issuance
Date or, if such day is not a Trading Day, the next succeeding Trading Day.
"FOURTH DETERMINATION PERIOD" means the period commencing four
Trading Days prior to the Fourth Target Date and concluding five Trading Days
after the Fourth Target Date.
"FOURTH REPRICING EVENT" means the Fourth Repricing Price being less
than 120.5% of the Conversion Price.
"FOURTH REPRICING FORMULA" is defined in Section 2(c)(iv).
"FOURTH REPRICING PERIOD" means the period commencing 211 days
following the Issuance Date and concluding 240 days following the Issuance Date.
"FOURTH REPRICING PRICE" means the average Closing Bid Price of
the Common Stock during the Fourth Determination Period.
"FOURTH TARGET DATE" means the day 210 days following the Issuance
Date or, if such day is not a Trading Day, the next succeeding Trading Day.
"INABILITY TO FULLY CONVERT NOTICE" is defined in Section 4(b).
"INITIAL REPRICING LIMITATION" is defined in Section 2(l).
"INITIAL REPRICING PERIOD" means the First Repricing Period, the
Second Repricing Period, the Third Repricing Period, the Fourth Repricing
Period or the Fifth Repricing Period, as applicable.
-8-
<PAGE> 9
"ISSUANCE DATE" is defined in Section 2(a).
"LIQUIDATION VALUE" means (i) prior to and during the First
Repricing Period, $1,160; (ii) during the Second Repricing Period, $1,175; (iii)
during the Third Repricing Period, $1,190; (iv) during the Fourth Repricing
Period, $1,205; and (v) during the Fifth Repricing Period and the Optional
Repricing Period, $1,220.
"MAJOR TRANSACTION" is defined in Section 3(c).
"MAJOR TRANSACTION REDEMPTION PRICE" is defined in Section 3(a).
"MANDATORY CONVERSION DATE" is defined in Section 2(i).
"MANDATORY REDEMPTION" is defined in Section 4(a)(i).
"MANDATORY REDEMPTION PRICE" is defined in Section 4(a)(i).
"MARKET PRICE" means the average Closing Bid Price of the Common
Stock for the five Trading Days immediately preceding the date of determination.
"MATERIAL ADVERSE CHANGE" means any change, event, result or
happening involving, directly or indirectly, the Company or any of its
subsidiaries resulting in a material adverse effect on the business, prospects,
financial condition or results of operations of the Company and its
subsidiaries, taken as a whole, including, without limitation, an event
constituting a Major Transaction (as defined in the Securities Purchase
Agreement) or a Triggering Event shall have occurred, or a breach by the Company
of any of its obligations under the Transaction Documents (as defined in the
Purchase Agreement).
"NOTICE IN RESPONSE TO INABILITY TO CONVERT" is defined in
Section 4(b).
"NOTICE OF MAJOR TRANSACTION" is defined in Section 3(e).
"NOTICE OF REDEMPTION AT OPTION OF BUYER UPON MAJOR TRANSACTION"
is defined in Section 3(e).
"NOTICE OF REDEMPTION AT OPTION OF BUYER UPON TRIGGERING EVENT"
is defined in Section 3(f).
-9-
<PAGE> 10
"NOTICE OF TRIGGERING EVENT" is defined in Section 3(f).
"OPTIONAL 5 DAY PERIOD" means the five Trading Days immediately
preceding notice from a holder to the Company of repricing during the Optional
Repricing Period.
"OPTIONAL REPRICING FORMULA" is defined in Section 2(c)(vi).
"OPTIONAL REPRICING LIMITATION" is defined in Section 2(l).
"OPTIONAL REPRICING PERIOD" means the period commencing 271 days
following the Issuance Date.
"OPTIONAL REPRICING PRICE" means the average Closing Bid Price of
the Common Stock during the Optional 5 Day Period.
"OPTIONS" is defined in Section 2(f)(i)(A).
"ORGANIC CHANGE" is defined in Section 2(f)(iii).
"OTHER SECURITIES" means (i) those warrants of the Company issued
prior to, and outstanding on, the date of issuance of the Warrants (as defined
in the Securities Purchase Agreement), (ii) the Preferred Shares, and (iii)
additional shares of Common Stock issued pursuant to that certain Private Equity
Line of Credit Agreement dated as of April 30, 1997, between Deere Park Capital
Management and the Company.
"PARI PASSU SHARES" is defined in Section 8.
"PERSON" is defined in Section 2(f)(iii).
"PREFERRED FUNDS" is defined in Section 8.
"PREFERRED SHARES" is defined in the resolution clause hereto.
"PREFERRED STOCK CERTIFICATES" is defined in Section 2(h)(i).
"PURCHASE RIGHTS" is defined in Section 2(g).
"REDEMPTION PRICE" is defined in Section 3(b).
-10-
<PAGE> 11
"REGISTRATION STATEMENT" is defined in Section 2(e).
"REGISTRATION RIGHTS AGREEMENT" is defined in Section 2(e).
"REPRICING EVENT" means a First Repricing Event, a Second Repricing
Event, a Third Repricing Event, a Fourth Repricing Event, a Fifth Repricing
Event or a repricing during the Optional Repricing Period.
"REPRICING FORMULA" means the First Repricing Formula, the Second
Repricing Formula, the Third Repricing Formula, the Fourth Repricing Formula,
the Fifth Repricing Formula or the Optional Repricing Formula, as applicable.
"REPRICING PRICE" means the First Repricing Price, the Second
Repricing Price, the Third Repricing Price, the Fourth Repricing Price or the
Fifth Repricing Price, as applicable.
"REPRICING SHARES" means the number of shares of Common Stock
determined pursuant to the First Repricing Formula, the Second Repricing
Formula, the Third Repricing Formula, the Fourth Repricing Formula, the Fifth
Repricing Formula or the Optional Repricing Formula, as applicable.
"SCHEDULED EFFECTIVE DATE" is defined in Section 2(e).
"SCHEDULED FILING DATE" is defined in Section 2(e).
"SEC" is defined in Section 2(e).
"SECOND DETERMINATION PERIOD" means the period commencing four
Trading Days prior to the Second Target Date and concluding five Trading Days
after the Second Target Date.
"SECOND REPRICING EVENT" means the Second Repricing Price being less
than 117.5% of the Conversion Price.
"SECOND REPRICING FORMULA" is defined in Section 2(c)(ii).
"SECOND REPRICING PERIOD" means the period commencing 151 days
following the Issuance Date and concluding 180 days following the Issuance Date.
-11-
<PAGE> 12
"SECOND REPRICING PRICE" means the average Closing Bid Price of
the Common Stock during the Second Determination Period.
"SECOND TARGET DATE" means the day 150 days following the Issuance
Date or, if such day is not a Trading Day, the next succeeding Trading Day.
"SECURITIES PURCHASE AGREEMENT" is defined in Section 2(h)(v).
"THIRD DETERMINATION PERIOD" means the period commencing four
Trading Days prior to the Third Target Date and concluding five Trading Days
after the Third Target Date.
"THIRD REPRICING EVENT" means the Third Repricing Price being less
than 119% of the Conversion Price.
"THIRD REPRICING FORMULA" is defined in Section 2(c)(iii).
"THIRD REPRICING PERIOD" means the period commencing 181 days
following the Issuance Date and concluding 210 days following the Issuance Date.
"THIRD REPRICING PRICE" means the average Closing Bid Price of
the Common Stock during the Third Determination Period.
"THIRD TARGET DATE" means the day 180 days following the Issuance
Date or, if such day is not a Trading Day, the next succeeding Trading Day.
"TRADING DAY" means any day during which the Nasdaq National Market,
the Nasdaq Small-Cap Market, the American Stock Exchange or the New York Stock
Exchange, whichever is at the time the principal trading exchange or market for
the Common Stock, is open for business.
"TRANSFER AGENT" is defined in Section 2(h)(i).
"TRIGGERING EVENT" is defined in Section 3(d).
"TRIGGERING EVENT REDEMPTION PRICE" is defined in Section 3(b).
"VALUATION EVENT" is defined in Section 2(f)(i)(E)(I).
"VOID OPTIONAL REDEMPTION NOTICE" is defined in Section 3(g).
-12-
<PAGE> 13
"VOID OPTIONAL REDEMPTION OPTION" is defined in Section 3(g).
(e) Effect of Failure to Obtain and Maintain Effectiveness of
Registration Statement. If the registration statement (the "REGISTRATION
STATEMENT") covering the resale of the shares of Common Stock issuable upon
conversion or exercise of the Preferred Shares and the Warrants (as defined in
the Securities Purchase Agreement), respectively, and required to be filed by
the Company pursuant to the Registration Rights Agreement between the Company
and the Buyers referred to therein (the "REGISTRATION RIGHTS AGREEMENT") is not
(i) filed within 90 days of the first Issuance Date of any Preferred Shares (the
"SCHEDULED FILING DATE"), (ii) declared effective by the United States
Securities and Exchange Commission (the "SEC") on or before 120 days after the
first Issuance Date for any Preferred Shares (the "SCHEDULED EFFECTIVE DATE"),
or (iii) if after the Registration Statement has been declared effective by the
SEC, sales cannot be made pursuant to the Registration Statement (whether
because of a failure to keep the Registration Statement effective, to disclose
such information as is necessary for sales to be made pursuant to the
Registration Statement, to register sufficient shares of Common Stock or
otherwise), then, as partial relief for the damages to any holder by reason of
any such delay in or reduction of its ability to sell the underlying shares of
Common Stock (which remedy shall not be exclusive of any other remedies
available at law or in equity), the Company shall pay to the Buyers a 2% per
month penalty, in the manner described in Section 2(c) of the Registration
Rights Agreement, which is incorporated herein by this reference.
(f) Adjustment to Conversion Price -- Dilution and Other Events. In
order to prevent dilution of the rights granted under this Certificate of
Designations, the Conversion Price will be subject to adjustment from time to
time as provided in this Section 2(f).
(i) Adjustment of Conversion Price upon Issuance of Common
Stock. If and whenever on or after the date of issuance of the Preferred Shares,
the Company issues or sells, or is deemed to have issued or sold, any shares of
Common Stock (other than shares of Common Stock deemed to have been issued by
the Company in connection with an Approved Stock Plan or Other Securities) for a
consideration per share less than the Average Market Price of the Common Stock
for the ten (10) consecutive Trading Days immediately preceding the date of such
issuance or sale (the "APPLICABLE PRICE"), then immediately after such issue or
sale, the Conversion Price shall be reduced to an amount equal to the product of
(x) the Conversion Price in effect immediately prior to such issue or sale and
(y) the quotient determined by dividing (1) the sum of (I) the product of the
Applicable Price and the number of shares of Common
-13-
<PAGE> 14
Stock Deemed Outstanding (as defined below) immediately prior to such issue or
sale, and (II) the consideration, if any, received by the Company upon such
issue or sale, by (2) the product of (I) the Applicable Price and (II) the
number of shares of Common Stock Deemed Outstanding immediately after such issue
or sale. For purposes of determining the adjusted Conversion Price under this
Section 2(d)(i), the following shall be applicable:
(A) Issuance of Options. If the Company in any manner
grants any rights or options to subscribe for or to purchase Common Stock
(other than pursuant to an Approved Stock Plan or upon conversion of the
Preferred Shares) or any stock or other securities convertible into or
exchangeable for Common Stock (such rights or options being herein called
"OPTIONS" and such convertible or exchangeable stock or securities being
herein called "CONVERTIBLE SECURITIES") and the price per share for which
Common Stock is issuable upon the exercise of such Options or upon
conversion or exchange of such Convertible Securities is less than the
Applicable Price, then the total maximum number of shares of Common Stock
issuable upon the exercise of such Options or upon conversion or exchange
of the total maximum amount of such Convertible Securities issuable upon
the exercise of such Options shall be deemed to be outstanding and to have
been issued and sold by the Company for such price per share. For purposes
of this Section 2(f)(i)(A), the "price per share for which Common Stock is
issuable upon exercise of such Options or upon conversion or exchange of
such Convertible Securities" is determined by dividing (I) the total
amount, if any, received or receivable by the Company as consideration for
the granting of such Options, plus the minimum aggregate amount of
additional consideration payable to the Company upon the exercise of all
such Options, plus in the case of such Options which relate to Convertible
Securities, the minimum aggregate amount of additional consideration, if
any, payable to the Company upon the issuance or sale of such Convertible
Securities and the conversion or exchange thereof, by (II) the total
maximum number of shares of Common Stock issuable upon exercise of such
Options or upon the conversion or exchange of all such Convertible
Securities issuable upon the exercise of such Options. No adjustment of
the Conversion Price shall be made upon the actual issuance of such Common
Stock or of such Convertible Securities upon the exercise of such Options
or upon the actual issuance of such Common Stock upon conversion or
exchange of such Convertible Securities.
(B) Issuance of Convertible Securities. If the Company
in any manner issues or sells any Convertible Securities and the price per
share for which Common Stock is issuable upon such conversion or exchange
is less than the Applicable Price, then the maximum number of shares of
Common Stock
-14-
<PAGE> 15
issuable upon conversion or exchange of such Convertible Securities shall
be deemed to be outstanding and to have been issued and sold by the
Company for such price per share. For the purposes of this Section
2(f)(i)(B), the "price per share for which Common Stock is issuable upon
such conversion or exchange" is determined by dividing (I) the total
amount received or receivable by the Company as consideration for the
issue or sale of such Convertible Securities, plus the minimum aggregate
amount of additional consideration, if any, payable to the Company upon
the conversion or exchange thereof, by (II) the total maximum number of
shares of Common Stock issuable upon the conversion or exchange of all
such Convertible Securities. No adjustment of the Conversion Price shall
be made upon the actual issue of such Common Stock upon conversion or
exchange of such Convertible Securities, and if any such issue or sale of
such Convertible Securities is made upon exercise of any Options for which
adjustment of the Conversion Price had been or are to be made pursuant to
other provisions of this Section 2(f)(i), no further adjustment of the
Conversion Price shall be made by reason of such issue or sale.
(C) Change in Option Price or Rate of Conversion. If the
purchase price provided for in any Options, the additional consideration,
if any, payable upon the issue, conversion or exchange of any Convertible
Securities, or the rate at which any Convertible Securities are
convertible into or exchangeable for Common Stock change at any time, the
Conversion Price in effect at the time of such change shall be readjusted
to the Conversion Price which would have been in effect at such time had
such Options or Convertible Securities still outstanding provided for such
changed purchase price, additional consideration or changed conversion
rate, as the case may be, at the time initially granted, issued or sold;
provided that no adjustment shall be made if such adjustment would result
in an increase of the Conversion Price then in effect.
(D) Certain Definitions. For purposes of determining the
adjusted Conversion Price under this Section 2(f)(i), the following terms
have meanings set forth below:
(I) "APPROVED STOCK PLAN" shall mean any
employee benefit plan of the Company providing for the grant or exercise
of any stock or options of the Company, now existing or to be implemented
in the future, so long as the issuance of such stock or options is
approved by a majority of the non-employee members of the Board of
Directors of the Company or a majority of the members of a committee of
non-employee directors established for such purpose.
-15-
<PAGE> 16
(II) "COMMON STOCK DEEMED OUTSTANDING" means,
at any given time, the number of shares of Common Stock actually
outstanding at such time, plus the number of shares of Common Stock deemed
to be outstanding pursuant to Sections 2(f)(i)(A) and 2(f)(i)(B) hereof
regardless of whether the Options or Convertible Securities are actually
exercisable at such time, but excluding any shares of Common Stock
issuable upon conversion of the Preferred Shares.
(E) Effect on Conversion Price of Certain Events. For
purposes of determining the adjusted Conversion Price under this Section
2(f)(i), the following shall be applicable:
(I) Calculation of Consideration Received.
If any Common Stock, Options or Convertible Securities are issued or sold
or deemed to have been issued or sold for cash, the consideration received
therefor will be deemed to be the net amount received by the Company
therefor. In case any Common Stock, Options or Convertible Securities are
issued or sold for a consideration other than cash, the amount of the
consideration other than cash received by the Company will be the fair
value of such consideration, except where such consideration consists of
securities, in which case the amount of consideration received by the
Company will be the Average Market Price of such securities for the twenty
(20) consecutive trading days immediately preceding the date of receipt.
In case any Common Stock, Options or Convertible Securities are issued to
the owners of the non-surviving entity in connection with any merger in
which the Company is the surviving entity the amount of consideration
therefor will be deemed to be the fair value of such portion of the net
assets and business of the non-surviving entity as is attributable to such
Common Stock, Options or Convertible Securities, as the case may be. The
fair value of any consideration other than cash or securities will be
determined jointly by the Company and the holders of a majority of the
Preferred Shares then outstanding. If such parties are unable to reach
agreement within ten (10) days after the occurrence of an event requiring
valuation (the "VALUATION EVENT"), the fair value of such consideration
will be determined within forty-eight (48) hours of the tenth (10th) day
following the Valuation Event by an independent, reputable appraiser
selected by the Company. The determination of such appraiser shall be
deemed binding upon all parties absent manifest error.
(II) Integrated Transactions. In case any
Option is issued in connection with the issue or sale of other securities
of the Company, together comprising one integrated transaction in which no
specific consideration
-16-
<PAGE> 17
is allocated to such Options by the parties thereto, the Options will be
deemed to have been issued for a consideration of $.01.
(III) Treasury Shares. The number of shares of
Common Stock outstanding at any given time does not include shares owned
or held by or for the account of the Company, and the disposition of any
shares so owned or held will be considered an issue or sale of Common
Stock.
(IV) Record Date. If the Company takes a
record of the holders of Common Stock for the purpose of entitling them
(1) to receive a dividend or other distribution payable in Common Stock,
Options or in Convertible Securities or (2) to subscribe for or purchase
Common Stock, Options or Convertible Securities, then such record date
will be deemed to be the date of the issue or sale of the shares of Common
Stock deemed to have been issued or sold upon the declaration of such
dividend or the making of such other distribution or the date of the
granting of such right of subscription or purchase, as the case may be.
(ii) Adjustment of Conversion Price upon Subdivision or
Combination of Common Stock. If the Company at any time subdivides (by any stock
split, stock dividend, recapitalization or otherwise) one or more classes of its
outstanding shares of Common Stock into a greater number of shares, the
Conversion Price in effect immediately prior to such subdivision will be
proportionately reduced. If the Company at any time combines (by combination,
reverse stock split or otherwise) one or more classes of its outstanding shares
of Common Stock into a smaller number of shares, the Conversion Price in effect
immediately prior to such combination will be proportionately increased.
(iii) Reorganization, Reclassification, Consolidation, Merger
or Sale. Any recapitalization, reorganization, reclassification, consolidation,
merger, sale of all or substantially all of the Company's assets to another
Person (as defined below) or other transaction which is effected in such a way
that holders of Common Stock are entitled to receive (either directly or upon
subsequent liquidation) stock, securities or assets with respect to or in
exchange for Common Stock is referred to herein as an "ORGANIC CHANGE." Prior to
the consummation of any Organic Change, the Company will make appropriate
provision (in form and substance satisfactory to the holders of a majority of
the Preferred Shares then outstanding) to insure that each of the holders of the
Preferred Shares will thereafter have the right to acquire and receive in lieu
of or addition to (as the case may be) the shares of Common Stock immediately
theretofore acquirable and receivable upon the conversion of such holder's
Preferred Shares, such shares of stock, securities or assets as may be issued or
payable with respect to or in exchange for
-17-
<PAGE> 18
the number of shares of Common Stock (including, without limitation, Repricing
Shares) which would have been issuable upon conversion of such holder's
Preferred Shares had such Organic Change not taken place (without taking into
account any limitations or restrictions on the timing or amount of conversions),
and in any such case, appropriate provisions shall be made with respect to the
rights and interests of the holder to the end that the provisions hereof
(including, without limitation, provisions for adjustment of the Conversion
Price and of the number of shares of Common Stock issuable upon conversion of
Preferred Shares) shall, if relevant, thereafter be applicable, as nearly as may
be practicable in relation to any shares of stock or securities thereafter
deliverable upon the conversion thereof. In any such case, the Company will make
appropriate provision (in form and substance satisfactory to the holders of a
majority of the Preferred Shares then outstanding) with respect to such holders'
rights and interests to insure that the provisions of this Section 2(f) and
Section 2(g) below will thereafter be applicable to the Preferred Shares
(including, in the case of any such consolidation, merger or sale in which the
successor entity or purchasing entity is other than the Company, an immediate
adjustment of the Conversion Price to the value for the Common Stock reflected
by the terms of such consolidation, merger or sale, if the value so reflected is
less than the Conversion Price in effect immediately prior to such
consolidation, merger or sale). The Company will not effect any such
consolidation, merger or sale, unless prior to the consummation thereof, the
successor entity (if other than the Company) resulting from consolidation or
merger or the entity purchasing such assets assumes, by written instrument (in
form and substance satisfactory to the holders of a majority of the Preferred
Shares then outstanding), the obligation to deliver to each holder of Preferred
Shares such shares of stock, securities or assets as, in accordance with the
foregoing provisions, such holder may be entitled to acquire. "PERSON" shall
mean an individual, a limited liability company, a partnership, a joint venture,
a corporation, a trust, an unincorporated organization and a government or any
department or agency thereof.
(iv) Certain Events. If any event occurs of the type
contemplated by the provisions of this Section 2(f) but not expressly provided
for by such provisions (including, without limitation, the granting of stock
appreciation rights, phantom stock rights or other rights with equity features),
then the Company's Board of Directors will make an appropriate adjustment in the
Conversion Price so as to protect the rights of the holders of the Preferred
Shares; provided that no such adjustment will increase the Conversion Price as
otherwise determined pursuant to this Section 2(f).
(v) Notices.
(A) Immediately upon any adjustment of the Conversion
Price, the Company will give written notice thereof by facsimile and
courier to
-18-
<PAGE> 19
each holder of Preferred Shares, setting forth in reasonable detail and
certifying the calculation of such adjustment.
(B) The Company will give written notice to each holder
of Preferred Shares at least twenty (20) days prior to the date on which
the Company closes its books or takes a record (I) with respect to any
dividend or distribution upon the Common Stock, (II) with respect to any
pro rata subscription offer to holders of Common Stock or (III) for
determining rights to vote with respect to any Organic Change, dissolution
or liquidation; provided that in no event shall such notice be provided to
such holder prior to such information being made known to the public.
(C) The Company will also give written notice to each
holder of Preferred Shares at least twenty (20) days prior to the date on
which any Organic Change, dissolution or liquidation will take place;
provided that in no event shall such notice be provided to such holder
prior to such information being made known to the public.
(g) Purchase Rights. In addition to any adjustments of the
Conversion Price pursuant to Section 2(f) above, if at any time the Company
grants, issues or sells any Options, Convertible Securities or rights to
purchase stock, warrants, securities or other property pro rata to the record
holders of any class of Common Stock (the "PURCHASE RIGHTS"), then the holders
of Preferred Shares will be entitled to acquire, upon the terms applicable to
such Purchase Rights, the aggregate Purchase Rights which such holder could have
acquired if such holder had held the number of shares of Common Stock acquirable
upon complete conversion of the Preferred Shares (without taking into account
any limitations or restrictions on the timing or amount of conversions)
immediately before the date on which a record is taken for the grant, issuance
or sale of such Purchase Rights, or, if no such record is taken, the date as of
which the record holders of Common Stock are to be determined for the grant,
issue or sale of such Purchase Rights.
(h) Mechanics of Conversion. Subject to the Company's inability to
fully satisfy its obligations under a Conversion Notice (as defined below) as
provided for in Section 4 below:
(i) Holder's Delivery Requirements. To convert Preferred
Shares into full shares of Common Stock on any date (the "CONVERSION
DATE"), the holder thereof shall (A) transmit by facsimile (or otherwise
deliver), for receipt on or prior to 11:59 p.m., Mountain Time on such
date, a copy of a fully executed notice of conversion in the form attached
hereto as Exhibit I (the "CONVERSION
-19-
<PAGE> 20
NOTICE"), to the Company or its designated transfer agent (the "TRANSFER
AGENT"), and (B) surrender to a common carrier for delivery to the Company
or the Transfer Agent as soon as practicable following such date, the
original certificates representing the Preferred Shares being converted
(or an indemnification undertaking with respect to such shares in the case
of their loss, theft or destruction) (the "PREFERRED STOCK CERTIFICATES")
and the originally executed Conversion Notice.
(ii) Company's Response. Upon receipt by the Company of a
facsimile copy of a Conversion Notice, the Company shall immediately send,
via facsimile, a confirmation of receipt of such Conversion Notice to such
holder, which confirmation shall state whether such notice is fully
completed and, if incomplete, shall specify the reason for the deficiency.
If the confirmation of the Company does not state that the Conversion
Notice is incomplete, then the Conversion Notice shall be deemed to be
fully completed. If the confirmation of the Company does state that the
Conversion Notice is incomplete, the holder shall have one (1) Trading Day
to correct the Conversion Notice and still retain the original Conversion
Date for pricing purposes. If such holder fails to correct the Conversion
Notice within one (1) Trading Day of receiving a Company confirmation
identifying an incomplete Conversion Notice, such holder may refile its
Conversion Notice under Section 2(h)(i) above. Upon receipt by the Company
or the Transfer Agent of the Preferred Stock Certificates to be converted
pursuant to a Conversion Notice, together with the originally executed
Conversion Notice, the Company or the Transfer Agent (as applicable)
shall, on the next business day following the date of receipt (or the
second business day following the date of receipt if received after 11:00
a.m. Mountain Time, (I) issue and surrender to a common carrier for
overnight delivery to the address as specified in the Conversion Notice, a
certificate, registered in the name of the holder or its designee, for the
number of shares of Common Stock to which the holder shall be entitled, or
(II) credit such aggregate number of shares of Common Stock to which the
holder shall be entitled to the holder's or its designee's balance account
with The Depository Trust Company. If the number of Preferred Shares
represented by the Preferred Stock Certificate(s) submitted for conversion
is greater than the number of Preferred Shares being converted, then the
Company or Transfer Agent, as the case may be, shall, as soon as
practicable and in no event later than two business days after receipt of
the Preferred Stock Certificate(s) and at its own expense, issue and
deliver to the holder a new Preferred Stock Certificate representing the
number of Preferred Shares not converted.
(iii) Dispute Resolution. In the case of a dispute as to the
determination of the Repricing Shares or the arithmetic calculation of the
-20-
<PAGE> 21
Conversion Rate, the Company shall promptly issue to the holder the number
of shares of Common Stock that is not disputed and shall submit the
disputed determinations or arithmetic calculations to the holder via
facsimile as soon as possible, but in no event later than two (2) business
days after receipt of such holder's Conversion Notice. If such holder and
the Company are unable to agree upon the determination of the Repricing
Shares or arithmetic calculation of the Conversion Rate within one (1)
business day of such disputed determination or arithmetic calculation
being submitted to the holder, then the Company shall within one (1)
business day submit via facsimile (A) the disputed determination of the
Repricing Shares to an independent, reputable investment bank or (B) the
disputed arithmetic calculation of the Conversion Rate to its independent,
outside accountant. The Company shall cause the investment bank or the
accountant, as the case may be, to perform the determinations or
calculations and notify the Company and the holder of the results no later
than forty-eight (48) hours from the time it receives the disputed
determinations or calculations. Such investment bank's or accountant's
determination or calculation, as the case may be, shall be binding upon
all parties absent manifest error. Any holder may, at its option, prior to
submitting a conversion notice with respect to any of its Preferred
Shares, request a written confirmation from the Company that such holder's
calculation of the number of Repricing Shares and arithmetic calculation
of the Conversion Rate is correct. If the Company disputes the holder's
calculation, then the Company and the holder shall follow the dispute
resolution procedures set forth above. If the Company agrees with the
holders' calculation, then the Company shall deliver a written notice of
such concurrence to the holder within 24 hours of its receipt of the
holder's request.
