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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(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, 1999
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)
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DELAWARE 86-0619668
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
5227 NORTH 7TH STREET, PHOENIX, ARIZONA 85014-2800
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (602) 266-6700
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
NONE N/A
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
(TITLE OF CLASS)
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, 1999, the aggregate market value of common stock held
by non-affiliates of the registrant was $129,528,641.
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, 1999, the number of shares of common stock outstanding
was 40,863,895.
DOCUMENTS INCORPORATED BY REFERENCE
Materials from the Registrant's 1999 Proxy Statement have been
incorporated by reference into Part III, Items 10, 11, 12 and 13.
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TABLE OF CONTENTS
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PART I ....................................................................................................... 1
Item 1. BUSINESS.................................................................................... 1
Item 2. PROPERTIES.................................................................................. 15
Item 3. LEGAL PROCEEDINGS........................................................................... 16
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......................................... 16
PART II ...................................................................................................... 17
Item 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS......................................................................... 17
Item 6. SELECTED FINANCIAL DATA..................................................................... 17
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS....................................................................... 18
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................................. 23
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES................................................................... 23
PART III ..................................................................................................... 24
PART IV ...................................................................................................... 25
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8............................. 25
SIGNATURES.................................................................................................... 27
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This Form 10-K contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. The Company's actual results could differ materially from those set
forth in the forward-looking statements. Certain factors that might cause such a
difference are discussed in the section entitled "Cautionary Factors that May
Affect Future Results" on page 11 of this Form 10-K.
PART I
ITEM 1. BUSINESS
GENERAL
Zila, Inc., a Delaware corporation, is an international manufacturer
and marketer of pharmaceutical, biomedical, dental, and nutritional products.
The Company's business is organized into three major product groups:
Pharmaceuticals, Professional Products and Nutraceuticals. Unless the context
otherwise indicates, the terms "Zila" and "Company" as used herein refer to
Zila, Inc. and each of its subsidiaries.
The Pharmaceuticals Group consists of over-the-counter and prescription
products, including the Zilactin(R) family of over-the-counter products,
Peridex(R) prescription mouth rinse and OraTest(R), an oral cancer diagnostic
system. The Pharmaceuticals Group operates under the wholly owned
subsidiary of the Company, Zila Pharmaceuticals, Inc., a Nevada corporation.
The Professional Products Group operates through the Company's wholly
owned subsidiaries Bio-Dental Technologies Corporation, a California
corporation, and Cygnus Imaging, Inc., an Arizona corporation. Bio-Dental
Technologies Corporation has two subsidiaries, Ryker Dental of Kentucky, Inc. a
Kentucky corporation, which does business under the name Zila Dental Supply and
is a national distributor of professional dental supplies, and Integrated Dental
Technologies, Inc.("IDT"), a California corporation which distributes
PracticeWorks(TM), the Company's dental practice management software. Cygnus
Imaging, Inc. ("Cygnus") is a manufacturer and marketer of dental imaging
products including digital x-ray systems and intraoral cameras.
On October 28, 1999, Cygnus completed the sale of substantially all of
its assets and certain of its liabilities to Procare Laboratories, Inc.
("Procare"), of Scottsdale, Arizona for approximately $4.0 million. Procare is
controlled by the former owner and President of Cygnus, Egidio Cianciosi. The
purchase price was paid through the issuance of a note receivable which is
collateralized by the assets of Procare and matures November 10, 1999.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Company Overview" for the Company's acquisition
history.
Financial information for each group or segment for each of the last
three fiscal years is included in the Audited Consolidated Financial Statements.
The Nutraceuticals Group includes Oxycal Laboratories, Inc., an Arizona
corporation, ("Oxycal") and its two subsidiaries Inter-Cal Corporation, Inc, an
Arizona corporation, and Oxycal Export, Inc. a U.S. Virgin Islands corporation.
Oxycal and its subsidiaries manufacture and distribute a patented and unique
form of vitamin C under the trademark Ester-C(R).
The Company's principal executive offices are located at 5227 North
Seventh Street, Phoenix, Arizona 85014-2800, and its telephone number is (602)
266-6700.
PRODUCTS
PHARMACEUTICALS GROUP
- - Zilactin(R) The Zilactin(R) line includes six over-the-counter ("OTC"),
non-prescription products: Zilactin(R), Zilactin(R)-B,
Zilactin(R)-L, Zilactin(R)-Lip, Zilactin(R) Baby and
Zilactin(R) Toothache Swabs. The Zilactin(R) 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 -- 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.
- ZILACTIN(R)-L -- a liquid for treating developing
fever blisters and cold sores.
- ZILACTIN(R)-Lip -- 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
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and dry, chapped lips. Most other competing products
only perform one or two of such applications.