(iv) Record Holder. The person or persons entitled to receive
the shares of Common Stock issuable upon a conversion of Preferred Shares
shall be treated for all purposes as the record holder or holders of such
shares of Common Stock on the Conversion Date.
(v) Company's Failure to Timely Convert. If within three (3)
business days of the Company's or the Transfer Agent's receipt of the
Preferred Stock Certificates to be converted and the originally executed,
fully completed Conversion Notice the Company shall fail to issue a
certificate to a holder or credit the holder's balance account with The
Depository Trust Company for the number of shares of Common Stock to which
such holder is entitled upon such holder's conversion of Preferred Shares
or to issue a new Preferred Stock Certificate representing the number of
Preferred Shares to which such holder is entitled pursuant to Section
2(h)(ii), in addition to all other available remedies which such holder
may pursue hereunder and under the Securities Purchase Agreement
-21-
<PAGE> 22
between the Company and the initial holders of the Preferred Shares (the
"SECURITIES PURCHASE AGREEMENT") (including indemnification pursuant to
Section 8 thereof), the Company shall pay additional damages to such
holder on each date after such third (3rd) business day that such
conversion is not timely effected in an amount equal to 1.0% of the
product of (A) the sum of the number of shares of Common Stock not issued
to the holder on a timely basis pursuant to Section 2(h)(ii) and to which
such holder is entitled and, in the event the Company has failed to
deliver a Preferred Stock Certificate to the holder on a timely basis
pursuant to Section 2(h)(ii), the greatest number of shares of Common
Stock issuable upon conversion of the Preferred Shares represented by such
Preferred Stock Certificate (without regard to any limitations on
conversion set forth herein, including, without limitation, the Exchange
Cap and the limitations contained in Sections 2(a) and 2(l) hereof) on any
day during the period from the time the holder delivered its conversion
notice to the Company to the time the Company properly delivers such
Preferred Stock Certificate to the holder, and (B) the highest Closing Bid
Price of the Common Stock from the time the holder delivered its
conversion notice to the Company to the time the Company properly delivers
such shares of Common Stock or such Preferred Stock Certificate, as
applicable, to the holder. Such additional damages shall continue until
the Company converts the Preferred Shares or redeems the Preferred Shares
pursuant to Section 3.
(i) Mandatory Conversion. If any Preferred Shares remain outstanding
on the Mandatory Conversion Date (as defined below), then all such Preferred
Shares shall be converted as of such date in accordance with Section 2(b) with
Repricing Shares calculated at the Optional Repricing Formula as if the holders
of such Preferred Shares had given the Conversion Notice on the Mandatory
Conversion Date. All holders of Preferred Shares shall thereupon surrender all
Preferred Stock Certificates, duly endorsed for cancellation, to the Company or
the Transfer Agent and on the Mandatory Conversion Date all Preferred Shares,
whether or not the Preferred Stock Certificates therefor are surrendered, shall
be cancelled and deemed null and void provided that the Company has complied
with its obligations under this Section 2(i). "MANDATORY CONVERSION DATE" means
the date which is three years after the applicable Issuance Date. The
limitations in the proviso to Section 2(a) and in Section 2(l) shall not apply
to any conversion on a Mandatory Conversion Date.
(j) Fractional Shares. The Company shall not issue any fraction of a
share of Common Stock upon any conversion. All shares of Common Stock (including
fractions thereof) issuable upon conversion of more than one Preferred Share by
a holder thereof shall be aggregated for purposes of determining whether the
conversion would result in the issuance of a fraction of a share of Common
Stock. If, after the aforementioned aggregation, the issuance would result in
the issuance of a fraction of a
-22-
<PAGE> 23
share of Common Stock, the Company shall round such fraction of a share of
Common Stock up or down to the nearest whole share.
(k) Taxes. The Company shall pay any and all taxes which may be
imposed upon it with respect to the issuance and delivery of Common Stock upon
the conversion of the Preferred Shares.
(l) Conversion and Selling Restrictions.
(I) Without the prior consent of the Company, a holder of
Preferred Shares shall not be entitled to convert, (x) during any one of
the Initial Repricing Periods, an aggregate number of Preferred Shares in
excess of 20% of the number of such holder's originally purchased
Preferred Shares (the "INITIAL REPRICING LIMITATION") or (y) during any
calendar month in the Optional Repricing Period, an aggregate number of
Preferred Shares in excess of 33% of the number of such holder's
originally purchased Preferred Shares (the "OPTIONAL REPRICING
LIMITATION"); provided, however, that the foregoing restriction shall not
apply:
(A) with respect to a conversion pursuant to
Section 2(i);
(B) if there shall have occurred a Material Adverse
Change; or
(C) to any conversion made on a date on which the Market
Price is equal to or greater than 120% of the Conversion Price;
provided that the exception in this paragraph (C) shall apply only
to Preferred Shares that could have been converted in a prior
Repricing Period but were not.
(II) Without the prior consent of the Company, during any one
of the Initial Repricing Periods (such period being referred to as the
"APPLICABLE REPRICING PERIOD"), a holder of Preferred Shares shall not be
entitled to sell Conversion Shares in excess of the greater of:
(A) the highest number of Conversion Shares
received in any prior Repricing Period; or
(B) the maximum number of Conversion Shares that such
holder could receive in the Applicable Repricing Period;
-23-
<PAGE> 24
provided, however, that the restrictions contained in this paragraph (II)
shall not apply to any sale made on a date on which the Market Price is
equal to or greater than 120% of the Conversion Price.
(m) Adjustment of Conversion Restrictions upon Issuance of
Convertible Securities. If within six months following the Issuance Date, the
Company in any manner issues or sells Convertible Securities that are
convertible into Common Stock and are subject to restrictions on the amount of
shares that can be converted (the restriction on conversions being herein
referred to as, the "CONVERSION RESTRICTIONS") and such Conversion Restriction
is not formulated with using the same time periods and percentages used in
Section 2(l), the Company shall provide written notice thereof via facsimile and
overnight courier to each holder of the Preferred Shares ("CONVERSION
RESTRICTION NOTICE") on the date of issuance of such Convertible Securities. If
the holders of Preferred Shares representing all of the Preferred Shares then
outstanding which remain subject to the restrictions in Section 2(l) provide
written notice via facsimile and overnight courier (the "CONVERSION RESTRICTION
ELECTION NOTICE") to the Company within five (5) business days of receiving a
Conversion Restriction Notice that such holders desire to replace the conversion
restrictions set forth in Section 2(l) then in effect with the Conversion
Restriction described in such Conversion Restriction Notice, then Section 2(l)
shall automatically be deemed to be amended so as to incorporate the provisions
set forth in the Conversion Restriction Notice.
(3) Redemption at Option of Holders.
(a) Redemption Option Upon Major Transaction. In addition to all
other rights of the holders of Preferred Shares contained herein, simultaneous
with or following the occurrence of a Major Transaction (as defined below), each
holder of Preferred Shares shall have the right, at such holder's option, to
require the Company to redeem all or a portion of such holder's Preferred Shares
at a price per Preferred Share equal to the greater of (i) the Liquidation Value
and (ii) the product of (A) the Conversion Rate (including the Repricing Shares
applicable to that Repricing Period) at such time and (B) the Closing Bid Price
on the date of the public announcement of such Major Transaction or the next
date on which the exchange or market on which the Common Stock is traded is open
if such public announcement is made (X) after 12:00 p.m., Mountain Time, on such
date or (Y) on a date on which the exchange or market on which the Common Stock
is traded is closed ("MAJOR TRANSACTION REDEMPTION PRICE"), plus all accrued
penalties hereunder.
(b) Redemption Option Upon Triggering Event. In addition to all
other rights of the holders of Preferred Shares contained herein, after a
Triggering Event (as defined below), each holder of Preferred Shares shall have
the right, at such holder's
-24-
<PAGE> 25
option, to require the Company to redeem all or a portion of such holder's
Preferred Shares at a price per Preferred Share equal to the greater of (i) the
Liquidation Value and (ii) the product of (A) the Conversion Rate (including the
Repricing Shares applicable to that Repricing Period) at such time and (B) the
Closing Bid Price calculated as of the date immediately preceding such
Triggering Event on which the exchange or market on which the Common Stock is
traded is open ("TRIGGERING EVENT REDEMPTION PRICE" and, collectively with
"MAJOR TRANSACTION REDEMPTION PRICE," the "REDEMPTION PRICE"), plus all accrued
penalties hereunder.
(c) "Major Transaction". A "MAJOR TRANSACTION" shall be deemed
to have occurred at such time as any of the following events:
(i) the consolidation, merger or other business combination of
the Company with or into another Person (other than pursuant to a migratory
merger effected solely for the purpose of changing the jurisdiction of
incorporation of the Company);
(ii) the sale or transfer of all or substantially all of
the Company's assets; or
(iii) a purchase, tender or exchange offer made to and
accepted by the holders of more than 25% of the outstanding shares of Common
Stock.
(d) "Triggering Event". A "TRIGGERING EVENT" shall be deemed
to have occurred at such time as any of the following events:
(i) the failure of the Registration Statement to be declared
effective by the SEC on or prior to the date that is 180 days after the Initial
Issuance Date;
(ii) while the Registration Statement is required to be
maintained effective pursuant to the terms of the Registration Rights Agreement,
the effectiveness of the Registration Statement lapses for any reason
(including, without limitation, the issuance of a stop order) or is unavailable
to the holder of the Preferred Shares for sale of the Registrable Securities (as
defined in the Registration Rights Agreement) in accordance with the terms of
the Registration Rights Agreement, and such lapse or unavailability continues
for a period of ten consecutive trading days, provided that the cause of such
lapse or unavailability is not due to factors solely within the control of such
holder of Preferred Shares;
-25-
<PAGE> 26
(iii) the failure of the Common Stock to be listed on the
Nasdaq National Market, The Nasdaq SmallCap Market, The New York Stock
Exchange, Inc. or The American Stock Exchange, Inc. for a period of seven
consecutive days (provided that such failure shall not constitute a
Triggering Event if the Company delists the Common Stock at the election of
the holders of Preferred Shares pursuant to Section 3(g) below);
(iv) the Company's notice to any holder of Preferred Shares,
including by way of public announcement, at any time, of its intention not to
comply with proper requests for conversion of any Preferred Shares into shares
of Common Stock, including due to any of the reasons set forth in Section 4(a)
below; or
(v) the continuance of the Company's failure to timely convert
Preferred Shares into Common Stock as described in Section 2(h)(v), for a period
of 10 consecutive days.
(e) Mechanics of Redemption at Option of Buyer Upon Major
Transaction. No later than 20 days prior to the consummation of a Major
Transaction, but not prior to the public announcement of such Major Transaction,
the Company shall deliver written notice thereof via facsimile and overnight
courier ("NOTICE OF MAJOR TRANSACTION") to each holder of Preferred Shares. At
any time after the public announcement of such Major Transaction, any holder of
Preferred Shares then outstanding may require the Company to redeem all of the
holder's Preferred Shares then outstanding by delivering written notice thereof
via facsimile and overnight courier ("NOTICE OF REDEMPTION AT OPTION OF BUYER
UPON MAJOR TRANSACTION") to the Company, which Notice of Redemption at Option of
Buyer Upon Major Transaction shall indicate (i) the number of Preferred Shares
subject to such redemption and (ii) the applicable Major Transaction Redemption
Price, as calculated pursuant to Section 3(a) above.
(f) Mechanics of Redemption at Option of Buyer Upon Triggering
Event. Within one (1) day after the occurrence of a Triggering Event, the
Company shall deliver written notice thereof via facsimile and overnight courier
("NOTICE OF TRIGGERING EVENT") to each holder of Preferred Shares. At any time
after a Triggering Event, any holder of Preferred Shares then outstanding may
require the Company to redeem all of the holder's Preferred Shares by delivering
written notice thereof via facsimile and overnight courier ("NOTICE OF
REDEMPTION AT OPTION OF BUYER UPON TRIGGERING EVENT") to the Company, which
Notice of Redemption at Option of Buyer Upon Triggering Event shall indicate (i)
the number of Preferred Shares subject to such redemption and (ii) the
applicable Triggering Event Redemption Price, as calculated pursuant to Section
3(b) above.
-26-
<PAGE> 27
(g) Payment of Redemption Price. Upon the Company's receipt of a
Notice(s) of Redemption at Option of Buyer Upon Major Transaction or a Notice(s)
of Redemption at Option of Buyer Upon Triggering Event, as the case may be, from
any holder of Preferred Shares then outstanding, the Company shall immediately
notify each holder by facsimile of the Company's receipt of such notices of
redemption, so as to enable the other holders, if they so desire, to submit
their own Notice(s) of Redemption at Option of Buyer Upon Major Transaction or
Notice(s) of Redemption at Option of Buyer Upon Triggering Event, as applicable.
If any other holders submit such notice(s) within two Trading Days of their
receipt of the Company's notice described in the preceding sentence, the Company
shall redeem those holders' Preferred Shares at the same time and on the same
terms as the originally notifying holder. All such holders who have submitted
the applicable Notice of Redemption shall thereafter promptly send their
Preferred Stock Certificates to be redeemed to the Company or its Transfer
Agent. The Company shall deliver the applicable Redemption Price (including
accrued penalties) to such holder within five days after the Company's receipt
of the requisite notices required to effect a redemption; provided, however,
that the Major Transaction Redemption Price must be delivered to such holder
prior to, or simultaneously with, the occurrence of a Major Transaction;
provided further that a holder's Preferred Stock Certificates shall have been so
delivered to the Company or its Transfer Agent; provided further that if the
Company is unable to redeem all of the Preferred Shares, the Company shall
redeem an amount from such holder of Preferred Shares equal to such holder's
pro-rata amount (based on the number of Preferred Shares held by such holder
relative to the number of Preferred Shares outstanding) of all Preferred Shares
being redeemed. The Company hereby covenants and agrees that a Major Transaction
shall not be consummated until the Company redeems all of the Preferred Shares
submitted for redemption pursuant to a Major Transaction. If the Company shall
fail to redeem all of the Preferred Shares submitted for redemption pursuant to
a Triggering Event (other than pursuant to a dispute as to the arithmetic
calculation of the Triggering Event Redemption Price), in addition to any remedy
such holder of Preferred Shares may have under this Certificate of Designations
and the Securities Purchase Agreement, the Triggering Event Redemption Price
payable in respect of such unredeemed Preferred Shares shall bear interest at
the rate of 2.0% per month (prorated for partial months) until paid in full.
Commencing five (5) Trading Days after the Company has failed to pay any unpaid
applicable Redemption Price in full to each holder as required by this Section,
any holder of Preferred Shares then outstanding, including shares of Preferred
Shares submitted for redemption pursuant to this Section 3 and for which the
applicable Redemption Price has not been paid, shall have the option (the "VOID
OPTIONAL REDEMPTION OPTION") to, in lieu of redemption, require the Company to
promptly return to each holder all of the Preferred Shares that were submitted
for redemption by such holder under this Section 3 and for which the applicable
Redemption Price has not been paid, by sending written notice thereof to the
-27-
<PAGE> 28
Company via facsimile (the "VOID OPTIONAL REDEMPTION NOTICE"). Upon the
Company's receipt of such Void Optional Redemption Notice(s) and prior to
payment of the full applicable Redemption Price to each holder, (i) the
Notice(s) of Redemption at Option of Buyer Upon Triggering Event or the
Notice(s) of Redemption at Option of Buyer Upon Major Transaction, as the case
may be, shall be null and void with respect to those Preferred Shares submitted
for redemption and for which the applicable Redemption Price has not been paid,
(ii) the Company shall immediately return any Preferred Shares submitted to the
Company by each holder for redemption under this Section 3(g) and for which the
applicable Redemption Price has not been paid, and (iii) the Conversion Price of
such returned Preferred Shares shall be adjusted to the lesser of (A) the
Conversion Price as in effect on the date on which the Void Optional Redemption
Notice(s) is delivered to the Company and (B) the lowest Closing Bid Price
during the period beginning on the date on which the Notice(s) of Redemption of
Option of Buyer Upon Major Transaction or the Notice(s) of Redemption at Option
of Buyer Upon Triggering Event, as the case may be, is delivered to the Company
and ending on the date on which the Void Optional Redemption Notice(s) is
delivered to the Company; provided that no adjustment shall be made if such
adjustment would result in an increase of the Conversion Price then in effect.
The Company shall also deliver to each holder all accrued penalties hereunder.
In addition, if a redemption voided pursuant to this Section 3(g) was caused by
a Triggering Event involving the Company's inability to issue Conversion Shares
because of the Exchange Cap (as defined in Section 11), and if so directed by
the holders of all Preferred Shares then outstanding, including shares of
Preferred Shares submitted for redemption pursuant to this Section 3 with
respect to which the applicable Redemption Price has not been paid, the Company
shall immediately delist the Common Stock from such exchange and have the Common
Stock, at such holders' option, listed on The Nasdaq SmallCap Market or traded
on the electronic bulletin board or the "pink sheets." Notwithstanding the
foregoing, in the event of a dispute as to the determination of the Closing Bid
Price or the arithmetic calculation of the Redemption Price, such dispute shall
be resolved pursuant to Section 2(h)(iii) above with the term "Redemption Price"
being substituted for the term "Conversion Rate." Payments provided for in this
Section 3 shall have priority over payments to other stockholders in connection
with a Major Transaction.
-28-
<PAGE> 29
(4) Inability to Fully Convert.
(a) Holder's Option if Company Cannot Fully Convert. If, upon the
Company's receipt of a Conversion Notice or upon the Mandatory Conversion Date,
the Company cannot issue shares of Common Stock registered for resale under the
Registration Statement for any reason, including, without limitation, because
the Company (x) does not have a sufficient number of shares of Common Stock
authorized and available, (y) is otherwise prohibited by applicable law or by
the rules or regulations of any stock exchange, interdealer quotation system or
other self-regulatory organization with jurisdiction over the Company or its
Securities, including without limitation the Exchange Cap, from issuing all of
the Common Stock which is to be issued to a holder of Preferred Shares pursuant
to a Conversion Notice or (z) fails to have a sufficient number of shares of
Common Stock registered for resale under the Registration Statement, then the
Company shall issue as many shares of Common Stock as it is able to issue in
accordance with such holder's Conversion Notice and pursuant to Section 2(h)
above and, with respect to the unconverted Preferred Shares, the holder, solely
at such holder's option, can elect to:
(i) require the Company to redeem from such holder those
Preferred Shares for which the Company is unable to issue Common Stock in
accordance with such holder's Conversion Notice ("MANDATORY REDEMPTION") at a
price per Preferred Share (the "MANDATORY REDEMPTION PRICE") equal to the
Triggering Event Redemption Price as of such Conversion Date, including accrued
penalties (for this purpose treating the date on which (x), (y) or (z) in
Section 4(a) above occurs as the date of a Triggering Event);
(ii) if the Company's inability to fully convert Preferred
Shares is pursuant to Section 4(a)(z) above, require the Company to issue
restricted shares of Common Stock in accordance with such holder's Conversion
Notice and pursuant to Section 2(h) above;
(iii) void its Conversion Notice and retain or have returned,
as the case may be, the nonconverted Preferred Shares that were to be converted
pursuant to such holder's Conversion Notice (subject to the same adjustment to
the Conversion Price as applies under the Void Optional Redemption Option in
Section 3(g)); or
(iv) if the Company's inability to fully convert Preferred
Shares is pursuant to the Exchange Cap described in Section 4(a)(y) above,
require the Company to issue shares of Common Stock in accordance with such
holder's Conversion Notice and pursuant to Section 2(h) above at a Conversion
Price equal to the average Closing Bid
-29-
<PAGE> 30
Price of the Common Stock for the five consecutive trading days preceding such
holder's Notice in Response to Inability to Convert (as defined below).
(b) Mechanics of Fulfilling Holder's Election. The Company shall
immediately send via facsimile to a holder of Preferred Shares, upon receipt of
a facsimile copy of a Conversion Notice from such holder which cannot be fully
satisfied as described in Section 4(a) above, a notice of the Company's
inability to fully satisfy such holder's Conversion Notice (the "INABILITY TO
FULLY CONVERT NOTICE"). Such Inability to Fully Convert Notice shall indicate
(i) the reason why the Company is unable to fully satisfy such holder's
Conversion Notice, (ii) the number of Preferred Shares which cannot be converted
and (iii) the applicable Mandatory Redemption Price. Such holder must within
fifteen (15) business days of receipt of such Inability to Fully Convert Notice
deliver written notice via facsimile to the Company ("NOTICE IN RESPONSE TO
INABILITY TO CONVERT") of its election pursuant to Section 4(a) above.
(c) Payment of Redemption Price. If such holder shall elect to have
its shares redeemed pursuant to Section 4(a)(i) above, the Company shall pay the
Mandatory Redemption Price in cash to such holder within five (5) days of the
Company's receipt of the holder's Notice in Response to Inability to Convert. If
the Company shall fail to pay the applicable Mandatory Redemption Price to such
holder on a timely basis as described in this Section 4(c) (other than pursuant
to a dispute as to the determination of the arithmetic calculation of the
Redemption Price), in addition to any remedy such holder of Preferred Shares may
have under this Certificate of Designations and the Securities Purchase
Agreement, such unpaid amount shall bear interest at the rate of 2% per month
(prorated for partial months) until paid in full. Until the full Mandatory
Redemption Price is paid in full to such holder, such holder may void the
Mandatory Redemption with respect to those Preferred Shares for which the full
Mandatory Redemption Price has not been paid and receive back such Preferred
Shares (subject to the same adjustment to the Conversion Price as applies under
the Void Optional Redemption Option in Section 3(g)). Notwithstanding the
foregoing, if the Company fails to pay the applicable Mandatory Redemption Price
within such five (5) days time period due to a dispute as to the determination
of the arithmetic calculation of the Redemption Rate, such dispute shall be
resolved pursuant to Section 2(h)(iii) above with the term "Redemption Price"
being substituted for the term "Conversion Rate."
(d) Pro-rata Conversion and Redemption. In the event the Company
receives a Conversion Notice from more than one holder of Preferred Shares on
the same day and the Company can convert and redeem some, but not all, of the
Preferred Shares pursuant to this Section 4, the Company shall convert and
redeem from each holder of Preferred Shares electing to have Preferred Shares
converted and redeemed at such time an amount equal to such holder's pro-rata
amount (based on the number of Preferred
-30-
<PAGE> 31
Shares held by such holder relative to the number of Preferred Shares
outstanding) of all Preferred Shares being converted and redeemed at such time.
(5) Reissuance of Certificates. In the event of a conversion or redemption
pursuant to this Certificate of Designations of less than all of the Preferred
Shares represented by a particular Preferred Stock Certificate, the Company
shall promptly cause to be issued and delivered to the holder of such Preferred
Shares a preferred stock certificate representing the remaining Preferred Shares
which have not been so converted or redeemed.
(6) Reservation of Shares. The Company shall, so long as any of the
Preferred Shares are outstanding, reserve and keep available out of its
authorized and unissued Common Stock, solely for the purpose of effecting the
conversion of the Preferred Shares, such number of shares of Common Stock as
shall from time to time be sufficient to effect the conversion of all of the
Preferred Shares then outstanding; provided that the number of shares of Common
Stock so reserved shall at no time be less than 150% of the number of shares of
Common Stock for which the Preferred Shares are at any time convertible. The
number of shares so reserved shall be allocated among the holders pro rata based
on the number of Preferred Shares purchased by such holder pursuant to the
Securities Purchase Agreement compared to the original total number of Preferred
Shares purchased by all holders pursuant to the Securities Purchase Agreement.
Any increase in the number of shares so reserved shall be allocated among the
holders pro rata based on the outstanding number of a holder's Preferred Shares
at the time of such increase compared to the outstanding number of all Preferred
Shares at the time of such increase.
(7) Voting Rights. Holders of Preferred Shares shall have no voting
rights, except as required by law, including but not limited to the General
Corporation Law of the State of Delaware, and as expressly provided in this
Certificate of Designations.
(8) Liquidation, Dissolution, Winding-Up. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Company, the holders
of the Preferred Shares shall be entitled to receive in cash out of the assets
of the Company, whether from capital or from earnings available for distribution
to its stockholders (the "PREFERRED FUNDS"), before any amount shall be paid to
the holders of any of the capital stock of the Company of any class junior in
rank to the Preferred Shares in respect of the preferences as to the
distributions and payments on the liquidation, dissolution and winding up of the
Company, an amount per Preferred Share equal to the Liquidation Value; provided
that, if the Preferred Funds are insufficient to pay the full amount due to the
holders of Preferred Shares and holders of shares of other classes or series of
preferred stock of the Company that are of equal rank with the Preferred Shares
as to payments of Preferred Funds (the "PARI PASSU SHARES"), then each holder of
Preferred
-31-
<PAGE> 32
Shares and Pari Passu Shares shall receive a percentage of the Preferred Funds
equal to the full amount of Preferred Funds payable to such holder as a
liquidation preference, in accordance with their respective Certificate of
Designations, Preferences and Rights, as a percentage of the full amount of
Preferred Funds payable to all holders of Preferred Shares and Pari Passu
Shares. The purchase or redemption by the Company of stock of any class, in any
manner permitted by law, shall not, for the purposes hereof, be regarded as a
liquidation, dissolution or winding up of the Company. Neither the consolidation
or merger of the Company with or into any other Person, nor the sale or transfer
by the Company of less than substantially all of its assets, shall, for the
purposes hereof, be deemed to be a liquidation, dissolution or winding up of the
Company. No holder of Preferred Shares shall be entitled to receive any amounts
with respect thereto upon any liquidation, dissolution or winding up of the
Company other than the amounts provided for herein.
(9) Preferred Rank. All shares of Common Stock shall be of junior rank to
all Preferred Shares in respect to the preferences as to distributions and
payments upon the liquidation, dissolution and winding up of the Company. The
rights of the shares of Common Stock shall be subject to the preferences and
relative rights of the Preferred Shares. Without the prior express written
consent of the holders of all of the then outstanding Preferred Shares, the
Company shall not hereafter authorize or issue additional or other capital stock
that is of senior or equal rank to the Preferred Shares in respect of the
preferences as to distributions and payments upon the liquidation, dissolution
and winding up of the Company. Without the prior express written consent of the
holders of all of the then outstanding Preferred Shares, the Company shall not
hereafter authorize or make any amendment to the Company's Certificate of
Incorporation or bylaws, or file any resolution of the board of directors of the
Company with the Delaware Secretary of State containing any provisions, which
would adversely affect or otherwise impair the rights or relative priority of
the holders of the Preferred Shares relative to the holders of the Common Stock
or the holders of any other class of capital stock. In the event of the merger
or consolidation of the Company with or into another corporation, the Preferred
Shares shall maintain their relative powers, designations and preferences
provided for herein and no merger shall result inconsistent therewith.
(10) Restriction on Redemption and Cash Dividends with respect to Other
Capital Stock. Until all of the Preferred Shares have been converted or redeemed
as provided herein, the Company shall not, directly or indirectly, redeem, or
declare or pay any cash dividend or distribution on, its Common Stock without
the prior express written consent of the holders of all of the then outstanding
Preferred Shares.
-32-
<PAGE> 33
(11) Limitation on Number of Conversion Shares. The Company shall not be
obligated to issue, in the aggregate, more than 19.99% of outstanding shares of
Common Stock (such amount to be proportionately and equitably adjusted from time
to time in the event of stock splits, stock dividends, combinations, reverse
stock splits, reclassification, capital reorganizations and similar events
relating to the Common Stock) (the "EXCHANGE CAP") upon conversion of the
Preferred Shares, if issuance of a larger number of shares of Common Stock would
constitute a breach of the Company's obligations under the rules or regulations
of The Nasdaq Stock Market, Inc. or any other principal securities exchange or
market upon which the Common Stock is or becomes traded. The Exchange Cap shall
be allocated among the holders pro rata based on the number of Preferred Shares
purchased by such holder pursuant to the Securities Purchase Agreement compared
to the original total number of Preferred Shares purchased by all holders
pursuant to the Securities Purchase Agreement. Any increase in the Exchange Cap
shall be allocated among the holders pro rata based on the outstanding number of
a holder's Preferred Shares at the time of such increase compared to the
outstanding number of all Preferred Shares at the time of such increase.
(12) Vote to Change the Terms of Preferred Shares. The affirmative vote at
a meeting duly called for such purpose or the written consent without a meeting,
of the holders of all of the then outstanding Preferred Shares, shall be
required for any change to this Certificate of Designations or the Company's
Certificate of Incorporation which would amend, alter, change or repeal any of
the powers, designations, preferences and rights of the Preferred Shares.
(13) Lost or Stolen Certificates. Upon receipt by the Company of evidence
satisfactory to the Company of the loss, theft, destruction or mutilation of any
Preferred Stock Certificates representing the Preferred Shares, and, in the case
of loss, theft or destruction, of any indemnification undertaking by the holder
to the Company and, in the case of mutilation, upon surrender and cancellation
of the Preferred Stock Certificate(s), the Company shall execute and deliver new
preferred stock certificate(s) of like tenor and date; provided, however, the
Company shall not be obligated to re-issue preferred stock certificates if the
holder contemporaneously requests the Company to convert such Preferred Shares
into Common Stock.
-33-
<PAGE> 34
IN WITNESS WHEREOF, the Company has caused this Certificate of
Designations to be signed by Joseph Hines, its President, as of the 17th day of
October, 1997.
ZILA, INC.
By: /s/ Joseph Hines
-----------------------
Name: Joseph Hines
Its: President
-33-
<PAGE> 35
EXHIBIT I
ZILA, INC.
CONVERSION NOTICE
Reference is made to the Certificate of Designations, Preferences and Rights of
Series C Redeemable Convertible Preferred Stock (the "CERTIFICATE OF
DESIGNATIONS"). In accordance with and pursuant to the Certificate of
Designations, the undersigned hereby elects to convert the number of shares of
Series A Redeemable Convertible Preferred Stock, par value $.001 per share (the
"PREFERRED SHARES"), of Zila, Inc., a Delaware corporation (the "COMPANY"),
indicated below into shares of Common Stock, par value $.001 per share (the
"COMMON STOCK"), of the Company, by tendering the stock certificate(s)
representing the share(s) of Preferred Shares specified below as of the date
specified below.
Date of Conversion:
----------------------------------------------------
Number of Preferred Shares to be converted:
----------------------------
Stock certificate no(s). of Preferred Shares to be converted:
----------
Please confirm the following information:
Conversion Price:
-----------------------------------------------------
Applicable Repricing Price:
--------------------------------------------
Number of Repricing Shares:
-------------------------------------------
Total number of shares of Common Stock to be issued:
-------------------
Please issue the Common Stock into which the Preferred Shares are being
converted and, if applicable, any check drawn on an account of the Company in
the following name and to the following address:
Issue to:
-----------------------------------------------------
-----------------------------------------------------
-----------------------------------------------------
-----------------------------------------------------
<PAGE> 36
Facsimile Number:
------------------------------------------
Authorization:
---------------------------------------------
By:
--------------------------------
Title:
-----------------------------
Dated:
-----------------------------
Account Number:
(if electronic book entry transfer):
---------------------
Transaction Code Number
(if electronic book entry transfer):
-----------------------------------
<PAGE> 1
Exhibit 4.D
THE SECURITIES REPRESENTED BY THIS STOCK PURCHASE WARRANT HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE OFFERED FOR SALE OR SOLD EXCEPT
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER THE
SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE
EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS.
NO._____________________
Commencing Date: October 17, 1997
Expiration Date: October 17, 2000
STOCK PURCHASE WARRANT
TO PURCHASE COMMON SHARES
OF
ZILA, INC.
THIS CERTIFIES that, for value received (the "INVESTOR") is entitled to
subscribe for and purchase from Zila, Inc., incorporated under the laws of the
State of Delaware (hereinafter called the "COMPANY"), at the price of $9.915 per
share, subject to adjustment as provided herein (the "EXERCISE PRICE") at any
time during the three year period commencing OCTOBER 17, 1997 and ending OCTOBER
17, 2000 up to ____________ fully paid and non-assessable shares of Common Stock
of the Company, par value ($.001) per share (hereinafter called "COMMON STOCK"),
subject, however, to the provisions and upon the terms and conditions
hereinafter set forth; provided, however, that in no event shall the holder be
entitled to exercise this Warrant to the extent that (a) the number of shares of
Common Stock beneficially owned by such holder and its affiliates (other than
shares of Common Stock which may be deemed beneficially owned through the
ownership of the unexercised portion of this Warrant or the unexercised or
unconverted portion of any other securities of the Company (including the
Company's Series A Redeemable Convertible Preferred Stock) subject to a
limitation on conversion or exercise analogous to the limitation contained
herein) and (b) the number of shares of Common Stock issuable upon exercise of
this Warrant (or portion thereof) with respect to which the determination
described herein is being made, would result in beneficial ownership by such
holder and its affiliates of more than 4.99% of the outstanding shares of Common
Stock. For purposes of the immediately preceding sentence, beneficial ownership
shall be determined in accordance with Section 13(d) of the Securities Exchange
Act of 1934, as amended, and Regulation 13D-G thereunder, except as otherwise
provided in clause (a) hereof. Except as provided in the immediately succeeding
sentence, the restrictions set forth above in this paragraph may not be amended
without the consent of the holder of this Warrant and the holders of a majority
of the Company's then outstanding Common Stock. The holder hereof may waive the
restrictions set forth above by written notice to the Company upon not less than
sixty one (61) days prior notice (with such waiver taking effect only upon the
expiration of such sixty one (61) day notice period).
<PAGE> 2
This Warrant is one of the Warrants (the "WARRANTS") issued pursuant to
Section 1 of that certain Securities Purchase Agreement dated as of October __,
1997, among the Company and the Buyers referred to therein (the "PURCHASE
AGREEMENT").
The resale of the shares of Common Stock or other securities issuable upon
exercise or exchange of this Warrant is subject to the provisions of the
Registration Rights Agreement of even date herewith (the "REGISTRATION RIGHTS
AGREEMENT") by and between the Company and the Investor, as well as applicable
federal and state securities laws.
1. (a) The rights represented by this warrant may be exercised by the holder
hereof, in whole or part (but not as to a fractional share of Common Stock), by
delivery of written notice in the form of Exhibit A attached hereto, the
surrender of this Warrant (properly endorsed if required) at the office of the
Company (or such other office or agency of the Company as it may designate by
notice in writing to the holder hereof at the address of such holder appearing
on the books of the Company at any time within the period above named) and upon
payment to it by certified check, cashiers check or wire transfer of the
Exercise Price of such shares. In the event of any exercise of the rights
represented by this Warrant, certificates for the shares of Common Stock as
purchased shall be delivered to the holder hereof at the Company's expense
(including, without limitation, the payment by it of any applicable stock
transfer or stock issuance tax) within three (3) business days, after the rights
represented by this Warrant shall have been so exercised, and, unless this
Warrant has expired, a new Warrant representing the number of shares of Common
Stock, if any, with respect to which this Warrant shall not then have been
exercised shall also be issued to the holder hereof within such time. The holder
thereof shall be deemed for all corporate purposes to have become the holder of
record of such shares of Common Stock immediately prior to the close of business
on the date on which the Warrant is surrendered and payment of the amount due in
respect of such exercise and any applicable taxes is made, irrespective of the
date of delivery of certificates evidencing such shares of Common Stock, except
that, if the date of such surrender and payment is a date when the stock
transfer books of the Company are properly closed, such person shall be deemed
to have become the holder of such Warrant Shares at the opening of business on
the next succeeding date on which the stock transfer books are open. In the
event that the exercise of this Warrant, in full or in part, would result in the
issuance of any fractional shares of Common Stock, then in such event the number
of shares to be issued shall be rounded up or down to the nearest whole share
and no fractional shares shall be issued.
(b) In the case of a dispute as to the determination of the Exercise Price
of this Warrant or the last reported sale price (as reported by Bloomberg) of a
security or the arithmetic calculation of the shares of Common Stock to be
received upon exercise, the Company shall promptly issue to the holder the
number of shares of Common Stock that is not disputed and shall submit the
disputed determinations or arithmetic calculations to the holder via facsimile
within one business day of receipt of the holder's subscription notice. If the
holder and the Company are unable to agree upon any such disputed item within
one day of such disputed determination or arithmetic calculation being submitted
to the holder,
-2-
<PAGE> 3
then the Company shall immediately submit via facsimile the disputed
determination or arithmetic calculation to its independent, outside accountant.
The Company shall cause the accountant to perform the determinations or
calculations and notify the Company and the holder of the results no later than
forty-eight (48) hours from the time it receives the disputed determinations or
calculations. Such or accountant's determination shall be deemed conclusive
absent manifest error.
(c) If the Company shall fail for any reason or for no reason to issue to
the holder on a timely basis as described in this Section 1, a certificate for
the number of shares of Common Stock to which the holder is entitled upon the
holder's exercise of this Warrant or a new Warrant for the number of shares of
Common Stock to which such holder is entitled pursuant to paragraph 1(a) hereof,
the Company shall, in addition to any other remedies under this Warrant or the
Purchase Agreement or otherwise available to such holder, including any
indemnification under Section 8 of the Purchase Agreement, pay as additional
damages in cash to such holder on each day that such exercise is not timely
effected in an amount equal to 1% of the product of (A) the sum of the number of
shares of Common Stock not issued to the holder on a timely basis and to which
the holder is entitled and, in the event the Company has failed to timely
deliver a new Warrant, the number of shares represented by the portion of this
Warrant which is not being converted, as the case may be, and (B) the highest
Closing Bid Price (as defined in the Company's Certificate of Designations) of
the Company's Common Stock from the time the holder delivered its exercise
notice to the Company to the time the Company properly delivers such shares of
Common Stock to the holder.
(d) The Company will not, by amendment of its Certificate of Incorporation
or through any reorganization, transfer of assets, consolidation, merger,
dissolution, issue or sale of securities, or any other voluntary action, avoid
or seek to avoid the observance or performance of any of the terms to be
observed or performed by it hereunder, but will at all times in good faith
assist in the carrying out of all the provisions of this Warrant and in the
taking of all such action as may reasonably be requested by the holder of this
Warrant in order to protect the exercise privilege of the holder of this Warrant
against dilution or other impairment, consistent with the tenor and purpose of
this Warrant. No impairment of the designations, preferences and rights of the
Preferred Shares contained in the Company's Certificate of Designations or any
waiver thereof which has an adverse effect on the rights granted hereunder shall
be given effect until the Company has taken appropriate action (satisfactory to
the holders of all of the Warrants) to avoid such adverse effect with respect to
this Warrant. Without limiting the generality of the foregoing, the Company (i)
will not increase the par value of any shares of Common Stock receivable upon
the exercise of this Warrant above the Exercise Price then in effect, and (ii)
will take all such actions as may be necessary or appropriate in order that the
Company may validly and legally issue fully paid and nonassessable shares of
Common Stock upon the exercise of this Warrant.
2. The Company represents and warrants that this Warrant has been duly
authorized and validly issued and is enforceable against the Company in
accordance with its terms (except as such enforceability may be limited by
bankruptcy, insolvency or other laws affecting
-3-
<PAGE> 4
creditors' rights, whether at law or in equity). The Company covenants and
agrees that all shares of Common Stock which may be issued upon the exercise of
the rights represented by this Warrant will, upon issuance, be fully paid and
non-assessable and free of from taxes, liens and charges with respect to the
issue thereof (other than taxes in respect of any transfer occurring
contemporaneously with such issue). The Company further covenants and agrees
that during the period within which the rights represented by this Warrant may
be exercised, the Company will at all times have authorized, and reserved, a
sufficient number of shares of Common Stock to provide for the exercise of the
rights represented by this Warrant and will at its expense expeditiously upon
each such reservation of shares procure the listing thereof (subject to issuance
of notice of issuance) on all stock exchanges, if any, on which such shares are
then listed. The Company further covenants and agrees that the Company shall
maintain the listing of any shares of Common Stock issuable upon the exercise of
this Warrant if and so long as any Warrant is outstanding or any shares of
Common Stock issued upon exercise of any Warrant are held by an Investor or any
transferee of an Investor (unless the Common Stock is de-listed pursuant to
Section 3(g) of the Certificate of Designations).
3. The above provisions are, however, subject to the following:
(a) In the event that the Company shall declare any dividend or other
distribution upon its outstanding Common Stock payable in Common Stock or shall
subdivide its outstanding shares of Common Stock into a greater number of
shares, then the number of shares of Common Stock which may thereafter be
purchased upon the exercise of the rights represented hereby shall be increased
in proportion to the increase through such dividend or subdivision and the
Exercise Price per share shall be decreased in such proportion. In the event
that the Company shall at any time combine the outstanding shares of its Common
Stock into a smaller number of shares, the number of shares of Common Stock
which may thereafter be purchased upon the exercise of the rights represented
hereby shall be decreased in proportion to the decrease through such combination
and the Exercise Price per share shall be increased in such proportion.
(b) In the event that the Company shall declare a dividend upon the
Common Stock payable otherwise than out of earnings or surplus (other than
paid-in surplus) or otherwise than in Common Stock, the Exercise Price per share
in effect immediately prior to the declaration of such dividend shall be reduced
by an amount equal, in the case of a dividend in cash, to the amount thereof
payable per share of the Common or, in the case of any other dividend, to the
fair value thereof share of the Common Stock as determined by the Board of
Directors of the Company. For the purposes of the foregoing a dividend other
than in cash shall be considered payable out of earnings or surplus (other
paid-in surplus) only to the extent that such earnings or surplus are charged an
amount equal to the fair value of such dividend as determined by the Board of
Directors of the Company. Such reductions shall take effect as of the date on
which a record is taken for the purpose of such dividend, or, if a record is not
taken, the date as of which the holders of Common Stock of record entitled to
such dividend are to be determined.
-4-
<PAGE> 5
(c) If any capital reorganization or reclassification of the Common
Stock of the Company, or consolidation or merger of the Company with another
corporation, or the sale of all or substantially all of its assets to another
corporation shall be effected, then, as a condition of such reorganization,
reclassification, consolidation, merger sale, lawful and adequate provision
shall be made whereby the holder hereof shall thereafter have the right to
purchase and receive upon the basis and upon the terms and conditions specified
in this Warrant and in lieu of the shares of the Common Stock of the Company
immediately theretofore purchasable and receivable upon the exercise of the
rights represented hereby, such shares of stock, securities or assets as may be
issued or payable with respect to or in exchange for a number of outstanding
shares of such Common Stock equal to the number of shares of such Common Stock
immediately theretofore purchasable and receivable upon the exercise of the
rights represented hereby had such reorganization, reclassification,
consolidation, merger or sale not taken place, and in any such case appropriate
provision shall be made with respect to the rights and interests of the holder
of this Warrant to the end that the provisions hereof (including without
limitation provisions for adjustment of the Exercise Price per share and of the
number of shares of Common Stock purchasable upon the exercise of this Warrant)
shall thereafter be applicable, as nearly as may be in relation to any shares of
stock, securities or assets thereafter deliverable upon the exercise hereof. The
Company shall not effect any such consolidation, merger or sale, unless prior to
or simultaneously with the consummation thereof the successor corporation (if
other than the Company) resulting from such consolidation or merger or the
corporation purchasing such assets shall assume by written instrument executed
and mailed or delivered to the holder hereof at the last address of such holder
appearing on the books of the Company, the obligation to deliver to such holder
such shares of stock, securities or assets as, in accordance with the foregoing
provisions, such holder may be entitled to purchase. Any such shares of stock,
securities or assets which the holder hereof may be entitled to purchase
pursuant to this paragraph (c) shall be included within the term "COMMON STOCK"
as used herein.
(d) Upon any adjustment of the number of shares of Common Stock which
may be purchased upon the exercise of the rights represented hereby and/or of
the Exercise Price per share, then and in each such case the Company shall give
written notice thereof, by first class mail, postage prepaid, addressed to the
holder of this Warrant at the address of such holder as shown on the books of
the Company, which notice shall state the Exercise Price per share resulting
from such adjustment and the increase or decrease, if any, in the number of
shares purchasable at such price upon the exercise of this Warrant, setting
forth in reasonable detail the method of calculation and the facts upon which
such calculation is based.
(e) In case at any time:
(i) the Company shall pay any dividend payable in stock upon its
Common Stock or make any distribution (other than regular cash
dividends paid at an established annual rate) to the holders of its
Common Stock;
(ii) the Company shall offer for subscription pro rata to the
holders of its common stock any additional shares of stock of any
class or other rights;
-5-
<PAGE> 6
(iii) there shall be any capital reorganization or reclassification of the
Common Stock of the Company, or consolidation or merger of the Company
with, or sale of all or substantially all of its assets to, another
corporation; or
(iv) there shall be a voluntary or involuntary dissolution, liquidation or
winding up of the Company;
then, in any one or more of such cases, the Company shall give to the holders of
this warrant:
(aa) at least twenty days' prior written notice of the date on which the
books of the Company shall close or a record shall be taken for such
dividend, distribution or subscription rights or for determining rights to
vote in respect of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up; and,
in the case of any such dividend, distribution or subscription rights such
notice shall also specify the date on which the holders of Common Stock
shall be entitled thereto; and
(bb) in the case of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up, at
least twenty days' prior written notice of the date when the same shall
take place, and said notice shall also specify the date on which the
holders of Common Stock shall be entitled to exchange their Common Stock
for securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up, as the case may be; and,
(cc) each such written notice shall be given by first class mail, postage
prepaid, addressed to the holder of this Warrant at the address of such
holder as shown on the books of the Company.
4. This Warrant shall be transferable only on the books of the Company by the
holder hereof in person, or by duly authorized attorney on surrender of this
Warrant properly assigned.
5. The holder represents that this Warrant is being acquired with no present
intention of selling or distributing any Common Stock received upon the exercise
hereof, unless registered under Federal and applicable state laws or pursuant to
an exemption from such registration.
6. Neither this Warrant, nor the shares of Common Stock issuable hereunder, have
been registered under the Securities Act of 1933, as amended (the "SECURITIES
ACT"), or the laws of any other jurisdiction, and neither this Warrant nor the
Warrant shares may be offered, sold, transferred, pledged, hypothecated or
otherwise disposed of unless so registered, or unless an exemption from
registration is available pursuant to law.
-6-
<PAGE> 7
The sale, assignment or other disposition of this Warrant and the shares
of Common Stock issuable hereunder are further restricted by Rule 144,
promulgated by the Securities and Exchange Commission.
The certificate or certificates representing the Common Stock issued upon
the exercise of this Warrant will bear and be subject to a legend in
substantially the following form:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 (THE "ACT") OR UNDER THE SECURITIES LAWS OF
ANY STATE AND MAY BE OFFERED AND SOLD ONLY IF REGISTERED PURSUANT TO THE
PROVISIONS OF THE ACT AND APPLICABLE STATE SECURITIES LAWS OR AVAILABLE
EXEMPTION FROM SUCH REGISTRATION."
7. The corporation laws of the State of Delaware shall govern all issues
concerning the relative rights of the Company and its stockholders. All other
questions concerning the construction, validity, enforcement and interpretation
of this Warrant shall be governed by the internal law of the State of New York,
without giving effect to any choice of law or conflict of law provision or rule
(whether of the State of New York or any other jurisdictions) that would cause
the application of the laws of any jurisdictions other than the State of New
York.
8. This Warrant shall be deemed an original even in the event it shall be a
carbon copy or shall be mechanically reproduced, so long as it bears the
original signatures of the designated corporate officers.
9. This Warrant may be assigned at any time, in whole or in part, to an
affiliate of the holder hereof without the consent of the Company. Assuming the
conditions of Section 6 above regarding registration or exemption have been
satisfied, the holder may sell, transfer, assign, pledge or otherwise dispose of
this Warrant, in whole or in part. The holder shall deliver a written notice to
the Company, substantially in the form of the Assignment attached hereto as
Exhibit B, indicating the person or persons to whom the Warrant shall be
assigned and the respective number of warrants to be assigned to each assignee.
The Company shall effect the assignment within ten (10) days, and shall deliver
to the assignee(s) designated by the holder a Warrant or Warrants of like tenor
and terms for the appropriate number of shares.
-7-
<PAGE> 8
10. Any notice or other communication required or permitted to be given
hereunder shall be in writing and shall be effective (a) upon hand delivery or
delivery by facsimile at the address or number designated below (if delivered on
a business day during normal business hours where such notice is to be
received), or the first business following such delivery (if delivered other
than on a business day during normal business hours where such notice is to be
received) or (b) on the second business day following the date of mailing by
express courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses for
such communications shall be:
to the Company: Zila, Inc.
5227 North 7th Street
Phoenix, AZ 85014-2800
Attention: Mr. Joseph Hines
Facsimile No.: 602/234-2264
to the Investor at the address or facsimile number set forth below on the
signature page hereto.
Either party hereto may from time to time change its address or facsimile number
for notices under this Section 10 by giving prior written notice of such change
in the manner provided for giving notice as set forth herein.
11. This Warrant and any term hereof may be changed, waived, discharged or
terminated only by an instrument in writing signed by the party against which
enforcement of such change, waiver, discharge or termination is sought. The
invalidity or unenforceability of any provision hereof shall in no way affect
the validity or enforceability of any other provision.
12. The holder shall deliver to the Company, along with the original Warrant,
the "Form of Warrant Exercise" in order to exercise the Warrant, attached hereto
as Exhibit A.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officers as of the 17th day of October, 1997, the original
issue date.
ZILA, INC.
/s/ Joseph Hines
------------------------
Joseph Hines
President
ATTEST:
/s/ Janice L. Backus
- -----------------------------
Janice L. Backus
Corporate Secretary
-8-
<PAGE> 9
EXHIBIT A
FORM OF WARRANT EXERCISE
I/we hereby exercise Zila, Inc. Common Stock Purchase Warrant #_________________
(a) Number of shares of Zila common stock
covered in Purchase Warrant #___________ #_________________
(b) Total Exercise price ($______ per share) #_________________
__________________________________ ________________________________
Signature Social Security No.
_______________________________________________
Name (please print)
________________________________________________________________
Address
________________________________________________________________
_____________________________________________
Telephone Number
I wish to register my shares of Zila Common stock as follows:
a. ( ) Individual Ownership
b. ( ) Husband and Wife as Community Property
c. ( ) Joint Tenants w/Right to Survivorship (JTROS)
d. ( ) Tenants in Common
e. ( ) Other _______________________________________________
Dated: ________________________________19_______.
-9-
<PAGE> 10
EXHIBIT B
FORM OF ASSIGNMENT
(To be executed by the registered Warrant Holder desiring to transfer the
Warrant)
FOR VALUED RECEIVED, the undersigned holder of the attached Warrant hereby
sells, assigns and transfers unto the persons below named the right to purchase
________________ shares of the Common Stock of Zila, Inc. evidenced by the
attached Warrant and does hereby irrevocably constitute and appoints Zila's
Corporate Secretary to transfer the said Warrant on the books of the Company,
with full power of substitution in the premises.
Dated: __________________________ 19 ____
_________________________________________
Signature
Fill in for new Registration of Warrant:
_________________________________________
Name
_________________________________________
Address
_________________________________________
_________________________________________
Please print name and address of assignee
(including zip code number)
NOTICE: The signature to the foregoing Assignment must correspond to the name as
written upon the face of the attached Warrant in every particular, without
alteration or enlargement or any change whatsoever.
-10-
<PAGE> 1
Exhibit 10.E
ZILA, INC.
1997 STOCK OPTION AWARD PLAN
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 appointed by the Board to
administer the Plan as referred to in Section 4.
(e) "Commission" means the Securities and Exchange Commission or any
successor agency.
(f) "Company" means Zila, Inc., a Delaware corporation.
(g) "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 as referred to in Section 7.
(h) "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.
(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
<PAGE> 2
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 any Option intended to be and
designated as an "incentive stock option" within the meaning of Section
422 of the Code.
(m) "Non-Employee Director" means a member of the Board who
qualifies as a "Non-employee Director" as defined in Rule 16b-3, as
promulgated by the Commission under the Exchange Act or any successor
definition adopted by the Commission.
(n) "Non-Qualified Options" means an Option which is not an
Incentive Stock Option
(o) "Normal Termination" means termination at retirement pursuant to
the Company or Subsidiary retirement plan then in effect.
(p) "Option" means an award granted under Section 6 of the Plan and
includes both Non-Qualified Options and Incentive Stock Options.
(q) "Plan" means the Zila, Inc. 1996 Stock Option Award Plan.
(r) "Securities Act" means the Securities Act of 1933, as amended
from time to time, and the rules and regulations promulgated thereunder.
(s) "Share" means a share of Stock.
(t) "Stock" means common stock of the Company as described in the
Certificate of Incorporation.
(u) "Subsidiary" means "subsidiary corporation" as defined in
Section 424(f) of the Code.
(v) "Termination" means separation from employment with the Company
or any of its Subsidiaries for any reason except due to death.
(w) "Treasury" means the Department of the Treasury of the United
States of America.
- 2 -
<PAGE> 3
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 Non-Qualified 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 February 5, 1997. The grant of any Incentive
Stock Options under the Plan is effective only upon the approval of the Plan by
the stockholders. 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 granted under the Plan and administration of
the Plan have been settled.