- ZILACTIN(R)-Baby -- Zilactin(R)-Baby is a medication
for teething pain. Zilactin(R)-Baby contains a higher
level of benzocaine than competing products, and has
a cool grape flavor. Unlike other teething gels, it
does not contain saccharin or coloring dyes.
ZILACTIN(R) TOOTHACHE SWABS - Zilactin(R) Toothache
Swabs is a new medication for aching teeth, sore gums
and pain from dentures and braces which the Company
began distributing in June of 1999. Each single use
dry handle swab applicator is saturated with a unique
Zilactin Toothache formula with 20 percent benzocaine
and is packaged 8 swabs to a box.
The Zilactin(R) treatment composition is covered by a patent
owned by the Company. This patent covers the composition and
the film-forming properties of the product formula. See
"Business --Patents and Trademarks." Zilactin(R) and
Zilactin(R)-B formulas incorporate these proprietary treatment
compositions.
Zilactin(R) and Zilactin(R)-B are packaged as gels in .25
ounce plastic tubes. Zilactin(R)-L, is a liquid packaged in a
7.4 ml 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 contain an active ingredient
which forms 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.
In addition to its over-the-counter applications, Zilactin(R)
is being used by dentists to treat patients with canker sores
and other oral mucosal ulcers or lesions, and has been
evaluated in dental schools at selected major universities.
Zilactin(R) was originally developed as a treatment for herpes
virus lesions. The most common form is Herpes Simplex Type I,
which is the cause of fever blisters and cold sores. Herpes
Simplex Type II is the cause of genital herpes. Other types of
herpes infections include chicken pox, shingles (herpes
zoster), mononucleosis and the Epstein-Barr Virus. Depending
principally on the availability of resources, the Company may
explore the development of new products, including the
addition of other medications into the Zilactin(R) vehicle,
and/or the approval of existing products as recognized
treatments for Type II herpes and such other viruses. However,
the Company currently does not market Zilactin(R) as a
treatment for genital herpes or shingles.
The Company believes that superior efficacy and targeted
marketing efforts are the reason that three independent
pharmacist research studies reported that Zilactin(R) is the
number one OTC product pharmacists recommend for treating
canker sores and cold sores.
- - Peridex(R) Peridex(R) is a prescription antibacterial oral rinse used
between dental visits as part of a professional program for
the treatment of gingivitis. The active ingredient in
Peridex(R) is 0.12% chlorhexidine gluconate. Peridex(R) was
the first rinse to receive the American Dental Association
seal for reduction of plaque and gingivitis. Peridex(R)
effectively controls the oral bacteria associated with
periodontal disease, particularly in the first and only
completely reversible stage, gingivitis. Controlling gum
disease at its earliest stage is important because, if left
untreated, gingivitis can progress to periodontitis, resulting
in destruction of the periodontal structure and supporting
bone. The Company acquired the Peridex(R) product line from
Procter & Gamble on November 5, 1997 for $12.0 million plus
the value of acquired inventory.
- - OraTest(R) The OraTest(R)product, a diagnostic adjunct for oral cancer
and site delineation for biopsy and surgical excision, has
been approved for distribution in the United Kingdom, Canada,
Australia, Taiwan, Belgium, Holland, Luxembourg, Finland,
Greece, Portugal, China, Bermuda and the Bahamas. The Company
is currently seeking government approval from the Food and
Drug Administration (the "FDA") to distribute the OraTest(R)
product in the United States. The OraTest(R) product continues
to be marketed under the name OraScreen(R) in the U.K. by the
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Company's licensee, Stafford-Miller (a division of Block Drug
Company, Inc.) and under the name OraScan in Canada by the
Germiphene Corporation. The Company will market the product
under the OraTest(R) name in the U.S. and other countries.
According to the American Cancer Society, 40,400 new oral,
nasopharyngeal and laryngeal cancers will be diagnosed and
12,300 oral cancer related deaths will occur in the U.S. in
1999. Worldwide, nearly 900,000 new cases of oral cancer
occurred in 1996, and incidence and mortality rates are
rising. 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. The economist estimates
that OraTest(R) could have the potential of reducing this cost
by approximately 60% if it successfully identifies 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.
PROFESSIONAL PRODUCTS GROUP
- - Dental Zila Dental Supply is a national distributor of professional
Supplies dental supplies, carrying brand names such as Eastman Kodak,
Dentsply, Sybron/Kerr and 3M. Most of Zila Dental Supply's
sales are through direct mail, outside sales force,
telemarketing and the internet.
Zila Dental Supply distributes consumable supplies and 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 and represents the
products of over 500 dental manufacturers. The Company
believes 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.
Dentists have traditionally purchased their supplies from
local full-service supply companies, or from mail-order firms.