4. ADMINISTRATION.
The Plan shall be administered by the Board or a Committee appointed by
the Board in accordance with Rule 16b-3 of the Exchange Act ("Rule 16b-3"). Any
Committee which has been delegated the duty of administering the Plan by the
Board shall be composed of two or more persons each of whom (i) is a
Non-Employee Director and (ii) is an "outside director" as defined in Section
162(m)(4) of the Code. To the extent reasonable and practicable, the Plan shall
be consistent with the provisions of Rule 16b-3 to the degree necessary to
ensure that transactions authorized pursuant to the Plan are 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
- 3 -
<PAGE> 4
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 1,000,000.
(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 or retained 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 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 Options to be granted. Non-Employee Directors shall not be eligible to
receive Options under the Plan.
7. STOCK OPTIONS.
Stock Options under the Plan may be of two types: Incentive Stock Options
and Non-Qualified Options. Any Stock Option granted under the Plan will be in
such form as the Board may from time to time approve.
The Board will have the authority to grant any optionee Incentive Stock
Options, Non-Qualified Options or both types of Options. Incentive Stock Options
may only be granted to Eligible Employees. To the extent that any Option is not
designated as an Incentive Stock Option or even
- 4 -
<PAGE> 5
if so designated does not qualify as an Incentive Stock Option, it will be
deemed to be a Non-Qualified Option.
Options will be evidenced by Option agreements, the terms and provisions
of which may differ. An Option agreement will indicate on its face whether it is
an agreement for an Incentive Stock Option, a Non-Qualified Option, or both. The
Date of Grant of an Option will be the date the Committee by resolution selects
an individual to be a participant in any grant of an Option, determines the
number of Shares to be subject to such Option to be granted to such individual
and specifies the terms and provisions of the Option. The Company will notify a
participant of any grant of an Option, and a written option agreement or
agreements shall be duly executed and delivered by the Company to the
participant.
Anything in the Plan to the contrary notwithstanding, no term of the Plan
relating to Incentive Stock Options will be interpreted, amended or altered nor
shall any discretion or authority granted under the Plan be exercised so as to
disqualify the Plan under Section 422 of the Code or, without the consent of the
optionee, to disqualify any Incentive Stock Option under such Section 422.
Options granted under the Plan will be subject to the following terms and
conditions and will contain such additional terms and conditions as the
Committee shall deem desirable:
(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 at the
Date of Grant in the case of Incentive Stock Options (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). The Option price per Share for Shares to be
issued pursuant to exercise of a Non-Qualified 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) withheld Shares upon exercise of an Option 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, (iii) with Shares owned by the
Holder upon exercise of an Option 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, 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
- 5 -
<PAGE> 6
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, three months after Normal
Termination, twelve months after the date of Termination if due to
permanent disability, 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, that 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.
(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.
- 6 -
<PAGE> 7
(iv) An unexpired Option shall become immediately exercisable
(1) automatically on the Holder's Normal Termination, (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 then in effect, 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 an 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.
(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.
(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
- 7 -
<PAGE> 8
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 under 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
- 8 -
<PAGE> 9
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.
(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.
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.
- 9 -
<PAGE> 10
(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 422 of the Code.
As approved by the Board of Directors as of February 5, 1997.
/s/ Joseph Hines
---------------------------------
JOSEPH HINES
Chairman
ATTEST:
/s/ Janice L. Backus
---------------------------------
JANICE L. BACKUS
Secretary
- 10 -
<PAGE> 1
Exhibit 10.N
SECURITIES PURCHASE AGREEMENT
SECURITIES PURCHASE AGREEMENT (the "AGREEMENT"), dated as of October
17, 1997, by and among Zila, Inc., a Delaware corporation, with headquarters
located at 5227 North Seventh Street, Phoenix, Arizona 85014-2800 (the
"COMPANY"), and the investors listed on the Schedule of Buyers attached hereto
(individually, a "BUYER" and collectively, the "BUYERS").
WHEREAS:
A. The Company and the Buyers are executing and delivering this
Agreement in reliance upon the exemption from securities registration afforded
by Rule 506 of Regulation D ("REGULATION D") as promulgated by the United States
Securities and Exchange Commission (the "SEC") under the Securities Act of 1933,
as amended (the "1933 ACT");
B. The Company has authorized the following new series of its Preferred
Stock, par value $.001 per share (the "PREFERRED STOCK"): the Company's Series A
Redeemable Convertible Preferred Stock (the "PREFERRED SHARES"), which shall be
convertible into shares of the Company's Common Stock, par value $.001 per share
(the "COMMON STOCK") (as converted, the "CONVERSION SHARES"), in accordance with
the terms of the Company's Certificate of Designations, Preferences and Rights
of the Preferred Shares, substantially in the form attached hereto as Exhibit A
(the "CERTIFICATE OF DESIGNATIONS");
C. The Buyers wish to purchase, upon the terms and conditions stated in
this Agreement, an aggregate of 30,000 units (the "Units"), each Unit consisting
of (i) one (1) Preferred Share and (ii) warrants, in substantially the form
attached hereto as Exhibit E (the "WARRANTS"), to acquire 12 shares of Common
Stock for each Preferred Share purchased, which Warrants shall expire three
years after the date of issuance;
D. Contemporaneously with the execution and delivery of this Agreement,
the parties hereto are executing and delivering a Registration Rights Agreement
substantially in the form attached hereto as Exhibit B (the "REGISTRATION RIGHTS
AGREEMENT") pursuant to which the Company has agreed to provide certain
registration rights under the 1933 Act and the rules and regulations promulgated
thereunder, and applicable state securities laws.
<PAGE> 2
NOW THEREFORE, the Company and the Buyers hereby agree as follows:
1. PURCHASE AND SALE OF UNITS.
a. Purchase of Units. The Company agrees to issue and sell to
each Buyer and each Buyer agrees to purchase from the Company such number of
Units as is set forth opposite each Buyer's name on the Schedule of Buyers. The
purchase price (the "PURCHASE PRICE") per Unit shall be $1,000. Each Buyer's
obligation to purchase Units hereunder is distinct and separate from each other
Buyer's obligation to purchase Units and no Buyer shall be required to purchase
hereunder more than the number of Units set forth opposite such Buyer's name on
the Schedule of Buyers notwithstanding any failure by any other Buyer to
purchase Units hereunder.
b. Form of Payment. Within three (3) calendar days after the
date the Company and the Buyers execute and deliver this Agreement, (i) each
Buyer shall deposit the Purchase Price with the escrow agent (the "ESCROW
AGENT") identified in the Escrow Agreement, a form of which is attached hereto
as Exhibit F (the "ESCROW AGREEMENT"), for the Preferred Shares to be issued and
sold to such Buyer pursuant to the Escrow Agreement, by wire transfer of
immediately available funds in accordance with the Escrow Agent's written wire
instructions, and (ii) the Company shall deliver to the Escrow Agent stock
certificates (in the denominations as each Buyer shall request) (the "STOCK
CERTIFICATES") representing such number of the Preferred Shares which such Buyer
will purchase (as indicated opposite such Buyer's name on the Schedule of
Buyers), and the related Warrants, duly executed on behalf of the Company and
registered in the name of such Buyer or its designee. By signing this Agreement,
the Company and the Buyers agree to all of the terms and conditions of, and
become parties to, the Escrow Agreement, all of the provisions of which are
incorporated herein by this reference as if set forth in full. If the written
notices contemplated by Section 2(b) of the Escrow Agreement are not received by
the Escrow Agent by the end of the Escrow Period (as defined in the Escrow
Agreement), then pursuant to Section 2(b) of the Escrow Agreement the Escrow
Agent shall deliver to each Buyer seven (7) Warrants for each Unit set forth
opposite such Buyer's name on the Schedule of Buyers (the "BREAK-UP WARRANTS").
c. The Closing Date. This transaction shall be closed in
escrow (the "CLOSING") pursuant to the Escrow Agreement. The date and time of
the Closing (the "CLOSING DATE") shall be 10:00 a.m. Central Time, within three
(3) calendar days following the date hereof (or such later date as is mutually
agreed to by the Company and the Buyers). The Closing shall occur on the Closing
Date at the offices of Katten Muchin & Zavis, 525 West Monroe Street, Suite
1600, Chicago, Illinois 60661-3693. The date on which all of the conditions set
forth in Sections 6 and 7 below are satisfied is referred to herein as the
"Escrow Release Date."
2. BUYER'S REPRESENTATIONS AND WARRANTIES.
Each Buyer represents and warrants with respect to only itself
that:
-2-
<PAGE> 3
a. Investment Purpose. Such Buyer is acquiring the Preferred
Shares and the Warrants for its own account for investment only and not with a
present view towards, or for resale in connection with, the public sale or
distribution thereof, except pursuant to sales registered or exempted under the
1933 Act; provided, however, that by making the representations herein, such
Buyer does not agree to hold any of the Preferred Shares or Warrants for any
minimum or other specific term and reserves the right to dispose of the
Preferred Shares and Warrants at any time in accordance with or pursuant to a
registration statement or an exemption under the 1933 Act.
b. Accredited Investor Status. Such Buyer is an "accredited
investor" as that term is defined in Rule 501(a)(3) of Regulation D.
c. Reliance on Exemptions. Such Buyer understands that the
Preferred Shares and Warrants are being offered and sold to it in reliance on
specific exemptions from the registration requirements of United States federal
and state securities laws and that the Company is relying in part upon the truth
and accuracy of, and such Buyer's compliance with, the representations,
warranties, agreements, acknowledgments and understandings of such Buyer set
forth herein in order to determine the availability of such exemptions and the
eligibility of such Buyer to acquire such Preferred Shares and Warrants.
d. Information. Such Buyer and its advisors, if any, have been
furnished with all materials relating to the business, finances and operations
of the Company and materials relating to the offer and sale of the Units, the
Preferred Shares, the Conversion Shares, the Warrants and the Warrant Shares [as
defined in Section 2(g) below] (collectively, the "SECURITIES") which have been
requested by such Buyer. Such Buyer and its advisors, if any, have been afforded
the opportunity to ask questions of the Company and have received what such
Buyer believes to be satisfactory answers to any such inquiries. Neither such
inquiries nor any other due diligence investigations conducted by such Buyer or
its advisors, if any, or its representatives shall modify, amend or affect such
Buyer's right to rely on the Company's representations and warranties contained
in Section 3 below.
e. No Governmental Review. Such Buyer understands that no
United States federal or state agency or any other government or governmental
agency has passed on or made any recommendation or endorsement of the Securities
or the fairness or suitability of the investment in the Securities nor have such
authorities passed upon or endorsed the merits of the offering of the
Securities.
f. Transfer or Resale. Such Buyer understands that (i) except
as provided in the Registration Rights Agreement, the sale or resale of the
Securities have not been and are not being registered under the 1933 Act or any
state securities laws, and the Securities may not be offered for sale, sold,
assigned or transferred unless (A) the resale of the Securities has been
registered thereunder, (B) such Buyer shall have delivered to the Company an
opinion of counsel (which opinion shall be in form, substance and scope
customary for opinions of counsel in comparable transactions) to the effect that
such Securities to be sold, assigned or transferred may
-3-
<PAGE> 4
be sold, assigned or transferred pursuant to an exemption from such
registration, (C) such Buyer provides the Company with reasonable assurance that
such Securities can be sold, assigned or transferred under Rule 144 promulgated
under the 1933 Act (or a successor rule thereto) ("RULE 144"), or (D) sold or
transferred to an affiliate of such Buyer who agrees to sell or otherwise
transfer the Securities only in accordance with the provisions of this Section
2(f) and who is an Accredited Investor; (ii) any sale of the Securities made in
reliance on Rule 144 may be made only in accordance with the terms of Rule 144
and further, if Rule 144 is not applicable, any resale of the Securities under
circumstances in which the seller (or the person through whom the sale is made)
may be deemed to be an underwriter (as that term is defined in the 1933 Act) may
require compliance with some other exemption under the 1933 Act or the rules and
regulations of the SEC thereunder; and (iii) neither the Company nor any other
person is under any obligation to register such Securities under the 1933 Act or
any state securities laws or to comply with the terms and conditions of any
exemption thereunder (other than pursuant to the Registration Rights Agreement).
g. Legends. Such Buyer understands that the certificates or
other instruments representing the Preferred Shares and the Warrants and, until
such time as the sale of the Conversion Shares and the Common Stock issuable
upon exercise of the Warrants (the "Warrant Shares") has been registered under
the 1933 Act as contemplated by the Registration Rights Agreement or otherwise
may be sold by such Buyer under Rule 144, the stock certificates representing
the Conversion Shares and the Warrant Shares, except as set forth below, shall
bear a restrictive legend in substantially the following form (and a
stop-transfer order may be placed against transfer of such stock certificates):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE
SECURITIES LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND
MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED IN THE
ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES
LAWS, OR AN OPINION OF COUNSEL, IN FORM, SUBSTANCE AND SCOPE CUSTOMARY
FOR OPINIONS OF COUNSEL IN COMPARABLE TRANSACTIONS, THAT REGISTRATION
IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE STATE SECURITIES LAWS OR
UNLESS SOLD PURSUANT TO RULE 144 UNDER SAID ACT.
The legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of the Securities upon which it is
stamped, if, unless otherwise required by state securities laws, (i) the sale of
such Securities is registered under the 1933 Act (including registration
pursuant to Rule 416 thereunder) as contemplated by the Registration Rights
Agreement), (ii) in connection with a sale transaction, such holder provides the
Company with an opinion of counsel, in form, substance and scope customary for
opinions of counsel in
-4-
<PAGE> 5
comparable transactions, to the effect that a public sale, assignment or
transfer of such Securities may be made without registration under the 1933 Act,
or (iii) such holder provides the Company with reasonable assurances that such
Securities can be sold under Rule 144 without any restriction as to the number
of securities acquired as of a particular date that can then be immediately
sold. Each Buyer acknowledges, covenants and agrees to sell the Securities
represented by a certificate(s) from which the legend has been removed, only
pursuant to (i) a registration statement effective under the 1933 Act, or (ii)
advice of counsel that such sale is exempt from registration required by Section
5 of the 1933 Act.
h. Authorization; Enforcement. This Agreement has been duly
and validly authorized, executed and delivered on behalf of such Buyer and is a
valid and binding agreement of such Buyer enforceable in accordance with its
terms, subject as to enforceability to general principles of equity and to
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation and
other similar laws relating to, or affecting generally, the enforcement of
applicable creditors' rights and remedies.
i. Residency. Such Buyer is a resident of that jurisdiction
specified in its address on the Schedule of Buyers.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to each of the Buyers
that:
a. Organization and Qualification. The Company and each of its
subsidiaries (a complete list of which is set forth in Schedule 3(a)) is a
corporation duly organized and validly existing in good standing under the laws
of the jurisdiction in which it is incorporated, and has the requisite corporate
power to own their properties and to carry on their business as now being
conducted. Each of the Company and its subsidiaries is duly qualified as a
foreign corporation to do business and is in good standing in every jurisdiction
in which the nature of the business conducted by it makes such qualification
necessary, except to the extent that the failure to be so qualified or be in
good standing would not have a Material Adverse Effect. As used in this
Agreement, "MATERIAL ADVERSE EFFECT" means any material adverse effect on (i)
the business, properties, assets, operations, results of operations, financial
condition or prospects of the Company and its subsidiaries, if any, taken as a
whole, (ii) the Securities or (iii) the ability of the Company to perform its
obligations hereunder or under the Certificate of Designations, the Warrants or
the Registration Rights Agreement.
b. Authorization; Enforcement; Compliance with Other
Instruments. (i) The Company has the requisite corporate power and authority to
enter into and perform this Agreement, the Warrants, the Registration Rights
Agreement and each of the other agreements entered into by the parties hereto in
connection with the transactions contemplated by this Agreement (collectively,
the "TRANSACTION DOCUMENTS"), and to issue and sell the Securities in accordance
with the terms hereof and thereof, (ii) the execution, delivery and performance
of the Transaction Documents and the Certificate of Designations by the Company
and the
-5-
<PAGE> 6
consummation by it of the transactions contemplated hereby and thereby,
including without limitation the issuance of the Preferred Shares and the
Warrants and the reservation for issuance and the issuance of the Conversion
Shares and the Warrant Shares issuable upon conversion or exercise thereof, have
been duly authorized by the Company's Board of Directors and no further consent
or authorization is required by the Company, its Board of Directors or its
stockholders, (iii) the Transaction Documents have been duly executed and
delivered by the Company, (iv) the Transaction Documents constitute the valid
and binding obligations of the Company enforceable against the Company in
accordance with their terms, except as such enforceability may be limited by
general principles of equity or applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally, the enforcement of creditors' rights and remedies, and (v)
prior to the Closing Date, the Certificate of Designations shall have been filed
with the Secretary of State of the State of Delaware and will be in full force
and effect, enforceable against the Company in accordance with its terms.
c. Capitalization. As of the date hereof, the authorized
capital stock of the Company consists of (i) 50,000,000 shares of Common Stock,
of which as of the date hereof, 32,583,647 shares were issued and outstanding,
3,256,515 shares are reserved for issuance pursuant to the Company's stock
option and purchase plans and 4,447,278 shares are reserved for issuance
pursuant to securities (other than pursuant to the Company's stock option and
purchase plans and other than upon conversion or exercise, as applicable, of the
Preferred Shares and the Warrants) exercisable or exchangeable for, or
convertible into, shares of Common Stock and (ii) 2,500,000 shares of Preferred
Stock, of which as of the date hereof, no shares were issued and outstanding.
All of such outstanding shares have been, or upon issuance in accordance with
the terms of any such options, warrants or other securities, will be, validly
issued, fully paid and nonassessable. Except as disclosed in this Section 3(c)
or in Schedule 3(c), no shares of Common Stock or Preferred Stock are subject to
preemptive rights or any other similar rights or any liens or encumbrances
suffered or permitted by the Company. Except as disclosed in this Section 3(c)
or in Schedule 3(c), as of the effective date of this Agreement, (i) there are
no outstanding options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into, any shares of capital stock of the Company or any of its
subsidiaries, or contracts, commitments, understandings or arrangements by which
the Company or any of its subsidiaries is or may become bound to issue
additional shares of capital stock of the Company or any of its subsidiaries or
options, warrants, scrip, rights to subscribe to, calls or commitments of any
character whatsoever relating to, or securities or rights convertible into, any
shares of capital stock of the Company or any of its subsidiaries, (ii) there
are no outstanding debt securities, (iii) there are no agreements or
arrangements under which the Company or any of its subsidiaries is obligated to
register the sale of any of their securities under the 1933 Act (except the
Registration Rights Agreement) and (iv) there are no outstanding securities of
the Company or any of its subsidiaries which contain any redemption or similar
provisions, and there are no contracts, commitments, understandings or
arrangements by which the Company or any of its subsidiaries is or may become
bound to redeem a security of the Company or any of its subsidiaries. Except as
disclosed in Schedule 3(c), there are no securities or instruments containing
anti-dilution or similar provisions that will be triggered by the issuance of
the Securities in accordance with the terms of this Agreement, the
-6-
<PAGE> 7
Certificate of Designations and the Warrants. The Company has furnished to the
Buyers true and correct copies of the Company's Certificate of Incorporation, as
amended and as in effect on the date hereof (the "CERTIFICATE OF
INCORPORATION"), and the Company's By-laws, as in effect on the date hereof (the
"BY-LAWS"), and true and correct copies of all securities convertible into or
exercisable for Common Stock and the material rights of the holders thereof in
respect thereto.
d. Issuance of Securities. The Preferred Shares and the
Warrants are duly authorized and, upon issuance in accordance with the terms
hereof, shall be (i) validly issued, fully paid and non-assessable, (ii) free
from all taxes, liens, charges and encumbrances with respect to the issue
thereof and will not be subject to preemptive rights or other similar rights of
stockholders of the Company and will not impose personal liability on the
holders thereof and (iii) entitled to the rights and preferences set forth in
the Certificate of Designations. 7,000,000 shares of Common Stock (subject to
adjustment pursuant to the Company's covenant set forth in Section 4(f) below)
have been duly authorized and reserved for issuance upon conversion of the
Preferred Shares and upon exercise of the Warrants. In addition, the Company
covenants that it shall not reserve for issuance or issue (other than those
shares described as reserved for issuance in Section 3(c) or in Schedule 3(c))
an additional 2,500,000 shares of authorized Common Stock without first
obtaining the prior written consent of all of the holders of the Preferred
Shares and the Warrants. If the Company increases the number of authorized
shares of its Common Stock as set forth in its Certificate of Incorporation, it
shall reserve said additional 2,500,000 shares for the purposes of this
Agreement (in addition to any other additional reservation of shares required
hereby). Upon conversion or exercise in accordance with the Certificate of
Designations or the Warrants, as the case may be, the Conversion Shares and the
Warrant Shares will be validly issued, fully paid and nonassessable and free
from all taxes, liens and charges with respect to the issue thereof and will not
be subject to preemptive rights or other similar rights of stockholders of the
Company and will not impose personal liability on the holders thereof, with the
holders being entitled to all rights accorded to a holder of Common Stock.
Assuming the accuracy of the representations and warranties set forth in Section
2, the issuance by the Company of the Securities is exempt from registration
under the 1933 Act.
e. No Conflicts. Except as disclosed in Schedule 3(e), the
execution, delivery and performance of the Transaction Documents by the Company,
the performance by the Company of its obligations under the Certificate of
Designations and the consummation by the Company of the transactions
contemplated hereby and thereby (including, without limitation, the issuance and
reservation for issuance, as applicable, of the Preferred Shares, Warrants,
Conversion Shares and Warrant Shares) and thereby will not (i) result in a
violation of the Certificate of Incorporation, any Certificate of Designations,
Preferences and Rights of any outstanding series of Preferred Stock of the
Company or the By-laws or (ii) conflict with, or constitute a default (or an
event which with notice or lapse of time or both would become a default) under,
or give to others any rights of termination, amendment (including, without
limitation, the triggering of any anti-dilution rights), acceleration or
cancellation of, any agreement, indenture or instrument to which the Company or
any of its subsidiaries is a party, or result in a violation of any law, rule,
regulation, order, judgment or decree (including federal and state securities
laws and regulations and the rules and regulations of the principal market or
-7-
<PAGE> 8
exchange on which the Common Stock is traded or listed) applicable to the
Company or any of its subsidiaries or by which any property or asset of the
Company or any of its subsidiaries is bound or affected. Except as disclosed in
Schedule 3(e), neither the Company nor its subsidiaries is in violation of any
term of or in violation of the Certificate of Incorporation, any Certificate of
Designation, Preferences and Rights of any outstanding series of Preferred Stock
or the By-laws or their organizational charter or by-laws, respectively, or any
agreement, indenture, or instrument to which the Company or any of its
subsidiaries is a party. The business of the Company and its subsidiaries is not
being conducted and shall not be conducted, so long as any Buyer owns any
Securities, in violation of any law, ordinance or regulation of any governmental
entity. Except as specifically contemplated by this Agreement, the Warrants and
as required under the 1933 Act, the Company is not required to obtain any
consent, authorization or order of, or make any filing or registration with, any
court or governmental agency in order for it to execute, deliver or perform any
of its obligations under or contemplated by this Agreement, the Warrants or the
Registration Rights Agreement or to perform its obligations under the
Certificate of Designations, in each case in accordance with the terms hereof or
thereof. Except as disclosed in Schedule 3(e), all consents, authorizations,
orders, filings and registrations which the Company is required to obtain
pursuant to the preceding sentence have been obtained or effected on or prior to
the date hereof. The Company and its subsidiaries are unaware of any facts or
circumstances which might give rise to any of the foregoing. The Company is not
in violation of the listing requirements of the Nasdaq National Market as in
effect on the date of this Agreement and the Closing Date and does not
reasonably anticipate that the Common Stock will be delisted from the Nasdaq
National Market in the foreseeable future.
f. SEC Documents; Financial Statements. Since July 31, 1996,
the Company has filed all reports, schedules, forms, statements and other
documents required to be filed by it with the SEC pursuant to the reporting
requirements of the Securities Exchange Act of 1934, as amended (the "1934 ACT")
(all of the foregoing filed prior to the date hereof and all exhibits included
therein and financial statements and schedules thereto and documents
incorporated by reference therein being hereinafter referred to as the "SEC
DOCUMENTS"). The Company has delivered to the Buyers or their respective
representatives true and complete copies of the SEC Documents. As of their
respective dates, the SEC Documents complied in all material respects with the
requirements of the 1934 Act and the rules and regulations of the SEC
promulgated thereunder applicable to the SEC Documents, and none of the SEC
Documents, at the time they were filed with the SEC, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. The Company meets
the requirements for the use of Form S-3 for the registration of the resale of
the Conversion Shares and Warrant Shares by the Buyers or any Investor (as
defined in the Registration Rights Agreement). As of their respective dates, the
financial statements of the Company included in the SEC Documents complied as to
form in all material respects with applicable accounting requirements and the
published rules and regulations of the SEC with respect thereto. Such financial
statements have been prepared in accordance with U.S. generally accepted
accounting principles, consistently applied, during the periods involved (except
(i) as may be otherwise indicated in such financial statements or the notes
thereto, or (ii) in the case of
-8-
<PAGE> 9
unaudited interim statements, to the extent they may exclude footnotes or may be
condensed or summary statements) and fairly present in all material respects the
consolidated financial position of the Company and its consolidated subsidiaries
as of the dates thereof and the results of its operations and cash flows for the
periods then ended (subject, in the case of unaudited statements, to normal
year-end audit adjustments). No other information provided by or on behalf of
the Company to the Buyers which is not included in the SEC Documents, including,
without limitation, information referred to in Section 2(d) of this Agreement,
contains any untrue statement of a material fact or omits to state any material
fact necessary in order to make the statements therein, in the light of the
circumstance under which they are or were made, not misleading. Except as set
forth in the financial statements of the Company included in the SEC Documents
filed prior to the date hereof, the Company has no liabilities, contingent or
otherwise, other than (i) liabilities incurred in the ordinary course of
business subsequent to the date of such financial statements, (ii) liabilities
not required by generally accepted accounting principles ("GAAP") to be
disclosed on a balance sheet prepared in accordance with GAAP, and (iii)
obligations under contracts and commitments incurred in the ordinary course of
business and not required under GAAP to be reflected in such financial
statements, which liabilities and obligations referred to in clauses (i), (ii)
and (iii) individually or in the aggregate, are not material to the financial
condition or operating results of the Company.
g. Absence of Certain Changes. Except as disclosed in Schedule
3(g), since July 31, 1997 there has been no material adverse change and no
material adverse development in the business, properties, operations, financial
condition, results of operations or prospects of the Company or its
subsidiaries. The Company has not taken any steps, and does not currently expect
to take any steps, to seek protection pursuant to any bankruptcy law nor does
the Company or its subsidiaries have any knowledge or reason to believe that its
creditors intend to initiate involuntary bankruptcy proceedings.
h. Absence of Litigation. Except as disclosed in Schedule
3(h), there is no action, suit, proceeding, inquiry or investigation before or
by any court, public board, government agency, self-regulatory organization or
body pending or, to the knowledge of the Company or any of its subsidiaries,
threatened against or affecting the Company, the Common Stock or any of the
Company's subsidiaries, or any of their respective directors and officers in
their capacities as such, wherein an unfavorable decision, ruling or finding
would have a Material Adverse Effect.
i. Acknowledgment Regarding Buyers' Purchase of Preferred
Shares. The Company acknowledges and agrees that each of the Buyers is acting
solely in the capacity of arm's length purchaser with respect to the Transaction
Documents and the transactions contemplated thereby. The Company further
acknowledges that none of the Buyers is acting as a financial advisor or
fiduciary of the Company (or in any similar capacity) with respect to the
Transaction Documents and the transactions contemplated thereby and any advice
given by any of the Buyers or any of their respective representatives or agents
in connection with the Transaction Documents and the transactions contemplated
thereby is merely incidental to such Buyer's purchase of the Securities. The
Company further represents to each Buyer that the
-9-
<PAGE> 10
Company's decision to enter into the Transaction Documents has been based solely
on the independent evaluation by the Company and its representatives.
j. No Undisclosed Events, Liabilities, Developments or
Circumstances. No event, liability, development or circumstance has occurred or
exists, or is contemplated to occur, with respect to the Company or its
subsidiaries or their respective business, properties, prospects, operations or
financial condition, which has not been publicly announced or disclosed in
writing to the Buyers.
k. No General Solicitation. Neither the Company, nor any of
its affiliates, nor any person acting on its or their behalf, has engaged in any
form of general solicitation or general advertising (within the meaning of
Regulation D under the 1933 Act) in connection with the offer or sale of the
Securities.
l. No Integrated Offering. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf has, directly or
indirectly, made any offers or sales of any security or solicited any offers to
buy any security, under circumstances that would require registration of any of
the Securities under the 1933 Act or cause this offering of Securities to be
integrated with prior offerings by the Company for purposes of the 1933 Act or
any applicable stockholder approval provisions, including, without limitation,
under the rules and regulations of the Nasdaq National Market, nor will the
Company or any of its subsidiaries take any action or steps that would require
registration of the Securities under the 1933 Act or cause the offering of the
Securities to be integrated with other offerings.
m. Employee Relations. Neither the Company nor any of its
subsidiaries is involved in any union labor dispute nor, to the knowledge of the
Company or any of its subsidiaries, is any such dispute threatened. Neither the
Company nor any of its subsidiaries is a party to a collective bargaining
agreement, and the Company and its subsidiaries believe that relations with
their employees are good.
n. Intellectual Property Rights. The Company and its
subsidiaries own or possess adequate rights or licenses to use all trademarks,
trade names, service marks, service mark registrations, service names, patents,
patent rights, copyrights, inventions, licenses, approvals, governmental
authorizations, trade secrets and rights necessary to conduct their respective
businesses as now conducted or as presently contemplated to be conducted in the
future. Except as set forth on Schedule 3(n), none of the Company's trademarks,
trade names, service marks, service mark registrations, service names, patents,
patent rights, copyrights, inventions, licenses, approvals, government
authorizations, trade secrets or other intellectual property rights have expired
or terminated, or are expected to expire or terminate within two years from the
date of this Agreement. The Company and its subsidiaries do not have any
knowledge of any infringement by the Company or its subsidiaries of trademark,
trade name rights, patents, patent rights, copyrights, inventions, licenses,
service names, service marks, service mark registrations, trade secret or other
similar rights of others, or of any such development of similar or identical
trade secrets or technical information by others and, except as
-10-
<PAGE> 11
set forth on Schedule 3(n), there is no claim, action or proceeding being made
or brought against, or to the Company's knowledge, being threatened against, the
Company or its subsidiaries regarding trademark, trade name, patents, patent
rights, invention, copyright, license, service names, service marks, service
mark registrations, trade secret or other infringement; and the Company and its
subsidiaries are unaware of any facts or circumstances which might give rise to
any of the foregoing. The Company and its subsidiaries have taken reasonable
security measures to protect the secrecy, confidentiality and value of all of
their intellectual properties.
o. Environmental Laws. (i) The Company and its subsidiaries
are operating and have operated their businesses in compliance with all
applicable Environmental and Safety Requirements; (ii) there are no Hazardous
Materials present at the property in which such businesses are conducted (other
than those present in office supplies and cleaning/maintenance materials) that
could cause or give rise to liabilities or response obligations under any
Environmental and Safety Requirements; (iii) the Company and its subsidiaries
have disposed of all waste materials generated by the Company or at any
facilities presently or formerly owned or operated by the Company or its
subsidiaries in compliance with applicable Environmental and Safety
Requirements; (iv) there are and have been no facts, events, occurrences or
conditions at or related to any facility presently or formerly owned or operated
by the Company or its subsidiaries that could cause or give rise to liabilities
or response obligations under any Environmental and Safety Requirements; and (v)
the Company and its subsidiaries have received all permits, licenses or other
approvals required of them under applicable Environmental and Safety
Requirements to conduct their respective businesses. The term "Environmental and
Safety Requirements" means any foreign, federal, state and local laws, statutes,
regulations or other requirements relating to the protection, preservation or
conservation of the environment or worker health and safety, all as amended or
reauthorized. The term "Hazardous Materials" means "hazardous substances," as
defined by the Comprehensive Environmental Response, Compensation and Liability
Act, 42 U.S.C. Section 9601 et seq., "hazardous wastes," as defined by the
Resource Conservation Recovery Act, 42 U.S.C. Section 6901 et seq., asbestos in
any form or condition, polychlorinated biphenyls and any other material,
substance or waste to which liability or standards of conduct may be imposed
under any Environmental and Safety Requirement.
p. Title. The Company and its subsidiaries have good and
marketable title in fee simple to all real property and good and marketable
title to all personal property owned by them which is material to the business
of the Company and its subsidiaries, in each case free and clear of all liens,
encumbrances and defects except such as are described in Schedule 3(p) or such
as do not materially affect the value of such property and do not interfere with
the use made and proposed to be made of such property by the Company or any of
its subsidiaries. Any real property and facilities held under lease by the
Company or any of its subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and do not interfere
with the use made and proposed to be made of such property and buildings by the
Company and its subsidiaries.
-11-
<PAGE> 12
q. Insurance. The Company and each of its subsidiaries are
insured by insurers of recognized financial responsibility against such losses
and risks and in such amounts as management of the Company believes to be
prudent and customary in the businesses in which the Company and its
subsidiaries are engaged and/or for the conduct of the Company's operations and
its business. Neither the Company nor any such subsidiary has been refused any
insurance coverage sought or applied for and neither the Company nor any such
subsidiary has any reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not materially and adversely affect the condition,
financial or otherwise, or the earnings, business or operations of the Company
and its subsidiaries, taken as a whole.
r. Regulatory Permits. The Company and its subsidiaries
possess all certificates, authorizations and permits issued by the appropriate
federal, state or foreign regulatory authorities necessary to conduct their
respective businesses, and neither the Company nor any such subsidiary has
received any notice of proceedings relating to the revocation or modification of
any such certificate, authorization or permit.
s. Internal Accounting Controls. The Company and each of its
subsidiaries maintain a system of internal accounting controls sufficient to
provide reasonable assurance that (i) transactions are executed in accordance
with management's general or specific authorizations, (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to maintain asset
accountability, (iii) access to assets is permitted only in accordance with
management's general or specific authorization and (iv) the recorded
accountability for assets is compared with the existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
t. No Materially Adverse Contracts, Etc. Neither the Company
nor any of its subsidiaries is subject to any charter, corporate or other legal
restriction, or any judgment, decree, order, rule or regulation which in the
judgment of the Company's officers has or is expected in the future to have a
Material Adverse Effect. Neither the Company nor any of its subsidiaries is a
party to any contract or agreement which in the judgment of the Company's
officers has or is expected to have a Material Adverse Effect.
u. Tax Status. Except as set forth on Schedule 3(u), the
Company and each of its subsidiaries has made or filed all federal and state
income and all other tax returns, reports and declarations required by any
jurisdiction to which it is subject (unless and only to the extent that the
Company and each of its subsidiaries has set aside on its books provisions
reasonably adequate for the payment of all unpaid and unreported taxes) and has
paid all taxes and other governmental assessments and charges that are material
in amount, shown or determined to be due on such returns, reports and
declarations, except those being contested in good faith and has set aside on
its books provision reasonably adequate for the payment of all taxes for periods
subsequent to the periods to which such returns, reports or declarations apply.
There are no unpaid taxes in any material amount claimed to be due by the taxing
authority of any jurisdiction,
-12-
<PAGE> 13
and the officers of the Company know of no basis for any such claim. No issues
have been raised and none are pending by and no notice of any audit has been
received from, the Internal Revenue Service or any other taxing authority in
connection with any above-referenced returns or reports, and no waivers of
statutes of limitations have been given or requested with respect to the Company
or its subsidiaries.
v. Certain Transactions. Except as set forth on Schedule 3(v)
and in the SEC Documents and except for arm's length transactions pursuant to
which the Company makes payments in the ordinary course of business upon terms
no less favorable than the Company could obtain from third parties and other
than the grant of stock options disclosed on Schedule 3(c), none of the
officers, directors, or employees of the Company is presently a party to any
transaction with the Company or any of its subsidiaries (other than for services
as employees, officers and directors), including any contract, agreement or
other arrangement providing for the furnishing of services to or by, providing
for rental of real or personal property to or from, or otherwise requiring
payments to or from any officer, director or such employee or, to the knowledge
of the Company, any corporation, partnership, trust or other entity in which any
officer, director, or any such employee has a substantial interest or is an
officer, director, trustee or partner.
w. Dilutive Effect. The Company understands and acknowledges
that the number of Conversion Shares issuable upon conversion of the Preferred
Shares and the Warrant Shares issuable upon exercise of the Warrants will
increase in certain circumstances. The Company further acknowledges that its
obligation to issue Conversion Shares upon conversion of the Preferred Shares in
accordance with this Agreement and the Certificate of Designations and its
obligation to issue the Warrant Shares upon exercise of the Warrants in
accordance with this Agreement and the Warrants, is, in each case, absolute and
unconditional regardless of the dilutive effect that such issuance may have on
the ownership interests of other stockholders of the Company. The Company and
its Board of Directors believe that the transactions contemplated by the
Transaction Documents are in the best interest of the Company and its
stockholders.
x. Brokers. Except as set forth in Section 9(m) hereof, no
broker, finder, or similar person is entitled to any commission, fee or other
compensation by reason of the transactions contemplated by the Transaction
Documents, and the Company shall pay, and indemnify and hold harmless the Buyers
from, any claim made against the Buyers by such entity or any other person for
any such commission, fee or other compensation.
y. Foreign Corrupt Practices. Neither the Company, nor any of
its subsidiaries, nor any director, officer, agent, employee or other person
acting on behalf of the Company or any subsidiary has, in the course of his
actions for, or on behalf of, the Company, used any corporate funds for any
unlawful contribution, gift, entertainment or other unlawful expenses relating
to political activity; made any direct or indirect unlawful payment to any
foreign or domestic government official or employee from corporate funds;
violated or is in violation of any provision of the U.S. Foreign Corrupt
Practices Act of 1977; or made any bribe,
-13-
<PAGE> 14
rebate, payoff, influence payment, kickback or other unlawful payment to any
foreign or domestic government official or employee.
z. Corporate Existence. So long as the Buyers beneficially own
any of the Securities, the Company shall maintain its corporate existence,
except in the event of a merger, consolidation or sale of all or substantially
all of the Company's assets, as long as the surviving or successor entity in
such transaction (if such is not the Company) (i) assumes the Company's
obligations hereunder and under the agreements and instruments entered into in
connection herewith regardless of whether or not the Company would have had a
sufficient number of shares of Common Stock authorized and available for
issuance in order to effect the conversion in full of all Preferred Shares and
the exercise in full of all Warrants outstanding as of the date of such
transaction and (ii) is a publicly traded corporation whose common stock is
listed for trading on one of the national securities exchanges or automated
quotation systems described in Section 4(h). Notwithstanding the foregoing, the
Company covenants and agrees that it will not engage in a merger (if the Company
is not the surviving or successor entity), consolidation or sale of all or
substantially all of its assets at any time while any of the Securities are
outstanding without providing the Buyers with written notice of such transaction
(including the proposed record date and consummation date with respect to such
transaction) at least seventy-five (75) days prior to the earlier of (i) the
record date for determining stockholders entitled to vote with respect to any
such transaction, if applicable, and (ii) the proposed date of consummation of
the transaction.
4. COVENANTS.
a. Best Efforts. Each party shall use its best efforts timely
to satisfy each of the conditions to be satisfied by it as provided in Sections
6 and 7 of this Agreement.
b. Form D. The Company agrees to file a Form D with respect to
the Securities as required under Regulation D and to provide a copy thereof to
each Buyer promptly after such filing. The Company shall, on or before the
Closing Date, take such action as the Company shall reasonably determine is
necessary to qualify the Securities for, or obtain exemption for the Securities
for, sale to the Buyers at the Closing pursuant to this Agreement under
applicable securities or "Blue Sky" laws of the states of the United States, and
shall provide evidence of any such action so taken to the Buyers on or prior to
the Closing Date.
c. Reporting Status. Until the date on which (i) the Investors
shall have sold all the Conversion Shares and the Warrant Shares and (ii) none
of the Preferred Shares or Warrants is outstanding (the "REGISTRATION PERIOD"),
the Company shall file all reports required to be filed with the SEC pursuant to
the 1934 Act, and the Company shall not terminate its status as an issuer
required to file reports under the 1934 Act even if the 1934 Act or the rules
and regulations thereunder would otherwise permit such termination.
-14-
<PAGE> 15
d. Use of Proceeds. The Company will use the proceeds from the
sale of the Preferred Shares for substantially the same purposes and in
substantially the same amounts as indicated in Schedule 4(d).
e. Financial Information. The Company agrees to send the
following to each Investor (as that term is defined in the Registration Rights
Agreement) during the Registration Period: (i) within two (2) days after the
filing thereof with the SEC, a copy of its Annual Reports on Form 10-K, its
Quarterly Reports on Form 10-Q, any Current Reports on Form 8-K and any
registration statements or amendments filed pursuant to the 1933 Act; (ii) on
the same day as the release thereof, facsimile copies of all press releases
issued by the Company or any of its subsidiaries and (iii) copies of any notices
and other information made available or given to the stockholders of the Company
generally, contemporaneously with the making available or giving thereof to the
stockholders.
f. Reservation of Shares. The Company shall take all action
necessary to at all times have authorized, and reserved for the purpose of
issuance, no less than 150% of the number of shares of Common Stock then needed
to provide for the issuance of the Conversion Shares and the Warrant Shares upon
the conversion or exercise, as applicable, of the Preferred Shares and Warrants
then outstanding.
g. Limitation on Short Sales of the Common Stock. Each Buyer
agrees that it will not enter into a "short sale" (as such term is defined in
Rule 3b-3 of the 1934 Act) of Common Stock at a price less than 125% of the
Closing Bid Price on the trading date immediately preceding the Closing Date
until such time as such Buyer no longer holds any Preferred Shares or Warrants;
provided, however, that a sale which would otherwise be deemed a "short sale"
shall not be prohibited by this Agreement so long as the Buyer submits on the
date of such sale a notice of conversion of Preferred Shares and/or a notice of
exercise of Warrants entitling such Buyer to receive a number of shares of
Common Stock at least equal to the number of shares so sold.
h. Listing. The Company shall promptly secure the listing of
all of the Registrable Securities (as defined in the Registration Rights
Agreement) upon each national securities exchange and automated quotation system
(including the Nasdaq National Market and The Nasdaq SmallCap Market), if any,
upon which shares of Common Stock are then listed (subject to official notice of
issuance) and shall maintain, so long as any other shares of Common Stock shall
be so listed, such listing of all Registrable Securities from time to time
issuable under the terms of the Transaction Documents and the Certificate of
Designations. The Company shall maintain the Common Stock's authorization for
quotation and trading on the Nasdaq National Market, The Nasdaq SmallCap Market,
The New York Stock Exchange, Inc. ("NYSE") or The American Stock Exchange, Inc.
("AMEX") and comply with reporting, filing and other obligations under the rules
thereof. Neither the Company nor any of its subsidiaries shall take any action
which may result in the delisting or suspension of the Common Stock on The
Nasdaq SmallCap Market, the Nasdaq National Market, NYSE or AMEX. The Company
shall promptly provide to each Buyer copies of any notices it receives from the
Nasdaq National
-15-
<PAGE> 16
Market, The Nasdaq SmallCap Market, NYSE or AMEX regarding the continued
eligibility of the Common Stock for listing on such automated quotation system
or securities exchange. The Company shall pay all fees and expenses in
connection with satisfying its obligations under this Section 4(h).
i. Proxy Statement. If (i) at any time the Market Price (as
defined in the Certificate of Designations) of the Common Stock is less than
$6.50 per share, or (ii) on July 1, 1998, the Market Price of the Common Stock
is less than $7.00 per share, the Company shall call a special meeting of its
stockholders within 60 days of such event. The Company shall provide each
stockholder entitled to vote at such meeting of stockholders of the Company, a
proxy statement, which has been previously reviewed by the Buyers and a counsel
of their choice, soliciting each such stockholder's affirmative vote at such
stockholder meeting for approval of (x) the Company's issuance of the Securities
as described in this Agreement and (y) an increase in the authorized number of
shares of Common Stock of the Company to such number as the Board of Directors
of the Company shall recommend (but not less than an additional 5,000,000), and
the Company shall use its best efforts to solicit its stockholders' approval of
such issuance of the Securities and increase in the number of authorized shares
of Common Stock and cause the Board of Directors of the Company to recommend to
the stockholders that they approve such proposals. The Company shall cause the
Board of Directors to reserve for issuance upon conversion of the Preferred
Shares and exercise of the Warrants an additional 5,000,000 shares of Common
Stock from the additional shares so authorized.
-16-
<PAGE> 17
5. TRANSFER AGENT INSTRUCTIONS.
The Company shall issue irrevocable instructions to its
transfer agent, and any subsequent transfer agent, to issue certificates,
registered in the name of each Buyer or its respective nominee(s), for the
Conversion Shares and the Warrant Shares in such amounts as specified from time
to time by each Buyer to the Company upon conversion of the Preferred Shares or
exercise of the Warrants (the "IRREVOCABLE TRANSFER AGENT INSTRUCTIONS"). To the
extent and during the periods provided in Sections 2(f) and 2(g) of this
Agreement, all such certificates shall bear the restrictive legend specified in
Section 2(g) of this Agreement. The Company warrants that no instruction other
than the Irrevocable Transfer Agent Instructions referred to in this Section 5,
and stop transfer instructions to give effect to Section 2(f) hereof (in the
case of the Conversion Shares and the Warrant Shares, prior to registration of
the Conversion Shares and the Warrant Shares under the 1933 Act or without an
exemption therefrom) will be given by the Company to its transfer agent and that
the Securities shall otherwise be freely transferable on the books and records
of the Company as and to the extent provided in this Agreement and the
Registration Rights Agreement. Nothing in this Section 5 shall affect in any way
each Buyer's obligations and agreements set forth in Section 2(g) to sell
pursuant to an effective Registration Statement or in
compliance with an exemption from the registration requirements of applicable
securities laws. If a Buyer provides the Company with an opinion of counsel, in
form, substance and scope customary for opinions of counsel in similar
transactions, that registration of a resale by such Buyer of any of such
Securities is not required under the 1933 Act, the Company shall permit the
transfer, and, in the case of the Conversion Shares and the Warrant Shares,
promptly instruct its transfer agent to issue one or more certificates in such
name and in such denominations as specified by such Buyer and without any
restrictive legends. The Company acknowledges that a breach by it of its
obligations under this Agreement will cause irreparable harm to the Buyers by
vitiating the intent and purpose of the transaction contemplated hereby.
Accordingly, the Company acknowledges that the remedy at law for a breach of its
obligations hereunder will be inadequate and agrees, in the event of a breach or
threatened breach by the Company of the provisions hereunder, that the Buyers
shall be entitled, in addition to all other available remedies, to an injunction
restraining any breach and requiring immediate issuance and transfer, without
the necessity of showing economic loss and without any bond or other security
being required.
6. CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.
The obligation of the Company hereunder to issue and sell the
Preferred Shares to each Buyer on the Escrow Release Date is subject to the
satisfaction, at or before the Escrow Release Date, of each of the following
conditions, provided that these conditions are for the Company's sole benefit
and may be waived by the Company at any time in its sole discretion by providing
the Escrow Agent and each Buyer with prior written notice thereof:
(i) Such Buyer shall have executed each of the Transaction
Documents and delivered the same to the Company.
-17-
<PAGE> 18
(ii) Such Buyer shall have delivered to the Escrow Agent the
Purchase Price for the Preferred Shares being purchased by such Buyer
by wire transfer of immediately available funds pursuant to the wire
instructions provided by the Escrow Agent.
(iii) The representations and warranties of such Buyer shall
be true and correct in all material respects as of the date when made
and as of the Escrow Release Date as though made at that time (except
for representations and warranties that speak as of a specific date),
and such Buyer shall have performed, satisfied and complied in all
material respects with the covenants, agreements and conditions
required by the Transaction Documents to be performed, satisfied or
complied with by such Buyer at or prior to the Escrow Release Date.
(iv) The Company shall have acquired all of the stock or all
or substantially all of the assets of Oxycal Laboratories, Inc. (the
"Target Company") for cash in an amount not to exceed $30,000,000 (the
"ACQUISITION") within 14 business days following the Closing Date (or
such longer period as may be provided for pursuant to the Escrow
Agreement).
(v) All 30,000 Units shall have been sold.
7. CONDITIONS TO EACH BUYER'S OBLIGATION TO PURCHASE.
The obligation of each Buyer hereunder to purchase the
Preferred Shares on the Escrow Release Date is subject to the satisfaction, at
or before the Escrow Release Date, of each of the following conditions, provided
that these conditions are for each Buyer's sole benefit and may be waived by
such Buyer at any time in its sole discretion:
(i) The Company shall have executed each of the Transaction
Documents, and delivered the same to the Buyers.
(ii) The Certificate of Designations shall have been filed
with the Secretary of State of the State of Delaware, and a copy
thereof certified by such Secretary of State shall have been delivered
to the Buyers.
(iii) The Common Stock shall be authorized for quotation on
the Nasdaq National Market, The Nasdaq SmallCap Market, NYSE or AMEX,
trading in the Common Stock issuable upon conversion of the Preferred
Shares and the exercise of the related Warrants to be traded on the
Nasdaq National Market, The Nasdaq SmallCap Market, NYSE or AMEX shall
not have been suspended by the SEC, The Nasdaq Stock Market, Inc., NYSE
or AMEX and all of the Conversion Shares and Warrant Shares issuable
upon conversion of the Preferred Shares and exercise of the related
Warrants to be sold in escrow at the Closing shall be listed upon the
Nasdaq National Market, The Nasdaq SmallCap Market, NYSE or AMEX.
-18-
<PAGE> 19
(iv) The representations and warranties of the Company shall
be true and correct in all material respects (except to the extent that
any of such representations and warranties is already qualified as to
materiality in Section 3 above, in which case, such representations and
warranties shall be true and correct without further qualification) as
of the date when made and as of the Escrow Release Date as though made
at that time (except for representations and warranties that speak as
of a specific date) and the Company shall have performed, satisfied and
complied in all material respects with the covenants, agreements and
conditions required by the Transaction Documents to be performed,
satisfied or complied with by the Company at or prior to the Escrow
Release Date. Without limiting the generality of the foregoing, neither
the Company nor any of its subsidiaries shall have experienced any
Material Adverse Effect. Such Buyer shall have received a certificate,
executed by the Chief Executive Officer of the Company, dated as of the
Closing Date, to the foregoing effect and as to such other matters as
may be reasonably requested by such Buyer including, without
limitation, an update as of the Escrow Release Date regarding the
representation contained in Section 3(c) above.
(v) The Buyers shall have received the opinion of the
Company's counsel dated as of the Escrow Release Date, in form, scope
and substance reasonably satisfactory to such Buyer and in
substantially the form of Exhibit C attached hereto.
(vi) The Company shall have executed and delivered to the
Escrow Agent the Warrants and the Stock Certificates (in such
denominations as each Buyer shall request) for the Preferred Shares
being purchased by such Buyer.
(vii) The Board of Directors of the Company shall have adopted
resolutions consistent with Section 3(b)(ii) above and in a form
reasonably acceptable to such Buyer (the "RESOLUTIONS").
(viii) As of the Closing Date, the Company shall have reserved
out of its authorized and unissued Common Stock, solely for the purpose
of effecting the conversion of the Preferred Shares and the exercise of
the Warrants, at least 7,000,000 shares of Common Stock.
(ix) The Irrevocable Transfer Agent Instructions, in the form
of Exhibit D-1 with respect to the Warrants and Exhibit D-2 with
respect to the Preferred Shares, shall have been delivered to the
Transfer Agent.
(x) The Company shall have delivered to the Buyers a
certificate evidencing the incorporation and good standing of the
Company and each subsidiary in such corporation's state of
incorporation issued by the Secretary of State of such state of
incorporation as of a date within 10 days of the Closing Date.
(xi) The Company shall have delivered to the Buyers certified
copies of its Certificate of Incorporation and Bylaws, each as in
effect at the Closing Date.
-19-
<PAGE> 20
(xii) The Company shall have delivered to the Buyers such
other documents relating to the transactions contemplated by the
Transaction Documents as such Buyer or its counsel may reasonably
request.
(xiii) The Company shall have consummated its Acquisition of
the Target Company (in accordance with the terms, conditions and
provisions previously disclosed to the Buyers) within 14 business days
following the Closing Date (or such longer period as may be provided
for pursuant to the Escrow Agreement) and shall have delivered a
written notice to the Escrow Agent to such effect with a copy to the
Buyers.
(xiv) All 30,000 Units shall have been sold.
8. INDEMNIFICATION.
In consideration of each Buyer's execution and delivery of the
Transaction Documents and acquiring the Securities thereunder and in addition to
all of the Company's other obligations under the Transaction Documents, the
Company shall defend, protect, indemnify and hold harmless each Buyer and each
other holder of the Securities and all of their officers, directors, employees
and agents (including, without limitation, those retained in connection with the
transactions contemplated by this Agreement) (collectively, the "INDEMNITEES")
from and against any and all actions, causes of action, suits, claims, losses,
costs, penalties, fees, liabilities and damages, and expenses in connection
therewith (irrespective of whether any such Indemnitee is a party to the action
for which indemnification hereunder is sought), and including reasonable
attorneys' fees and disbursements (the "INDEMNIFIED LIABILITIES"), incurred by
any Indemnitee as a result of, or arising out of, or relating to (a) any
misrepresentation or breach of any representation or warranty made by the
Company in the Transaction Documents, the Certificate of Designations or the
Warrants or any other certificate, instrument or document contemplated hereby or
thereby, (b) any breach of any covenant, agreement or obligation of the Company
contained in the Transaction Documents, the Certificate of Designations or the
Warrants or any other certificate, instrument or document contemplated hereby or
thereby, or (c) any cause of action, suit or claim brought or made against such
Indemnitee and arising out of or resulting from the execution, delivery,
performance or enforcement of this Agreement or any other instrument, document
or agreement executed pursuant hereto by any of the Indemnitees, any transaction
financed or to be financed in whole or in part, directly or indirectly, with the
proceeds of the issuance of the Securities or the status of such Buyer or holder
of the Securities as an investor in the Company. To the extent that the
foregoing undertaking by the Company may be unenforceable for any reason, the
Company shall make the maximum contribution to the payment and satisfaction of
each of the Indemnified Liabilities which is permissible under applicable law.
-20-
<PAGE> 21
9. GOVERNING LAW; MISCELLANEOUS.
a. Governing Law. The corporate law of the State of Delaware
shall govern all issues and questions concerning the relative rights and
obligations of the Company and holders of its securities. All other issues and
questions concerning the construction, validity, enforcement and interpretation
of this Agreement and the exhibits and schedules hereto shall be governed by,
and construed in accordance with, the laws of the State of New York, without
giving effect to any choice of law or conflict of law rules or provisions
(whether of the State of New York or any other jurisdiction) that would cause
the application of the laws of any jurisdiction other than the State of New
York. Each party hereby irrevocably submits to the non-exclusive jurisdiction of
the state and federal courts sitting the City of New York, Borough of Manhattan,
for the adjudication of any dispute hereunder or in connection herewith or with
any transaction contemplated hereby or discussed herein, and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, that
such suit, action or proceeding is brought in an inconvenient forum or that the
venue of such suit, action or proceeding is improper. Each party hereby
irrevocably waives personal service of process and consents to process being
served in any such suit, action or proceeding by mailing a copy thereof to such
party at the address for such notices to it under this Agreement and agrees that
such service shall constitute good and sufficient service of process and notice
thereof. Nothing contained herein shall be deemed to limit in any way any right
to serve process in any manner permitted by law. If any provision of this
Agreement shall be invalid or unenforceable in any jurisdiction, such invalidity
or unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other jurisdiction.
b. Counterparts. This Agreement may be executed in two or more
identical counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed by each
party and delivered to the other party. In the event any signature page is
delivered by facsimile transmission, the party using such means of delivery
shall cause four (4) additional original executed signature pages to be
physically delivered to the other party within five (5) days of the execution
and delivery hereof.
c. Headings. The headings of this Agreement are for
convenience of reference and shall not form part of, or affect the
interpretation of, this Agreement.
d. Severability. If any provision of this Agreement shall be
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other jurisdiction.
e. Entire Agreement; Amendments. This Agreement supersedes all
other prior oral or written agreements between the Buyers, the Company, their
affiliates and persons acting on their behalf with respect to the matters
discussed herein, and this Agreement and the
-21-
<PAGE> 22
instruments referenced herein contain the entire understanding of the parties
with respect to the matters covered herein and therein and, except as
specifically set forth herein or therein, neither the Company nor any Buyer
makes any representation, warranty, covenant or undertaking with respect to such
matters. No provision of this Agreement may be amended other than by an
instrument in writing signed by the Company and the holders of at least
two-thirds (2/3) of the Preferred Shares then outstanding, and no provision
hereof may be waived other than by an instrument in writing signed by the party
against whom enforcement is sought. No such amendment shall be effective to the
extent that it applies to less than all of the holders of the Preferred Shares
then outstanding.
f. Notices. Any notices consents, waivers or other
communications required or permitted to be given under the terms of this
Agreement must be in writing and will be deemed to have been delivered (i) upon
receipt, when delivered personally; (ii) upon receipt, when sent by facsimile
(provided confirmation of transmission is mechanically generated and kept on
file by the sending party); (iii) three (3) days after being sent by U.S.
certified mail, return receipt requested, or (iv) one (1) day after deposit with
a nationally recognized overnight delivery service, in each case properly
addressed to the party to receive the same. The addresses and facsimile numbers
for such communications shall be:
If to the Company:
Zila, Inc.
5227 North Seventh Street
Phoenix, Arizona 85014-2800
Telephone: 602-266-6700
Facsimile: 602-234-2264
Attention: President
With a copy to:
Streich Lang, P.A.
Renaissance One
Two North Central Avenue
Phoenix, Arizona 85504-2391
Telephone: 602-229-5509
Facsimile: 602-229-5890
Attention: Kevin Tourek, Esq.
-22-
<PAGE> 23
If to the Transfer Agent:
American Securities Transfer, Inc.
938 Quail Street
Lakewood, Colorado 80215
Telephone: 303-234-5300
Facsimile: 303-234-5340
If to a Buyer, to its address and facsimile number on the Schedule of
Buyers, with copies to such Buyer's representatives as set forth on the Schedule
of Buyers.
Each party shall provide five (5) days' prior written notice to the
other party of any change in address or facsimile number.
g. Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties and their respective successors and
assigns, including any purchasers of the Preferred Shares. Except as in
compliance with Section 3 of the Certificate of Designations, the Company shall
not assign this Agreement or any rights or obligations hereunder without the
prior written consent of the holders of all of the Preferred Shares then
outstanding including by merger or consolidation. A Buyer may assign some or all
of its rights hereunder to affiliates or associates of such Buyer, without the
consent of the Company, and to others, with the consent of the Company.
The Company shall make arrangements with its counsel so that any assignee may
rely on the opinion of the Company's counsel (in the form set forth in Exhibit C
hereto) to the same extent as the original Buyer.
h. No Third Party Beneficiaries. This Agreement is intended
for the benefit of the parties hereto and their respective permitted successors
and assigns, and is not for the benefit of, nor may any provision hereof be
enforced by, any other person.
i. Survival. Unless this Agreement is terminated under Section
9(l), the representations and warranties of the Company and the Buyers contained
in Sections 2 and 3, the agreements and covenants set forth in Sections 4, 5 and
9, and the indemnification provisions set forth in Section 8, shall survive the
Closing. Each Buyer shall be responsible only for its own representations,
warranties, agreements and covenants hereunder.
j. Publicity. The Company and each Buyer shall have the right
to approve before issuance any press releases or any other public statements
with respect to the transactions contemplated hereby; provided, however, that
the Company shall be entitled, without the prior approval of any Buyer, to make
any press release or other public disclosure with respect to such transactions
as is required by applicable law and regulations (although each Buyer shall be
consulted by the Company in connection with any such press release or other
public disclosure prior to its release and shall be provided with a copy
thereof).
-23-
<PAGE> 24
k. Further Assurances. Each party shall do and perform, or
cause to be done and performed, all such further acts and things, and shall
execute and deliver all such other agreements, certificates, instruments and
documents, as the other party may reasonably request in order to carry out the
intent and accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
l. Termination. In the event that the Closing shall not have
occurred with respect to a Buyer on or before seven (7) business days from the
date hereof due to the Company's or such Buyer's failure to satisfy the
conditions set forth in Sections 6 and 7 above (and the nonbreaching party's
failure to waive such unsatisfied condition(s)), the nonbreaching party shall
have the option to terminate this Agreement with respect to such breaching party
at the close of business on such date without liability of any party to any
other party; provided, however, that if this Agreement is terminated pursuant to
this Section 9(l), the Company shall remain obligated to reimburse the
non-breaching Buyers for the expenses described in Section 4(i) above.
m. Placement Agent. The Company acknowledges that it has
engaged a placement agent in connection with the sale of the Preferred Shares
and the Warrants, which placement agent may have formally or informally engaged
other agents on its behalf. The Company shall be responsible for the payment of
any placement agent's fees or broker's commissions relating to or arising out of
the transactions contemplated hereby. The Company shall pay, and hold each Buyer
harmless against, any liability, loss or expense (including, without limitation,
attorney's fees and out-of-pocket expenses) arising in connection with any such
claim.
n. No Strict Construction. The language used in this Agreement
will be deemed to be the language chosen by the parties to express their mutual
intent, and no rules of strict construction will be applied against any party.
-24-
<PAGE> 25
IN WITNESS WHEREOF, the Buyers and the Company have caused this
Securities Purchase Agreement to be duly executed as of the date first written
above.
COMPANY: BUYERS:
ZILA, INC. OLYMPUS SECURITIES, LTD.
By: /s/ Joseph Hines By: /s/ Anne Dupy
---------------------------- ----------------------------
Name: Joseph Hines Name: Anne Dupuy
Its: President Its: Officer
NELSON PARTNERS
By: /s/ Anne Dupuy
----------------------------
Name: Anne Dupuy
Its: Officer
LEONARDO, L.P.
By: Angelo, Gordon & Co., L.P.
General Partner
By: /s/ Michael L. Gordon
----------------------------
Name: Michael L. Gordon
Its: Chief Operating Officer
GAM ARBITRAGE INVESTMENTS, INC.
By: Angelo, Gordon & Co., L.P.
Investment Adviser
<PAGE> 26
By: /s/ Michael L. Gordon
----------------------------
Name: Michael L. Gordon
Its: Chief Operating Officer
AG SUPER FUND INTERNATIONAL
PARTNERS, L.P.
By: Angelo, Gordon & Co., L.P.
General Partner
By: /s/ Michael L. Gordon
----------------------------
Name: Michael L. Gordon
Its: Chief Operating Officer
RAPHAEL, L.P.
By: /s/ Michael L. Gordon
----------------------------
Name: Michael L. Gordon
Its: Chief Operating Officer
RAMIUS FUND, LTD.
By: AG Ramius Partners, L.L.C.
Investment Adviser
By: /s/ Michael L. Gordon
----------------------------
Name: Michael L. Gordon
Its: Managing Officer
HICK INVESTMENTS, LTD.
By: AG Ramius Partners, L.L.C.
Investment Adviser
By: /s/ Michael L. Gordon
----------------------------
<PAGE> 27
Name: Michael L. Gordon
Its: Managing Officer
CAPITAL VENTURES
INTERNATIONAL
By: Heights Capital Management, Inc.,
as Agent
By: /s/ Andrew Frost
Name: Andrew Frost
Its: President
<PAGE> 28
SCHEDULE OF BUYERS
<TABLE>
<CAPTION>
INVESTOR NAME INVESTOR ADDRESS NUMBER OF INVESTOR'S REPRESENTATIVES' ADDRESS
AND FACSIMILE NUMBER UNITS AND FACSIMILE NUMBER
- ----------------------------- ------------------------------- ------------ -----------------------------------
<S> <C> <C> <C>
Olympus Securities, Ltd. c/o Leeds Management Services 4,500 Citadel Investment Group, L.L.C.
129 Front Street 225 West Washington Street
Hamilton HM 12 Chicago, Illinois 60606
Bermuda Attention: Ken Griffin
Attn: Anne Dupuy Michael Hughes
Facsimile: (441) 292-2239 Facsimile: (312) 368-4347
Katten Muchin & Zavis
525 West Monroe Street
Chicago, Illinois 60661
Attention: Wesley Nissen
Kevin Barney
Facsimile: (312) 902-1061
Nelson Partners c/o Leeds Management Services 5,500 Citadel Investment Group, L.L.C.
129 Front Street 225 West Washington Street
Hamilton HM 12 Chicago, Illinois 60606
Bermuda Attention: Ken Griffin
Attn: Anne Dupuy Michael Hughes
Facsimile: (441) 292-2239 Facsimile: (312) 368-4347
Katten Muchin & Zavis
525 West Monroe Street
Chicago, Illinois 60661
Attention: Wesley Nissen
Kevin Barney
Facsimile: (312) 902-1061
Leonardo, L.P. _Angelo, Gordon & Co., L.P. 6,100
245 Park Avenue - 26th Floor
New York, New York 10167
Attn: Gary Wolf
Facsimile: (212) 867-6449
GAM Arbitrage Investments, Inc. _Angelo, Gordon & Co., L.P. 500
245 Park Avenue - 26th Floor
New York, New York 10167
Attn: Gary Wolf
Facsimile: (212) 867-6449
AG Super Fund International _Angelo, Gordon & Co., L.P. 500
Partners, L.P. 245 Park Avenue - 26th Floor
New York, New York 10167
Attn: Gary Wolf
Facsimile: (212) 867-6449
Raphael, L.P. _Angelo, Gordon & Co., L.P. 1,000
245 Park Avenue - 26th Floor
New York, New York 10167
Attn: Gary Wolf
Facsimile: (212) 867-6449
Ramius Fund, Ltd. _Angelo, Gordon & Co., L.P. 1,400
245 Park Avenue - 26th Floor
</TABLE>
<PAGE> 29
<TABLE>
<CAPTION>
INVESTOR NAME INVESTOR ADDRESS NUMBER OF INVESTOR'S REPRESENTATIVES' ADDRESS
AND FACSIMILE NUMBER UNITS AND FACSIMILE NUMBER
- ----------------------------- ------------------------------- ------------ -----------------------------------
<S> <C> <C> <C>
New York, New York 10167
Attn: Gary Wolf
Facsimile: (212) 867-6449
Hick Investments, Ltd. _Angelo, Gordon & Co., L.P. 500
245 Park Avenue - 26th Floor
New York, New York 10167
Attn: Gary Wolf
Facsimile: (212) 867-6449
Capital Ventures International _Heights Capital Management, Inc. 10,000 Klehr, Harrison, Harvey,
425 California Street Branzburg & Ellers
Suite 1100 1401 Walnut Street
San Francisco, California 94104 Philadelphia, Pennsylvania 19109
Attn: Michael Spolan Attention: Steve Burdumy
Facsimile: (415) 403-6525 Gerald Stahlecker
Facsimile: (215) 568-6603
</TABLE>
<PAGE> 30
SCHEDULE 3(a)
SUBSIDIARIES
<PAGE> 31
SCHEDULE 3(c)
CAPITALIZATION
<PAGE> 32
SCHEDULE 3(e)
CONFLICTS
<PAGE> 33
SCHEDULE 3(g)
MATERIAL CHANGES
<PAGE> 34
SCHEDULE 3(h)
LITIGATION
<PAGE> 35
SCHEDULE 3(n)
INTELLECTUAL PROPERTY
<PAGE> 36
SCHEDULE 3(p)
LIENS
<PAGE> 37
SCHEDULE 3(u)
TAX STATUS
<PAGE> 38
SCHEDULE 3(v)
CERTAIN TRANSACTIONS
<PAGE> 39
SCHEDULE 4(d)
USE OF PROCEEDS
<PAGE> 40
EXHIBIT A
FORM OF CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RIGHTS OF THE PREFERRED SHARES
Attached hereto.
<PAGE> 41
EXHIBIT B
FORM OF REGISTRATION RIGHTS AGREEMENT
Attached hereto.
<PAGE> 42
EXHIBIT C
FORM OF COMPANY COUNSEL OPINION
Attached hereto.
<PAGE> 43
EXHIBIT D-1
FORM OF IRREVOCABLE TRANSFER AGENT INSTRUCTIONS - WARRANTS
Attached hereto.
<PAGE> 44
EXHIBIT D-2
FORM OF IRREVOCABLE TRANSFER AGENT INSTRUCTIONS - PREFERRED SHARES
Attached hereto.
<PAGE> 45
EXHIBIT E
FORM OF WARRANT
Attached hereto.
<PAGE> 46
EXHIBIT F
FORM OF ESCROW AGREEMENT
Attached hereto.
<PAGE> 1
Exhibit 10.0
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT"), dated as of October
17, 1997, by and among Zila, Inc., a Delaware corporation, with headquarters
located at 5227 North Seventh Street, Phoenix, Arizona 85014-2800 (the
"COMPANY"), and the undersigned buyers (each, a "BUYER" and collectively, the
"BUYERS").
WHEREAS:
A. In connection with the Securities Purchase Agreement by and among
the parties of even date herewith (the "SECURITIES PURCHASE AGREEMENT"), the
Company has agreed, upon the terms and subject to the conditions contained
herein, to (i) issue and sell to the Buyers shares of the Company's Series A
Redeemable Convertible Preferred Stock (the "PREFERRED SHARES"), which will be
convertible into shares of the Company's common stock, par value $.001 per share
(the "COMMON STOCK") (as converted, the "CONVERSION SHARES"), in accordance with
the terms of the Company's Certificate of Designations, Preferences and Rights
of the Series A Redeemable Convertible Preferred Stock (the "CERTIFICATE OF
DESIGNATIONS"), and (ii) issue Warrants (the "WARRANTS") to acquire Common Stock
(the "WARRANT SHARES"); and
B. To induce the Buyers to execute and deliver the Securities Purchase
Agreement, the Company has agreed to provide certain registration rights under
the Securities Act of 1933, as amended, and the rules and regulations
thereunder, or any similar successor statute (collectively, the "1933 ACT"), and
applicable state securities laws:
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and the
Buyers hereby agree as follows:
1. DEFINITIONS.
As used in this Agreement, the following terms shall have the
following meanings:
a. "INVESTOR" means a Buyer and any transferee or assignee
thereof to whom a Buyer assigns its rights under this Agreement and who agrees
to become bound by the provisions of this Agreement in accordance with Section
9.
b. "PERSON" means a corporation, a limited liability company,
an association, a partnership, an organization, a business, an individual, a
governmental or political subdivision thereof or a governmental agency.
<PAGE> 2
c. "REGISTER," "REGISTERED," and "REGISTRATION" refer to a
registration effected by preparing and filing one or more Registration
Statements in compliance with the 1933 Act and pursuant to Rule 415 under the
1933 Act or any successor rule providing for offering securities on a continuous
basis ("RULE 415"), and the declaration or ordering of effectiveness of such
Registration Statement(s) by the United States Securities and Exchange
Commission (the "SEC").
d. "REGISTRABLE SECURITIES" means the Conversion Shares
(including any Repricing Shares issuable in accordance with the Certificate of
Designations) and the Warrant Shares issued or issuable upon conversion of the
Preferred Shares and exercise of the Warrants, respectively, and any shares of
capital stock issued or issuable with respect to the Conversion Shares, the
Warrant Shares, the Warrants or the Preferred Shares as a result of any stock
split, stock dividend, recapitalization, exchange or similar event or otherwise.
e. "REGISTRATION STATEMENT" means a registration statement of
the Company filed under the 1933 Act.
Capitalized terms used herein and not otherwise defined herein shall have the
respective meanings set forth in the Securities Purchase Agreement.
2. REGISTRATION.
a. Mandatory Registration. The Company shall prepare, and, on
or prior to 90 days after the date of issuance of the relevant Preferred Shares,
file with the SEC a Registration Statement or Registration Statements (as is
necessary) on Form S-3 (or, if such form is unavailable for such a registration,
on such other form as is available for such a registration, subject to the
consent of the Investors holding a majority of the Registrable Securities and
the provisions of Section 2(c), which consent will not be unreasonably
withheld), covering the resale of all of the Registrable Securities, which
Registration Statement(s) to the extent allowable under the 1933 Act and the
Rules promulgated thereunder (including Rule 416) shall state that such
Registration Statement(s) also covers such indeterminate number of additional
shares of Common Stock as may become issuable upon conversion of the Preferred
Shares or exercise of the Warrants (i) to prevent dilution resulting from stock
splits, stock dividends or similar transactions and (ii) to account for any
obligation to issue Repricing Shares in accordance with the Certificate of
Designations. Such Registration Statement shall initially register for resale at
least 7,000,000 shares of Common Stock, subject to adjustment as provided in
Section 3(b). Such registered shares of Common Stock shall be allocated among
the Investors as set forth in Section 11(k) hereof. The Company shall use its
best efforts to have the Registration Statement(s) declared effective by the SEC
as soon as practicable, but in no event later than 120 days after the issuance
of the relevant Preferred Shares.
b. Counsel and Investment Bankers. Subject to Section 5
hereof, in connection with any offering pursuant to Section 2, the Buyers shall
have the right to select one
-2-
<PAGE> 3
legal counsel and an investment banker or bankers and manager or managers to
administer their interest in the offering, which investment banker or bankers or
manager or managers shall be reasonably satisfactory to the Company. The Company
shall reasonably cooperate with any such counsel and investment bankers.
c. Payments by the Company. If (i) the Registration
Statement(s) covering the Registrable Securities required to be filed by the
Company pursuant to Section 2(a) hereof is not declared effective by the SEC on
or before the time specified in Section 2(a) hereof (the "REGISTRATION
DEADLINE") or if, after the Registration Statement has been declared effective
by the SEC, sales of the Registrable Securities (including any Registrable
Securities required to be registered pursuant to this Section 2(c) or Section
3(b) hereof) cannot be made pursuant to the Registration Statement (by reason of
a stop order or the Company's failure to update the Registration Statement or
any other reason outside the control of the Investors) or (ii) the Common Stock
is not listed or included for quotation on the New York Stock Exchange (the
"NYSE"), the Nasdaq National Market ("NASDAQ NM") or the Nasdaq SmallCap Market
("NASDAQ SMALLCAP") or the American Stock Exchange (the "AMEX") at any time
after the Registration Deadline, then the Company will make payments to the
Investors in such amounts and at such times as shall be determined pursuant to
this Section 2(c) as partial relief for the damages to the Investors by reason
of any such delay in or reduction of their ability to sell the Registrable
Securities (which remedy shall not be exclusive of any other remedies available
at law or in equity). The Company shall pay to each Investor an amount equal to
the product of (i) the aggregate purchase price of the Preferred Shares and
Warrants held by such Investor (including, without limitation, Preferred Shares
that have been converted into Conversion Shares and Warrants that have been
exercised for Warrant Shares then held by such Investor) (the "AGGREGATE SHARE
PRICE") multiplied by (ii) two hundredths (.02) multiplied by (iii) the sum of:
(y) the number of months (prorated for partial months) after the Registration
Deadline and prior to the date the Registration Statement filed pursuant to
Section 2(a) is declared effective by the SEC and (z) the number of months
(prorated for partial months) that sales of any Registrable Securities cannot be
made pursuant to the Registration Statement after the Registration Statement has
been declared effective or the Common Stock is not listed or included for
quotation on the NYSE, Nasdaq NM, Nasdaq SmallCap or AMEX; provided, however,
that there shall be excluded from each such period any delays which are solely
attributable to changes (other than corrections of Company mistakes with respect
to information previously provided by the Investors) required by the Investors
in the Registration Statement with respect to information relating to the
Investors, including, without limitation, changes to the plan of distribution.
(For example, if the Registration Statement is not effective by the Registration
Deadline, the Company would pay $20,000 per month for each $1,000,000 of
Aggregate Share Price until the Registration Statement becomes effective.) Such
amounts shall be paid in cash or, at the Company's option, may be convertible
into Common Stock at the "CONVERSION PRICE" (as defined in the Certificate of
Designations) then in effect. Any shares of Common Stock issued upon conversion
of such amounts shall be Registrable Securities. If the Company desires to
convert the amounts due hereunder into Registrable Securities it shall so notify
the Investors in writing within two (2) business days of the day on which such
amounts are first payable in cash and such amounts shall be so convertible
(pursuant to the mechanics set forth in the Certificate of
-3-
<PAGE> 4
Designations), beginning on the last day upon which the cash amount would
otherwise be due in accordance with the following sentence. Payments of cash
pursuant hereto shall be made within five (5) days after the end of each period
that gives rise to such obligation, provided that, if any such period extends
for more than thirty (30) days, interim payments shall be made for each such
thirty (30) day period.
d. Piggy-Back Registrations. If at any time prior to the
expiration of the Registration Period (as hereinafter defined) a Registration
Statement is not in effect with respect to the Registrable Securities and the
Company proposes to file with the SEC a Registration Statement relating to an
offering for its own account or the account of others under the 1933 Act of any
of its securities (other than on Form S-4 or Form S-8 or their then equivalents
relating to securities to be issued solely in connection with any acquisition of
any entity or business or equity securities issuable in connection with stock
option or other employee benefit plans) the Company shall promptly send to each
Investor who is entitled to registration rights under this Section 2(d) written
notice of the Company's intention to file a Registration Statement and of such
Investor's rights under this Section 2(d) and, if within twenty (20) days after
receipt of such notice, such Investor shall so request in writing, the Company
shall include in such Registration Statement all or any part of the Registrable
Securities such Investor requests to be registered, subject to the priorities
set forth in Section 2(e) below. No right to registration of Registrable
Securities under this Section 2(d) shall be construed to limit any registration
required under Section 2(a). The obligations of the Company under this Section
2(d) may be waived by Investors holding a majority of the Registrable
Securities. If an offering in connection with which an Investor is entitled to
registration under this Section 2(d) is an underwritten offering, then each
Investor whose Registrable Securities are included in such Registration
Statement shall, unless otherwise agreed by the Company, offer and sell such
Registrable Securities in an underwritten offering using the same underwriter or
underwriters and, subject to the provisions of this Agreement, on the same terms
and conditions as other shares of Common Stock included in such underwritten
offering.
e. Priority in Piggy-Back Registration Rights in connection
with Registrations for Company Account. If the registration referred to in
Section 2(d) is to be an underwritten public offering and the managing
underwriter(s) advise the Company in writing, that in their reasonable good
faith opinion, marketing or other factors dictate that a limitation on the
number of shares of Common Stock which may be included in the Registration
Statement is necessary to facilitate and not adversely affect the proposed
offering, then the Company shall include in such registration: (1) first, all
securities the Company proposes to sell for its own account, (2) second, up to
the full number of securities proposed to be registered for the account of the
holders of securities entitled to inclusion of their securities in the
Registration Statement by reason of demand registration rights, and (3) third,
the securities requested to be registered by the Investors and other holders of
securities entitled to participate in the registration, as of the date hereof,
drawn from them pro rata based on the number each has requested to be included
in such registration.
-4-
<PAGE> 5
f. Eligibility for Form S-3. The Company represents, warrants
and covenants that on and after the date hereof it meets and will meet the
requirements for the use of Form S-3 for registration of the sale by the
Investors of the Registrable Securities and the Company has filed and shall file
all reports required to be filed by the Company with the SEC in a timely manner
so as to obtain and maintain such eligibility for the use of Form S-3. In the
event that Form S-3 is not available for sale by the Investors of the
Registrable Securities, then the Company (i) with the consent of the Investors
holding a majority of the Registrable Securities pursuant to Section 2(a), shall
register the sale of the Registrable Securities on another appropriate form and
(ii) the Company shall undertake to register the Registrable Securities on Form
S-3 as soon as such form is available, provided that the Company shall maintain
the effectiveness of the Registration Statement then in effect until such time
as a Registration Statement on Form S-3 covering the Registrable Securities has
been declared effective by the SEC.
g. Rule 416. The Company and the Investors each acknowledge
that an indeterminate number of Registrable Securities shall be registered
pursuant to Rule 416 under the Securities Act so as to include in such
Registration Statement any and all Registrable Securities which may become
issuable (i) to prevent dilution resulting from stock splits, stock dividends or
similar transactions and (ii) to account for any obligation to issue Repricing
Shares in accordance with the Certificate of Designations (collectively, the
"RULE 416 SECURITIES"). In this regard, the Company agrees to take all steps
necessary to ensure that all Registrable Securities are registered pursuant to
Rule 416 under the Securities Act in the Registration Statement and, absent
guidance from the SEC or other definitive authority to the contrary, the Company
shall affirmatively support and not take any action adverse to the position that
the Registration Statements filed hereunder cover all of the Rule 416
Securities. If the Company determines that the Registration Statements filed
hereunder do not cover all of the Rule 416 Securities, the Company shall
immediately provide to each Investor written notice (a "RULE 416 NOTICE")
setting forth the basis for the Company's position and the authority therefor.
3. RELATED OBLIGATIONS.
Whenever an Investor has requested that any Registrable Securities be
registered pursuant to Section 2(c) or at such time as the Company is obligated
to file a Registration Statement with the SEC pursuant to Section 2(a), the
Company will use its best efforts to effect the registration of the Registrable
Securities in accordance with the intended method of disposition thereof and,
pursuant thereto, the Company shall have the following obligations:
a. The Company shall promptly prepare and file with the SEC a
Registration Statement with respect to the Registrable Securities (on or prior
to the 90th day after the date of issuance of any Preferred Shares for the
registration of Registrable Securities pursuant to Section 2(a)) and use its
best efforts to cause such Registration Statement relating to the Registrable
Securities to become effective as soon as possible after such filing (but in no
event later than 120 days after the issuance of any Preferred Shares for the
registration of Registrable Securities pursuant to Section 2(a)), and keep such
Registration Statement effective pursuant to Rule 415 at
-5-
<PAGE> 6
all times until the earlier of (i) the date as of which the Investors may sell
all of the Registrable Securities without restriction pursuant to Rule 144(k)
promulgated under the 1933 Act (or successor thereto) or (ii) the date on which
(A) the Investors shall have sold all the Registrable Securities and (B) none of
the Preferred Shares or Warrants is outstanding, but in any event for a minimum
of three years from the date of issuance of the Preferred Shares (the
"REGISTRATION PERIOD"), which Registration Statement (including any amendments
or supplements thereto and prospectuses contained therein) shall not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein, or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading.
b. The Company shall prepare and file with the SEC such
amendments (including post-effective amendments) and supplements to a
Registration Statement and the prospectus used in connection with such
Registration Statement, which prospectus is to be filed pursuant to Rule 424
promulgated under the 1933 Act, as may be necessary to keep such Registration
Statement effective at all times during the Registration Period, and, during
such period, comply with the provisions of the 1933 Act with respect to the
disposition of all Registrable Securities of the Company covered by such
Registration Statement until such time as all of such Registrable Securities
shall have been disposed of in accordance with the intended methods of
disposition by the seller or sellers thereof as set forth in such Registration
Statement. In the event (i) the Company delivers a Rule 416 Notice to the
Investors or the Investors who hold a majority in interest of the Registrable
Securities shall reasonably determine or the SEC shall state formally or
informally that Rule 416 under the Securities Act does not permit a registration
statement to cover securities which may become issuable upon conversion or
exercise of convertible or exercisable securities by reason of reductions in the
conversion or exercise price of such securities and (ii) the number of shares
available under a Registration Statement filed pursuant to this Agreement is,
for any three (3) consecutive trading days (the last of such three (3) trading
days being the "REGISTRATION TRIGGER DATE"), insufficient to cover one hundred
thirty five percent (135%) of the Registrable Securities issued or issuable upon
a conversion (without giving effect to any limitations on conversion contained
in Section 2(k) of the Certificate of Designations) of the Preferred Stock and
exercise of the Warrants, the Company shall amend the Registration Statement, or
file a new Registration Statement (on the short form available therefor, if
applicable), or both, so as to cover two hundred percent (200%) of the
Registrable Securities issued or issuable (without giving effect to any
limitations on conversion contained in Section 2(k) of the Certificate of
Designations) as of the Registration Trigger Date, in each case, as soon as
practicable, but in any event within fifteen (15) days after the Registration
Trigger Date (based on the market price then in effect of the Common Stock and
other relevant factors on which the Company reasonably elects to rely). The
Company shall cause such amendment and/or new Registration Statement to become
effective as soon as practicable following the filing thereof. In the event the
Company fails to obtain the effectiveness of any such Registration Statement
within sixty (60) days after a Registration Trigger Date, each Investor shall
thereafter have the option, exercisable in whole or in part at any time and from
time to time by delivery of a written notice to the Company (a "REDEMPTION
NOTICE"), to require the Company to purchase for cash, at an amount per share
equal to the Redemption Price (as defined in the Certificate of Designations), a
portion of the Investor's Preferred Shares such that the total number of
-6-
<PAGE> 7
Registrable Securities included on the Registration Statement for resale by such
Investor exceeds 135% of the Registrable Securities issued or issuable upon
conversion (without giving effect to any limitations on conversion contained in
Section 2(k) of the Certificate of Designation) of such Investor's Preferred
Shares and exercise of such Investor's Warrants. If the Company fails to redeem
any of such shares within five (5) business days after its receipt of a
Redemption Notice, then such Investor shall be entitled to the remedies provided
in the Certificate of Designations. For purposes of the calculation set forth in
the foregoing sentence, any restrictions on the convertibility of the Preferred
Shares or exerciseability of the Warrants shall be disregarded and such
calculation shall assume that the Preferred Shares and the Warrants are then
convertible and exercisable, respectively, into shares of Common Stock at the
then prevailing Conversion Rate (as defined in the Company's Certificate of
Designations) and Warrant Exercise Price (as defined in the Warrant),
respectively, if applicable.
c. The Company shall furnish to each Investor whose
Registrable Securities are included in any Registration Statement and its legal
counsel without charge (i) promptly after the same is prepared and filed with
the SEC at least one copy of such Registration Statement and any amendment(s)
thereto, including financial statements and schedules, all documents
incorporated therein by reference and all exhibits, the prospectus included in
such Registration Statement (including each preliminary prospectus) and, with
regards to such Registration Statement(s), any correspondence by or on behalf of
the Company to the SEC or the staff of the SEC and any correspondence from the
SEC or the staff of the SEC to the Company or its representatives, (ii) upon the
effectiveness of any Registration Statement, (or any amendments thereto) a
notice stating that such Registration Statement or any amendment thereto has
been declared effective and (iii) such number of copies of the prospectus
included in such Registration Statement and all amendments and supplements
thereto (or such other number of copies as such Investor may reasonably request)
and such other documents, including any preliminary prospectus, as such Investor
may reasonably request in order to facilitate the disposition of the Registrable
Securities owned by such Investor.
d. The Company shall use reasonable efforts to (i) register
and qualify the Registrable Securities covered by a Registration Statement under
such other securities or "blue sky" laws of such jurisdictions in the United
States as any Investor reasonably requests, (ii) prepare and file in those
jurisdictions, such amendments (including post-effective amendments) and
supplements to such registrations and qualifications as may be necessary to
maintain the effectiveness thereof during the Registration Period, (iii) take
such other actions as may be necessary to maintain such registrations and
qualifications in effect at all times during the Registration Period, and (iv)
take all other actions reasonably necessary or advisable to qualify the
Registrable Securities for sale in such jurisdictions; provided, however, that
the Company shall not be required in connection therewith or as a condition
thereto to (x) qualify to do business in any jurisdiction where it would not
otherwise be required to qualify but for this Section 3(d), (y) subject itself
to general taxation in any such jurisdiction, or (z) file a general consent to
service of process in any such jurisdiction. The Company shall promptly notify
each Investor who holds Registrable Securities of the receipt by the Company of
any notification with respect to the suspension of the registration or
qualification of any of the Registrable Securities
-7-
<PAGE> 8
for sale under the securities or "blue sky" laws of any jurisdiction in the
United States or its receipt of actual notice of the initiation or threatening
of any proceeding for such purpose.
e. As promptly as practicable after becoming aware of such
event, the Company shall notify each Investor in writing of the happening of any
event as a result of which the prospectus included in a Registration Statement,
as then in effect, includes an untrue statement of a material fact or omission
to state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, and promptly prepare a supplement or amendment to such
Registration Statement to correct such untrue statement or omission, and deliver
ten (10) copies of such supplement or amendment to each Investor (or such other
number of copies as such Investor may reasonably request). The Company shall
also promptly notify each Investor in writing (i) when a prospectus or any
prospectus supplement or post-effective amendment has been filed, and when a
Registration Statement or any post-effective amendment has become effective
(notification of such effectiveness shall be delivered to each Investor by
facsimile on the same day of such effectiveness and by overnight mail), (ii) of
any request by the SEC for amendments or supplements to a Registration Statement
or related prospectus or related information, and (iii) of the Company's
reasonable determination that a post-effective amendment to a Registration
Statement would be appropriate.
f. The Company shall use its best efforts to prevent the
issuance of any stop order or other suspension of effectiveness of a
Registration Statement, or the suspension of the qualification of any of the
Registrable Securities for sale in any jurisdiction and, if such an order or
suspension is issued, to obtain the withdrawal of such order or suspension at
the earliest possible moment and to notify each Investor who holds Registrable
Securities being sold of the issuance of such order and the resolution thereof
or its receipt of actual notice of the initiation or threat of any proceeding
for such purpose.
g. The Company shall permit each Investor and a single firm of
counsel, initially Katten Muchin & Zavis or such other counsel as thereafter
designated as selling stockholders' counsel by the Investors who hold a majority
of the Registrable Securities being sold, to review and comment upon a
Registration Statement and all amendments and supplements thereto at least five
(5) business days prior to their filing with the SEC, and not file any document
in a form to which such counsel reasonably objects. The Company shall not submit
a request for acceleration of the effectiveness of a Registration Statement or
any amendment or supplement thereto without the prior approval of such counsel,
which consent shall not be unreasonably withheld.
h. The Company shall make available for inspection by (i) any
Investor, and (ii) one firm of attorneys and one firm of accountants or other
agents retained by the Investors (collectively, the "INSPECTORS") all pertinent
financial and other records, and pertinent corporate documents and properties of
the Company (collectively, the "RECORDS"), as shall be reasonably deemed
necessary by each Inspector to enable each Inspector to exercise its due
diligence responsibility, and cause the Company's officers, directors and
employees to supply all
-8-
<PAGE> 9
information which any Inspector may reasonably request for purposes of such due
diligence; provided, however, that each Inspector shall hold in strict
confidence and shall not make any disclosure (except to an Investor) or use of
any Record or other information which the Company determines in good faith to be
confidential, and of which determination the Inspectors are so notified, unless
(a) the disclosure of such Records is necessary to avoid or correct a
misstatement or omission in any Registration Statement or is otherwise required
under the 1933 Act, (b) the release of such Records is ordered pursuant to a
final, non-appealable subpoena or order from a court or government body of
competent jurisdiction, or (c) the information in such Records has been made
generally available to the public other than by disclosure in violation of this
or any other agreement of which the Inspector has knowledge. Each Investor
agrees that it shall, upon learning that disclosure of such Records is sought in
or by a court or governmental body of competent jurisdiction or through other
means, give prompt notice to the Company and allow the Company, at its expense,
to undertake appropriate action to prevent disclosure of, or to obtain a
protective order for, the Records deemed confidential.
i. The Company shall hold in confidence and not make any
disclosure of information concerning an Investor provided to the Company unless
(i) disclosure of such information is necessary to comply with federal or state
securities laws, (ii) the disclosure of such information is necessary to avoid
or correct a misstatement or omission in any Registration Statement, (iii) the
release of such information is ordered pursuant to a subpoena or other final,
non-appealable order from a court or governmental body of competent
jurisdiction, (iv) such information has been made generally available to the
public other than by disclosure in violation of this Agreement or any other
agreement or (v) such Investor consents to the form and content of any such
disclosure. The Company agrees that it shall, upon learning that disclosure of
such information concerning an Investor is sought in or by a court or
governmental body of competent jurisdiction or through other means, give prompt
written notice to such Investor and allow such Investor, at the Investor's
expense, to undertake appropriate action to prevent disclosure of, or to obtain
a protective order for, such information.
j. The Company shall use its best efforts either to (i) cause
all the Registrable Securities covered by a Registration Statement to be listed
on each securities exchange on which securities of the same class or series
issued by the Company are then listed, if any, if the listing of such
Registrable Securities is then permitted under the rules of such exchange, or
(ii) secure designation and quotation of all the Registrable Securities covered
by the Registration Statement on the Nasdaq National Market or, if, despite the
Company's best efforts to satisfy the preceding clause (i) or (ii), the Company
is unsuccessful in satisfying the preceding clause (i) or (ii), to secure the
inclusion for quotation on The Nasdaq SmallCap Market for such Registrable
Securities and, without limiting the generality of the foregoing, to arrange for
at least two market makers to register with the National Association of
Securities Dealers, Inc. ("NASD") as such with respect to such Registrable
Securities. The Company shall pay all fees and expenses in connection with
satisfying its obligation under this Section 3(l).
k. The Company shall cooperate with the Investors who hold
Registrable Securities being offered and, to the extent applicable, any managing
underwriter or underwriters,
-9-
<PAGE> 10
to facilitate the timely preparation and delivery of certificates (not bearing
any restrictive legend) representing the Registrable Securities to be offered
pursuant to a Registration Statement and enable such certificates to be in such
denominations or amounts, as the case may be, as the Investors may reasonably
request and registered in such names as the Investors may request.
l. The Company shall take all other reasonable actions
necessary to expedite and facilitate disposition by the Investors of Registrable
Securities pursuant to a Registration Statement.
m. The Company shall provide a transfer agent and registrar
for all such Registrable Securities not later than the effective date of such
Registration Statement.
n. If requested by an Investor, the Company shall (i)
immediately incorporate in a prospectus supplement or post-effective amendment
such information as the Investors agree should be included therein relating to
the sale and distribution of Registrable Securities; (ii) make all required
filings of such prospectus supplement or post-effective amendment as soon as
notified of the matters to be incorporated in such prospectus supplement or
post-effective amendment; and (iii) supplement or make amendments to any
Registration Statement if requested by a shareholder of such Registrable
Securities.
o. The Company shall use its best efforts to cause the
Registrable Securities covered by the applicable Registration Statement to be
registered with or approved by such other governmental agencies or authorities
as may be necessary to consummate the disposition of such Registrable
Securities.
p. The Company shall make generally available to its security
holders as soon as practical, but not later than 90 days after the close of the
period covered thereby, an earnings statement (in form complying with the
provisions of Rule 158 under the 1933 Act) covering a twelve-month period
beginning not later than the first day of the Company's fiscal quarter next
following the effective date of the Registration Statement.
q. The Company shall otherwise use its best efforts to comply
with all applicable rules and regulations of the SEC in connection with any
registration hereunder.
r. Within two (2) business days after the Registration
Statement which includes the Registrable Securities is ordered effective by the
SEC, the Company shall deliver, and shall cause legal counsel for the Company to
deliver, to the transfer agent for such Registrable Securities (with copies to
the Investors whose Registrable Securities are included in such Registration
Statement) confirmation that the Registration Statement has been declared
effective by the SEC in the form attached hereto as Exhibit A.
-10-
<PAGE> 11
4. OBLIGATIONS OF THE INVESTORS.
a. At least five (5) business days prior to the first anticipated filing
date of a Registration Statement, the Company shall notify each Investor in
writing of the information (described in paragraph (b) below) the Company
requires from each such Investor if such Investor elects to have any of such
Investor's Registrable Securities included in such Registration Statement. It
shall be a condition precedent to the obligations of the Company to complete the
registration pursuant to this Agreement with respect to the Registrable
Securities of a particular Investor that such Investor shall furnish to the
Company such information regarding itself, the Registrable Securities held by it
and the intended method of disposition of the Registrable Securities held by it
as shall be reasonably required to effect the registration of such Registrable
Securities and shall execute such documents in connection with such registration
as the Company may reasonably request.
b. Each Investor, by such Investor's acceptance of the
Registrable Securities, agrees to cooperate with the Company as reasonably
requested by the Company in connection with the preparation and filing of any
Registration Statement hereunder, unless such Investor has notified the Company
in writing of such Investor's election to exclude all of such Investor's
Registrable Securities from such Registration Statement.
c. Each Investor agrees that, upon receipt of any notice from
the Company of the happening of any event of the kind described in Section 3(g)
or the first sentence of Section 3(f), such Investor will immediately
discontinue disposition of Registrable Securities pursuant to any Registration
Statement(s) covering such Registrable Securities until such Investor's receipt
of the copies of the supplemented or amended prospectus contemplated by Section
3(g) or the first sentence of Section 3(f).
5. EXPENSES OF REGISTRATION.
All reasonable expenses, other than underwriting discounts and
commissions, incurred in connection with registrations, filings or
qualifications pursuant to Sections 2 and 3, including, without limitation, all
registration, listing and qualifications fees, printers and accounting fees, and
fees and disbursements of counsel for the Company and fees and disbursements of
one counsel for the Investors, shall be paid by the Company; provided, however,
that the Company shall not be obligated to pay more than $2,500 of the fees and
disbursements of one counsel for the Investors for each Registration Statement
that is filed.
6. INDEMNIFICATION.
In the event any Registrable Securities are included in a
Registration Statement under this Agreement:
a. To the fullest extent permitted by law, the Company will,
and hereby does, indemnify, hold harmless and defend each Investor who holds
such Registrable Securities,
-11-
<PAGE> 12
the directors, officers, partners, employees, agents of, and each Person, if
any, who controls, any Investor within the meaning of the 1933 Act or the
Securities Exchange Act of 1934, as amended (the "1934 ACT"), and any
underwriter (as defined in the 1933 Act) for the Investors, and the directors
and officers of, and each Person, if any, who controls, any such underwriter
within the meaning of the 1933 Act or the 1934 Act (each, an "INDEMNIFIED
PERSON"), against any losses, claims, damages, liabilities, judgments, fines,
penalties, charges, costs, attorneys' fees, amounts paid in settlement or
expenses, joint or several (collectively, "CLAIMS"), incurred in investigating,
preparing or defending any action, claim, suit, inquiry, proceeding,
investigation or appeal taken from the foregoing by or before any court or
governmental, administrative or other regulatory agency, body or the SEC,
whether pending or threatened, whether or not an indemnified party is or may be
a party thereto ("INDEMNIFIED DAMAGES"), to which any of them may become subject
insofar as such Claims (or actions or proceedings, whether commenced or
threatened, in respect thereof) arise out of or are based upon: (i) any untrue
statement or alleged untrue statement of a material fact in a Registration
Statement or any post-effective amendment thereto or in any filing made in
connection with the qualification of the offering under the securities or other
"blue sky" laws of any jurisdiction in which Registrable Securities are offered
("BLUE SKY FILING"), or the omission or alleged omission to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which the statements therein were made, not
misleading, (ii) any untrue statement or alleged untrue statement of a material
fact contained in any preliminary prospectus if used prior to the effective date
of such Registration Statement, or contained in the final prospectus (as amended
or supplemented, if the Company files any amendment thereof or supplement
thereto with the SEC) or the omission or alleged omission to state therein any
material fact necessary to make the statements made therein, in light of the
circumstances under which the statements therein were made, not misleading, or
(iii) any violation or alleged violation by the Company of the 1933 Act, the
1934 Act, any other law, including, without limitation, any state securities
law, or any rule or regulation thereunder relating to the offer or sale of the
Registrable Securities pursuant to a Registration Statement (the matters in the
foregoing clauses (i) through (iii) being, collectively, "VIOLATIONS"). Subject
to the restrictions set forth in Section 6(d) with respect to the number of
legal counsel, the Company shall reimburse the Investors and each such
underwriter or controlling person, promptly as such expenses are incurred and
are due and payable, for any legal fees or other reasonable expenses incurred by
them in connection with investigating or defending any such Claim.
Notwithstanding anything to the contrary contained herein, the indemnification
agreement contained in this Section 6(a): (i) shall not apply to a Claim arising
out of or based upon a Violation which occurs in reliance upon and in conformity
with information furnished in writing to the Company by any Indemnified Person
or underwriter for such Indemnified Person expressly for use in connection with
the preparation of the Registration Statement or any such amendment thereof or
supplement thereto, if such prospectus was timely made available by the Company
pursuant to Section 3(c); (ii) with respect to any preliminary prospectus, shall
not inure to the benefit of any such person from whom the person asserting any
such Claim purchased the Registrable Securities that are the subject thereof (or
to the benefit of any person controlling such person) if the untrue statement or
omission of material fact contained in the preliminary prospectus was corrected
in the prospectus, as then amended or supplemented, if such prospectus
-12-
<PAGE> 13
was timely made available by the Company pursuant to Section 3(c), and the
Indemnified Person was promptly advised in writing not to use the incorrect
prospectus prior to the use giving rise to a violation and such Indemnified
Person, notwithstanding such advice, used it; (iii) shall not be available to
the extent such Claim is based on a failure of the Investor to deliver or to
cause to be delivered the prospectus made available by the Company; and (iv)
shall not apply to amounts paid in settlement of any Claim if such settlement is
effected without the prior written consent of the Company, which consent shall
not be unreasonably withheld. Such indemnity shall remain in full force and
effect regardless of any investigation made by or on behalf of the Indemnified
Person and shall survive the transfer of the Registrable Securities by the
Investors pursuant to Section 9.
b. In connection with any Registration Statement in which an
Investor is participating, each such Investor agrees to severally and not
jointly indemnify, hold harmless and defend, to the same extent and in the same
manner as is set forth in Section 6(a), the Company, each of its directors, each
of its officers who signs the Registration Statement, each Person, if any, who
controls the Company within the meaning of the 1933 Act or the 1934 Act and each
other Person selling securities pursuant to the Registration Statement or any
directors, officers or Persons controlling such party (collectively and together
with an Indemnified Person, an "INDEMNIFIED PARTY"), against any Claim or
Indemnified Damages to which any of them may become subject, under the 1933 Act,
the 1934 Act or otherwise, insofar as such Claim or Indemnified Damages arise
out of or are based upon any Violation, in each case to the extent, and only to
the extent, that such Violation occurs in reliance upon and in conformity with
written information furnished to the Company by such Investor expressly for use
in connection with such Registration Statement; and, subject to Section 6(d),
such Investor will reimburse any legal or other expenses reasonably incurred by
them in connection with investigating or defending any such Claim; provided,
however, that the indemnity agreement contained in this Section 6(b) and the
agreement with respect to contribution contained in Section 7 shall not apply to
amounts paid in settlement of any Claim if such settlement is effected without
the prior written consent of such Investor, which consent shall not be
unreasonably withheld; provided, further, however, that the Investor shall be
liable under this Section 6(b) for only that amount of a Claim or Indemnified
Damages as does not exceed the net proceeds to such Investor as a result of the
sale of Registrable Securities pursuant to such Registration Statement. Such
indemnity shall remain in full force and effect regardless of any investigation
made by or on behalf of such Indemnified Party and shall survive the transfer of
the Registrable Securities by the Investors pursuant to Section 9.
Notwithstanding anything to the contrary contained herein, the indemnification
agreement contained in this Section 6(b) with respect to any preliminary
prospectus shall not inure to the benefit of any Indemnified Party if the untrue
statement or omission of material fact contained in the preliminary prospectus
was corrected on a timely basis in the prospectus, as then amended or
supplemented.
c. The Company shall be entitled to receive indemnities from
underwriters, selling brokers, dealer managers and similar securities industry
professionals participating in any distribution, to the same extent as provided
above, with respect to information such persons so furnished in writing
expressly for inclusion in the Registration Statement.
-13-
<PAGE> 14
d. Promptly after receipt by an Indemnified Person or
Indemnified Party under this Section 6 of notice of the commencement of any
action or proceeding (including any governmental action or proceeding) involving
a Claim, such Indemnified Person or Indemnified Party shall, if a Claim in
respect thereof is to be made against any indemnifying party under this Section
6, deliver to the indemnifying party a written notice of the commencement
thereof, and the indemnifying party shall have the right to participate in, and,
to the extent the indemnifying party so desires, jointly with any other
indemnifying party similarly noticed, to assume control of the defense thereof
with counsel mutually satisfactory to the indemnifying party and the Indemnified
Person or the Indemnified Party, as the case may be; provided, however, that an
Indemnified Person or Indemnified Party shall have the right to retain its own
counsel with the fees and expenses to be paid by the indemnifying party, if, in
the reasonable opinion of counsel retained by the indemnifying party, the
representation by such counsel of the Indemnified Person or Indemnified Party
and the indemnifying party would be inappropriate due to actual or potential
differing interests between such Indemnified Person or Indemnified Party and any
other party represented by such counsel in such proceeding. The Company shall
pay reasonable fees for only one separate legal counsel for the Investors, and
such legal counsel shall be selected by the Investors holding a majority in
interest of the Registrable Securities included in the Registration Statement to
which the Claim relates. The Indemnified Party or Indemnified Person shall
cooperate fully with the indemnifying party in connection with any negotiation
or defense of any such action or claim by the indemnifying party and shall
furnish to the indemnifying party all information reasonably available to the
Indemnified Party or Indemnified Person which relates to such action or claim.
The indemnifying party shall keep the Indemnified Party or Indemnified Person
fully apprised at all times as to the status of the defense or any settlement
negotiations with respect thereto. No indemnifying party shall be liable for any
settlement of any action, claim or proceeding effected without its written
consent, provided, however, that the indemnifying party shall not unreasonably
withhold, delay or condition its consent. No indemnifying party shall, without
the consent of the Indemnified Party or Indemnified Person, consent to entry of
any judgment or enter into any settlement or other compromise which does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such Indemnified Party or Indemnified Person of a release from all liability
in respect to such claim or litigation. Following indemnification as provided
for hereunder, the indemnifying party shall be subrogated to all rights of the
Indemnified Party or Indemnified Person with respect to all third parties, firms
or corporations relating to the matter for which indemnification has been made.
The failure to deliver written notice to the indemnifying party within a
reasonable time of the commencement of any such action shall not relieve such
indemnifying party of any liability to the Indemnified Person or Indemnified
Party under this Section 6, except to the extent that the indemnifying party is
prejudiced in its ability to defend such action.
e. The indemnification required by this Section 6 shall be
made by periodic payments of the amount thereof during the course of the
investigation or defense, as and when bills are received or Indemnified Damages
are incurred.
-14-
<PAGE> 15
f. The indemnity agreements contained herein shall be in
addition to (i) any cause of action or similar right of the Indemnified Party or
Indemnified Person against the indemnifying party or others, and (ii) any
liabilities the indemnifying party may be subject to pursuant to the law.
7. CONTRIBUTION.
To the extent any indemnification by an indemnifying party is
prohibited or limited by law, the indemnifying party agrees to make the maximum
contribution with respect to any amounts for which it would otherwise be liable
under Section 6 to the fullest extent permitted by law; provided, however, that:
(i) no contribution shall be made under circumstances where the maker would not
have been liable for indemnification under the fault standards set forth in
Section 6; (ii) no Person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the 1933 Act) shall be entitled to contribution from
any seller of Registrable Securities who was not guilty of fraudulent
misrepresentation; and (iii) contribution by any seller of Registrable
Securities shall be limited in amount to the net amount of proceeds received by
such seller from the sale of such Registrable Securities.
8. REPORTS UNDER THE 1934 ACT.
With a view to making available to the Investors the benefits
of Rule 144 promulgated under the 1933 Act or any other similar rule or
regulation of the SEC that may at any time permit the Investors to sell
securities of the Company to the public without registration ("RULE 144"), the
Company agrees to:
a. make and keep public information available, as those terms
are understood and defined in Rule 144;
b. file with the SEC in a timely manner all reports and other
documents required of the Company under the 1933 Act and the 1934 Act so long as
the Company remains subject to such requirements (it being understood that
nothing herein shall limit the Company's obligations under Section 4(c) of the
Securities Purchase Agreement) and the filing of such reports and other
documents is required for the applicable provisions of Rule 144; and
c. furnish to each Investor so long as such Investor owns
Preferred Shares, Warrants or Registrable Securities, promptly upon request, (i)
a written statement by the Company that it has complied with the reporting
requirements of Rule 144, the 1933 Act and the 1934 Act, (ii) a copy of the most
recent annual or quarterly report of the Company and such other reports and
documents so filed by the Company, and (iii) such other information as may be
reasonably requested to permit the investors to sell such securities pursuant to
Rule 144 without registration.
-15-
<PAGE> 16
9. ASSIGNMENT OF REGISTRATION RIGHTS.
The rights under this Agreement, including the right to have
the Company register Registrable Securities pursuant hereto, shall be
automatically assignable by the Investors to any transferee of all or any
portion of Preferred Shares, Warrants or Registrable Securities if: (i) the
Investor agrees in writing with the transferee or assignee to assign such
rights, and a copy of such agreement is furnished to the Company within a
reasonable time after such assignment; (ii) the Company is, within a reasonable
time after such transfer or assignment, furnished with written notice of (a) the
name and address of such transferee or assignee, and (b) the securities with
respect to which such registration rights are being transferred or assigned;
(iii) immediately following such transfer or assignment the further disposition
of such securities by the transferee or assignee is restricted under the 1933
Act and applicable state securities laws; (iv) at or before the time the Company
receives the written notice contemplated by clause (ii) of this sentence the
transferee or assignee agrees in writing with the Company to be bound by all of
the provisions contained herein; (v) such transfer shall have been made in
accordance with the applicable requirements of the Securities Purchase
Agreement; and (vi) such transferee shall be an "accredited investor" as that
term is defined in Rule 501 of Regulation D promulgated under the 1933 Act.
10. AMENDMENT OF REGISTRATION RIGHTS.
Provisions of this Agreement may be amended and the observance
thereof may be waived (either generally or in a particular instance and either
retroactively or prospectively), only with the written consent of the Company
and Investors who hold all of the Registrable Securities. Any amendment or
waiver effected in accordance with this Section 10 shall be binding upon each
Investor and the Company.
11. MISCELLANEOUS.
a. A person or entity is deemed to be a holder of Registrable
Securities whenever such person or entity owns of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more persons or entities with respect to the same
Registrable Securities, the Company shall act upon the basis of instructions,
notice or election received from the registered owner of such Registrable
Securities.
-16-
<PAGE> 17
b. Any notices consents, waivers or other communications
required or permitted to be given under the terms of this Agreement must be in
writing and will be deemed to have been delivered (i) upon receipt, when
delivered personally; (ii) upon receipt, when sent by facsimile (provided a
confirmation of transmission is mechanically generated and kept on file by the
sending party); (iii) three (3) days after being sent by U.S. certified mail,
return receipt requested; or (iv) one (1) day after deposit with a nationally
recognized overnight delivery service, in each case properly addressed to the
party to receive the same. The addresses and facsimile numbers for such
communications shall be:
If to the Company:
Zila, Inc.
5227 North Seventh Street
Phoenix, Arizona 85014-2800
Telephone: 602-266-6700
Facsimile: 602-234-2264
Attention: President
With a copy to:
Streich Lang, P.A.
Renaissance One
Two North Central Avenue
Phoenix, Arizona 85504-2391
Telephone: 619-229-5509
Facsimile: 619-229-5890
Attention: Kevin Tourek, Esq.
If to a Buyer, to its address and facsimile number on the
Schedule of Buyers attached hereto, with copies to such
Buyer's counsel as set forth on the Schedule of Buyers.
Each party shall provide five (5) days prior notice to the other party of any
change in address, phone number or facsimile number.
c. Failure of any party to exercise any right or remedy under
this Agreement or otherwise, or delay by a party in exercising such right or
remedy, shall not operate as a waiver thereof.
d. The corporate law of the State of Delaware shall govern all
issues and questions concerning the relative rights and obligations of the
Company and holders of its securities. All other issues and questions concerning
the construction, validity, enforcement and interpretation of this Agreement and
the exhibits and schedules hereto shall be governed by, and construed in
accordance with, the laws of the State of New York, without giving effect to any
-17-
<PAGE> 18
choice of law or conflict of law rules or provisions (whether of the State of
New York or any other jurisdiction) that would cause the application of the laws
of any jurisdiction other than the State of New York. Each party hereby
irrevocably submits to the non-exclusive jurisdiction of the state and federal
courts sitting the City of New York, Borough of Manhattan for the adjudication
of any dispute hereunder or in connection herewith or with any transaction
contemplated hereby or discussed herein, and hereby irrevocably waives, and
agrees not to assert in any suit, action or proceeding, any claim that it is not
personally subject to the jurisdiction of any such court, that such suit, action
or proceeding is brought in an inconvenient forum or that the venue of such
suit, action or proceeding is improper. Each party hereby irrevocably waives
personal service of process and consents to process being served in any such
suit, action or proceeding by mailing a copy thereof to such party at the
address for such notices to it under this Agreement and agrees that such service
shall constitute good and sufficient service of process and notice thereof.
Nothing contained herein shall be deemed to limit in any way any right to serve
process in any manner permitted by law. If any provision of this Agreement shall
be invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other jurisdiction.
e. This Agreement, the Securities Purchase Agreement and the
Warrants constitute the entire agreement among the parties hereto with respect
to the subject matter hereof and thereof. There are no restrictions, promises,
warranties or undertakings, other than those set forth or referred to herein and
therein. This Agreement, the Securities Purchase Agreement and the Warrants
supersede all prior agreements and understandings among the parties hereto with
respect to the subject matter hereof and thereof.
f. Subject to the requirements of Section 9, this Agreement
shall inure to the benefit of and be binding upon the permitted successors and
assigns of each of the parties hereto.
g. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
h. This Agreement may be executed in two or more identical
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same agreement. This Agreement, once executed by a party,
may be delivered to the other party hereto by facsimile transmission of a copy
of this Agreement bearing the signature of the party so delivering this
Agreement.
i. Each party shall do and perform, or cause to be done and
performed, all such further acts and things, and shall execute and deliver all
such other agreements, certificates, instruments and documents, as the other
party may reasonably request in order to carry out the intent and accomplish the
purposes of this Agreement and the consummation of the transactions contemplated
hereby.
-18-
<PAGE> 19
j. All consents and other determinations to be made by the
Investors pursuant to this Agreement shall be made, unless otherwise specified
in this Agreement, by Investors holding a majority of the Registrable
Securities, determined as if all of the Preferred Shares and the Warrants then
outstanding have been converted into or exercised for Registrable Securities.
k. The initial number of Registrable Securities included on
any Registration Statement and each increase (if any) to the number of
Registrable Securities included thereon shall be allocated pro rata among the
Investors based on the number of Registrable Securities held by each Investor at
the time of such establishment or increase, as the case may be. In the event an
Investor shall sell or otherwise transfer any of such holder's Registrable
Securities, each transferee shall be allocated a pro rata portion of the number
of Registrable Securities included on a Registration Statement for such
transferor. Any shares of Common Stock included on a Registration Statement and
which remain allocated to any person or entity which does not hold any
Registrable Securities shall be allocated to the remaining Investors, pro rata
based on the number of shares of Registrable Securities then held by such
Investors. For the avoidance of doubt, the number of Registrable Securities held
by any Investor shall be determined as if all shares of Preferred Stock and
Warrants then outstanding were converted into or exercised for Registrable
Securities.
l. The language used in this Agreement will be deemed to be
the language chosen by the parties to express their mutual intent and no rules
of strict construction will be applied against any party.
-19-
<PAGE> 20
IN WITNESS WHEREOF, the parties have caused this Registration Rights
Agreement to be duly executed as of day and year first above written.
COMPANY: BUYERS:
ZILA, INC. OLYMPUS SECURITIES, LTD.
By: /s/ Joseph Hines By: /s/ Anne Dupuy
----------------------------- -----------------------------
Name: Joseph Hines Name: Anne Dupuy
-------------------------- Its: Officer
Its: President
--------------------------
NELSON PARTNERS
By: /s/ Anne Dupuy
-----------------------------
Name: Anne Dupuy
Its: Officer
LEONARDO, L.P.
By: Angelo, Gordon & Co., L.P.
General Partner
By: /s/ Michael L. Gordon
-----------------------------
Michael L. Gordon
Chief Operating Officer
-20-
<PAGE> 21
GAM ARBITRAGE INVESTMENTS, INC.
By: Angelo, Gordon & Co., L.P.
Investment Adviser
By: /s/ Michael L. Gordon
-----------------------------
Michael L. Gordon
Chief Operating Officer
AG SUPER FUND INTERNATIONAL
PARTNERS, L.P.
By: Angelo, Gordon & Co., L.P.
General Partner
By: /s/ Michael L. Gordon
-----------------------------
Michael L. Gordon
Chief Operating Officer
RAPHAEL, L.P.
By: /s/ Michael L. Gordon
-----------------------------
Michael L. Gordon
Chief Operating Officer
RAMIUS FUND, LTD.
By: AG Ramius Partners, L.L.C.
Investment Adviser
By: /s/ Michael L. Gordon
-----------------------------
Michael L. Gordon
Managing Officer
HICK INVESTMENTS, LTD.
-21-
<PAGE> 22
By: AG Ramius Partners, L.L.C.
Investment Adviser
By: /s/ Michael L. Gordon
-----------------------------
Michael L. Gordon
Managing Officer
CAPITAL VENTURES INTERNATIONAL
By: Heights Capital Management, Inc.,
as Agent
By: /s/ Andrew Frost
-----------------------------
Name: Andrew Frost
Its: President
-22-
<PAGE> 23
SCHEDULE OF BUYERS
<TABLE>
<CAPTION>
INVESTOR NAME Investor Address Number of Investor's Representatives' Address
and Facsimile Number Units and Facsimile Number
- ------------------------- --------------------------------------- --------- ------------------------------------
<S> <C> <C> <C>
Olympus Securities, Ltd. c/o Leeds Management Services 4,500 Citadel Investment Group, L.L.C.
129 Front Street 225 West Washington Street
Hamilton HM12 Chicago, Illinois 60606
Bermuda Attention: Ken Griffin
Attn: Anne Dupuy Michael Hughes
Facsimile: (441) 292-2239 Facsimile: (312) 368-4347
Katten Muchin & Zavis
525 West Monroe Street
Chicago, Illinois 60661
Attention: Wesley Nissen
Kevin Barney
Facsimile: (312) 902-1061
Nelson Partners c/o Leeds Management Services 5,500 Citadel Investment Group, L.L.C.
129 Front Street 225 West Washington Street
Hamilton HM 12 Chicago, Illinois 60606
Bermuda Attention: Ken Griffin
Attn: Anne Dupuy Michael Hughes
Facsimile: (441) 292-2239 Facsimile: (312) 368-4347
Katten Muchin & Zavis
525 West Monroe Street
Chicago, Illinois 60661
Attention: Wesley Nissen
Kevin Barney
Facsimile: (312) 902-1061
Leonardo, L.P. _Angelo, Gordon & Co., L.P. 6,100
245 Park Avenue - 26th Floor
New York, New York 10167
Attn: Gary Wolf
Facsimile: (212) 867-6449
GAM Arbitrage Investments, _Angelo, Gordon & Co., L.P. 500
Inc. 245 Park Avenue - 26th Floor
New York, New York 10167
Attn: Gary Wolf
Facsimile: (212) 867-6449
AG Super Fund International _Angelo, Gordon & Co., L.P. 500
Partners, L.P. 245 Park Avenue - 26th Floor
New York, New York 10167
Attn: Gary Wolf
Facsimile: (212) 867-6449
Raphael, L.P. _Angelo, Gordon & Co., L.P. 1,000
245 Park Avenue - 26th Floor
New York, New York 10167
Attn: Gary Wolf
Facsimile: (212) 867-6449
Ramius Fund, Ltd. _Angelo, Gordon & Co., L.P. 1,400
245 Park Avenue - 26th Floor
</TABLE>
-23-
<PAGE> 24
<TABLE>
<CAPTION>
INVESTOR NAME Investor Address Number of Investor's Representatives' Address
and Facsimile Number Units and Facsimile Number
- ------------------------- --------------------------------------- --------- ------------------------------------
<S> <C> <C> <C>
New York, New York 10167
Attn: Gary Wolf
Facsimile: (212) 867-6449
Hick Investments, Ltd. _Angelo, Gordon & Co., L.P. 500
245 Park Avenue - 26th Floor
New York, New York 10167
Attn: Gary Wolf
Facsimile: (212) 867-6449
Capital Ventures International _Heights Capital Management, Inc. 10,000 Klehr, Harrison, Harvey,
425 California Street Branzburg & Ellers
Suite 1100 1401 Walnut Street
San Francisco, California 94104 Philadelphia, Pennsylvania 19109
Attn: Michael Spolan Attention: Steve Burdumy
Facsimile: (415) 403-6525 Gerald Stahlecker
Facsimile: (215) 568-6603
</TABLE>
-24-
<PAGE> 25
EXHIBIT A
FORM OF NOTICE OF EFFECTIVENESS
OF REGISTRATION STATEMENT
_______________________________
ATTN: ___________________
RE: ZILA, INC.
Ladies and Gentlemen:
We are counsel to Zila, Inc., a Delaware corporation (the "COMPANY"),
and have represented the Company in connection with that certain Securities
Purchase Agreement (the "PURCHASE AGREEMENT") entered into by and among the
Company and the buyers named therein (collectively, the "HOLDERS") pursuant to
which the Company issued to the Holders shares of its Series A Redeemable
Convertible Preferred Stock, par value $.001 per share (the "PREFERRED SHARES"),
and warrants to purchase _____ shares of the Company's common stock, par value
$.001 per share (the "COMMON STOCK"), for each Preferred Share, subject to
adjustment (the "WARRANTS"). Pursuant to the Purchase Agreement, the Company
also has entered into a Registration Rights Agreement with the Holders (the
"REGISTRATION RIGHTS AGREEMENT") pursuant to which the Company agreed, among
other things, to register the Registrable Securities (as defined in the
Registration Rights Agreement), including the shares of Common Stock issuable
upon conversion of the Preferred Shares and exercise of the Warrants, under the
Securities Act of 1933, as amended (the "1933 ACT"). In connection with the
Company's obligations under the Registration Rights Agreement, on ____________
___, 1997, the Company filed a Registration Statement on Form S-3 (File No.
333-_____________) (the "REGISTRATION STATEMENT") with the Securities and
Exchange Commission (the "SEC") relating to the Registrable Securities which
names each of the Holders as a selling stockholder thereunder.
In connection with the foregoing, we advise you that a member of the
SEC's staff has advised us by telephone that the SEC has entered an order
declaring the Registration Statement effective under the 1933 Act at [ENTER TIME
OF EFFECTIVENESS] on [ENTER DATE OF EFFECTIVENESS] and we have no knowledge,
after telephonic inquiry of a member of the SEC's staff, that any stop order
suspending its effectiveness has been issued or that any proceedings for that
purpose are pending before, or threatened by, the SEC and the Registrable
Securities are available for resale under the 1933 Act pursuant to the
Registration Statement.
Very truly yours,
STREICH LANG, P.A.
By: ________________________
cc: [LIST NAMES OF HOLDERS]
-25-
<PAGE> 1
EXHIBIT 11
ZILA, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME (LOSS) PER COMMON SHARE
THREE YEARS ENDED JULY 31, 1997
<TABLE>
<CAPTION>
July 31,
----------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
PRIMARY (LOSS) INCOME PER
COMMON SHARE:
Computation for Statements of Operations --
Net (loss) income $(6,458,377) $ 1,217,298 $(1,282,357)
----------- ----------- -----------
Weighted average number of common shares
outstanding 31,530,096 30,095,791 29,134,901
Assumed exercise of stock options
and warrants(1) 305,445
----------- ----------- -----------
31,530,096 30,401,236 29,134,901
----------- ----------- -----------
Primary loss per common share $ (.20) $ .04 $ (.04)
=========== =========== ===========
FULLY DILUTED (LOSS) INCOME PER
COMMON SHARE:
Computation for Statements of Operations --
Net (loss) income $(6,458,377) $ 1,217,298 $(1,282,357)
----------- ----------- -----------
Weighted average number of common shares
outstanding 31,530,096 30,095,791 29,134,901
Assumed exercise of stock options
and warrants(1) 456,954
----------- ----------- -----------
31,530,096 30,552,745 29,134,901
----------- ----------- -----------
Fully diluted income (loss) per common share $ (.20) $ .04 $ (.04)
=========== =========== ===========
</TABLE>
(1) The stock options and warrants are included only in the periods in which
they are dilutive.
<PAGE> 1
Exhibit 21
Subsidiaries of Registrant
<TABLE>
<CAPTION>
Name under which Subsidiary
Subsidiaries State or Jurisdiction of Incorporation Does Business
- ------------ -------------------------------------- ----------------------------
<S> <C> <C>
Zila Pharmaceuticals, Inc. Nevada Zila Pharmaceuticals, Inc.
Bio-Dental Technologies Corporation California Bio-Dental Technologies Corporation
Cygnus Imaging, Inc. Arizona Cygnus Imaging, Inc.
Zila Ltd. United Kingdom Zila Ltd.
Zila International, Inc. Arizona Zila International, Inc.
*Ryker Dental of Kentucky, Inc. Kentucky The Supply House; Zila Dental Supply
*Integrated Dental Technologies, Inc. California Integrated Dental Technologies, Inc.
Zila Acquisition Corp. Arizona Zila Acquisition Corp.
Zila Acquisition Corp. Delaware Zila Acquisition Corp.
</TABLE>
*wholly owned subsidiary of Bio Dental Technologies Corporation
<PAGE> 1
EXHIBIT 23-A
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements
No.33-32805 and No. 33-32970 of Zila, Inc. on Form S-8 and Registration
Statements No. 33-46239, No. 333-06019, No. 333-00645 and No. 333-31651 of
Zila, Inc. on Form S-3 of our report dated October 28, 1997 appearing in this
Annual Report of Form 10-K of Zila, Inc. for the year ended July 31, 1997.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
October 28, 1997
<PAGE> 1
EXHIBIT 23-B
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in Registration Statements No.
33-32805 and No. 33-32970 of Zila, Inc. on Form S-8 and Registration Statements
No. 33-46239, No. 333-06019, No. 333-00645 and No. 333-31651 of Zila, Inc. on
Form S-3 of our report dated April 11, 1997 appearing in this Annual Report on
Form 10-K of Zila, Inc. for the year ended July 31, 1997.
Grant Thornton LLP
Sacramento, California
October 28, 1997
<PAGE> 1
EXHIBIT 24A
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, constitutes and
appoints CLARENCE J. BAUDHUIN, as his true and lawful attorney-in-fact and agent
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign the Annual Report on Form
10-K for the fiscal year ended July 31, 1997, for filing with the Securities and
Exchange Commission by Zila, Inc., a Delaware corporation, together with any and
all amendments to such Form 10-K, and to file the same with all exhibits
thereto, and all documents in connection therewith, with the Securities and
Exchange Commission, granting to such attorney-in-fact and agent, full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully and to all intents and purposes
as he might or could do in person, hereby ratifying and confirming that such
attorney-in-fact and agent, may lawfully do or cause to be done by virtue
hereof.
DATED: October 7, 1997
/s/ JOSEPH HINES
--------------------------------------
JOSEPH HINES
STATE OF ARIZONA
ss.
County of Maricopa
On this 7th day of October, 1997, before me, the undersigned Notary Public,
personally appeared JOSEPH HINES, known to me to be the person whose name is
subscribed to the within instrument and acknowledged that he executed the same
for the purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/ JANICE BACKUS
--------------------------------------
Notary Public
My commission expires:
October 23, 1997
<PAGE> 1
EXHIBIT 24B
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, constitutes and
appoints JOSEPH HINES, as his true and lawful attorney-in-fact and agent with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign the Annual Report on Form 10-K for
the fiscal year ended July 31, 1997, for filing with the Securities and Exchange
Commission by Zila, Inc., a Delaware corporation, together with any and all
amendments to such Form 10-K, and to file the same with all exhibits thereto,
and all documents in connection therewith, with the Securities and Exchange
Commission, granting to such attorneys-in-fact and agents full power and
authority to do and perform each and every act and thing requisite and necessary
to be done in and about the premises, as fully and to all intents and purposes
as he might or could do in person, hereby ratifying and confirming all that such
attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
DATED: October 7, 1997
/s/ CLARENCE J. BAUDHUIN
--------------------------------------
CLARENCE J. BAUDHUIN
STATE OF ARIZONA
ss.
County of Maricopa
On this 7th day of October, 1997, before me, the undersigned Notary Public,
personally appeared CLARENCE J. BAUDHUIN, known to me to be the person whose
name is subscribed to the within instrument and acknowledged that he executed
the same for the purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/ JANICE BACKUS
--------------------------------------
Notary Public
My commission expires:
October 23, 1997
<PAGE> 1
EXHIBIT 24C
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, constitutes and
appoints JOSEPH HINES and CLARENCE J. BAUDHUIN, and each of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K for the fiscal year ended
July 31, 1997, for filing with the Securities and Exchange Commission by Zila,
Inc., a Delaware corporation, together with any and all amendments to such Form
10-K, and to file the same with all exhibits thereto, and all documents in
connection therewith, with the Securities and Exchange Commission, granting to
such attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully and to all intents and purposes as he might
or could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or each of them, may lawfully do or cause to be
done by virtue hereof.
DATED: October 7, 1997
/s/ DOUGLAS AYER
--------------------------------------
DOUGLAS AYER
STATE OF ARIZONA
ss.
County of Maricopa
On this 7th day of October, 1997, before me, the undersigned Notary Public,
personally appeared DOUGLAS AYER, known to me to be the person whose name is
subscribed to the within instrument and acknowledged that he executed the same
for the purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/ JANICE BACKUS
--------------------------------------
Notary Public
My commission expires:
October 23, 1997
<PAGE> 1
EXHIBIT 24D
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, constitutes and
appoints JOSEPH HINES and CLARENCE J. BAUDHUIN, and each of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K for the fiscal year ended
July 31, 1997, for filing with the Securities and Exchange Commission by Zila,
Inc., a Delaware corporation, together with any and all amendments to such Form
10-K, and to file the same with all exhibits thereto, and all documents in
connection therewith, with the Securities and Exchange Commission, granting to
such attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully and to all intents and purposes as he might
or could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or each of them, may lawfully do or cause to be
done by virtue hereof.
DATED: October 7, 1997
/s/ PATRICK M. LONERGAN
--------------------------------------
PATRICK M. LONERGAN
STATE OF ARIZONA
ss.
County of Maricopa
On this 7th day of October, 1997, before me, the undersigned Notary Public,
personally appeared PATRICK M. LONERGAN, known to me to be the person whose name
is subscribed to the within instrument and acknowledged that he executed the
same for the purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/ JANICE BACKUS
--------------------------------------
Notary Public
My commission expires:
October 23, 1997
<PAGE> 1
EXHIBIT 24E
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, constitutes and
appoints JOSEPH HINES and CLARENCE J. BAUDHUIN, and each of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K for the fiscal year ended
July 31, 1997, for filing with the Securities and Exchange Commission by Zila,
Inc., a Delaware corporation, together with any and all amendments to such Form
10-K, and to file the same with all exhibits thereto, and all documents in
connection therewith, with the Securities and Exchange Commission, granting to
such attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully and to all intents and purposes as he might
or could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or each of them, may lawfully do or cause to be
done by virtue hereof.
DATED: October 7, 1997
/s/ MICHAEL S. LESSER
--------------------------------------
MICHAEL S. LESSER
STATE OF ARIZONA
ss.
County of Maricopa
On this 7th day of October, 1997, before me, the undersigned Notary Public,
personally appeared MICHAEL S. LESSER, known to me to be the person whose name
is subscribed to the within instrument and acknowledged that he executed the
same for the purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/ JANICE BACKUS
--------------------------------------
Notary Public
My commission expires:
October 23, 1997
<PAGE> 1
EXHIBIT 24F
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, constitutes and
appoints JOSEPH HINES and CLARENCE J. BAUDHUIN, and each of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K for the fiscal year ended
July 31, 1997, for filing with the Securities and Exchange Commission by Zila,
Inc., a Delaware corporation, together with any and all amendments to such Form
10-K, and to file the same with all exhibits thereto, and all documents in
connection therewith, with the Securities and Exchange Commission, granting to
such attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully and to all intents and purposes as he might
or could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or each of them, may lawfully do or cause to be
done by virtue hereof.
DATED: October 7, 1997
/s/ CARL SCHROEDER
--------------------------------------
CARL SCHROEDER
STATE OF ARIZONA
ss.
County of Maricopa
On this 7th day of October, 1997, before me, the undersigned Notary Public,
personally appeared CARL SCHROEDER, known to me to be the person whose name is
subscribed to the within instrument and acknowledged that he executed the same
for the purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/ JANICE BACKUS
--------------------------------------
Notary Public
My commission expires:
October 23, 1997
<PAGE> 1
EXHIBIT 24G
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, constitutes and
appoints JOSEPH HINES and CLARENCE J. BAUDHUIN, and each of them, his true and
lawful attorney-in-fact and agent with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign the Annual Report on Form 10-K for the fiscal year ended
July 31, 1997, for filing with the Securities and Exchange Commission by Zila,
Inc., a Delaware corporation, together with any and all amendments to such Form
10-K, and to file the same with all exhibits thereto, and all documents in
connection therewith, with the Securities and Exchange Commission, granting to
such attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in and about the premises, as fully and to all intents and purposes as he might
or could do in person, hereby ratifying and confirming all that such
attorneys-in-fact and agents, or each of them, may lawfully do or cause to be
done by virtue hereof.
DATED: October 7, 1997
/s/ CURTIS M. ROCCA III
--------------------------------------
CURTIS M. ROCCA III
STATE OF ARIZONA
ss.
County of Maricopa
On this 7th day of October, 1997, before me, the undersigned Notary Public,
personally appeared CURTIS M. ROCCA III, known to me to be the person whose name
is subscribed to the within instrument and acknowledged that he executed the
same for the purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
/s/ JANICE BACKUS
--------------------------------------
Notary Public
My commission expires:
October 23, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> JUL-31-1997
<CASH> 2,071,563
<SECURITIES> 0
<RECEIVABLES> 2,822,687
<ALLOWANCES> (349,021)
<INVENTORY> 4,286,627
<CURRENT-ASSETS> 10,779,049
<PP&E> 3,608,838
<DEPRECIATION> (1,743,453)
<TOTAL-ASSETS> 23,604,032
<CURRENT-LIABILITIES> 5,804,865
<BONDS> 375,908
0
0
<COMMON> 32,327
<OTHER-SE> 17,390,832
<TOTAL-LIABILITY-AND-EQUITY> 23,604,032
<SALES> 38,592,252
<TOTAL-REVENUES> 38,664,892
<CGS> 23,542,342
<TOTAL-COSTS> 23,542,342
<OTHER-EXPENSES> 22,268,206
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (79,450)
<INCOME-PRETAX> (7,048,308)
<INCOME-TAX> (589,931)
<INCOME-CONTINUING> (6,458,377)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,458,377)
<EPS-PRIMARY> (0.20)
<EPS-DILUTED> (0.20)
</TABLE>