Historically, Zila Dental Supply has operated primarily as a
direct mail distributor with full-service operations in
certain geographical markets. The mail order operation uses
the efficiencies of direct mail and telemarketing to provide
service, convenience and competitive prices. The full service
operation combines competitive prices with an even higher
level of service to the dental customer, usually resulting in
a higher level of sales per customer. Zila Dental Supply will
continue to provide the benefits of a mail order company
while, at the same time, seeking to expand its full-service
operations to other geographical markets.
- - Dental Cygnus manufacturers and markets intraoral cameras and digital
Imaging x-ray systems in domestic and international markets. Cygnus'
intraoral camera products include the OralVision 1000(TM) (for
U.S. and Canadian markets), Stylus 1000(TM) (featuring PAL
video format for export), and the Stylus 1500(TM). The Stylus
1500(TM) features mirror image, x-ray gray scale, quad freeze
frame and image stabilization for tremble-free images.
Rounding out the Cygnus camera line are the Stylus 2000(TM) ,
a fully self-contained system, and the Gemini(TM) video
management device, which turns any camera into a hands-free,
multi-functional diagnostic system.
During fiscal year 1998, Cygnus entered into an agreement with
Panasonic Medical and Industrial Video Company ("Panasonic"),
the U.S. division of Japan's Matsushita Industrial Equipment
Co., Ltd., which gives Cygnus exclusive U.S. rights for
Panasonic x-ray sensors for filmless digital x-ray technology.
Cygnus Ray2(TM), was introduced in February 1998. The system's
Panasonic sensors are available in pediatric, standard and
bite-wing sizes.
- - Dental Integrated Dental Technologies, Inc., located in Gold River,
Software California, develops and markets
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PracticeWorks(TM), proprietary, state-of-the-art dental office
software. Written to be compatible with the popular Windows NT
and Windows 95 formats, PracticeWorks(TM) helps in improving
the operating efficiency of dental practices in areas such as
patient scheduling, treatment planning, insurance processing,
accounts receivable management, patient charting, and
marketing communications. PracticeWorks(TM) is a true 32 bit
Windows(R)-based software, and is Year 2000 ready.
NUTRACEUTICALS GROUP
- - Ester-C(R) Oxycal, located in Prescott, Arizona, manufactures a patented
and unique form of Vitamin C under the trademark Ester-C(R).
Its products are distributed by Inter-Cal Corporation, an
Oxycal subsidiary. Products manufactured with Ester-C(R)
nutritional ingredients are sold throughout the U.S. and in 41
countries worldwide. Inter-Cal requires its customers to
display the federally-registered Ester-C(R)logo on their
packaging. Exciting opportunities for Ester-C(R) nutritional
ingredients exist among topical applications (such as skin
creams), chewable vitamins, nutrition bars, sport drinks and
food fortification. Oxycal holds two patents on the use of
Vitamin C metabolites and their impact on pharmaceutical
products as well as nutritional supplements. Ester-C(R)Topical
Concentrate, a liquid formulation for skin care products,
provides a stable form vitamin C that penetrates to the
collagen-producing layers of the skin without chemicals.
Ordinary vitamin C is quite unstable in most health and beauty
care products and thus cannot provide the benefit of vitamin C
to the skin. Ester-C(R) Topical Concentrate is non-acidic and
free of chemical esters.
MARKETING
PHARMACEUTICALS GROUP
- - Strategy for The Company's Pharmaceuticals Group employs three strategies
OTC Products to market its OTC products:
- Education - 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. During fiscal year 1999, the Company participated
in over thirty 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.
- Participation - participate in retailer-driven activities
designed to make its OTC products available at more outlets
and to offer value to consumers at the retail store level.
- Awareness - build consumer awareness of the OTC products
through focused efforts like targeted advertising and direct
mail sampling.
- - Peridex(R) Peridex(R) is marketed to healthcare professionals and
pharmacists with extensive support from ICS, Ltd., a national
contract detailing organization. Additionally, detailers call
upon the nation's 54 dental and 200 hygiene schools, as well
as managed care organizations, pharmacists and wholesalers, to
reinforce support for Peridex(R) and Zila's other brands.
- - OraTest(R) After two years of market preparation, Zila's U.K. licensee,
Stafford-Miller Ltd. (a division of Block Drug Company),
formally introduced OraTest(R) under the name OraScreen(TM) to
general practitioners in the U.K. in April 1998. The marketing
effort for OraScreen(TM) in the U.K. has been a multilevel
strategy designed to educate dentists, specialists and staff
on the accuracy of the OraScreen(TM) product and the strong
benefits of the early detection of oral cancer. Health
professionals have become aware of OraScreen(TM) through
journal advertising and some timely (independently authored)
articles on the impact of oral cancer and the benefits of
early intervention. The OraTest(R) product continues to be
marketed under the OraScan(R) name by the Germiphene
Corporation in Canada.
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The Company is continuing to make extensive preparations for
the U.S. introduction of the OraTest(R) product once its
approved. One of the nation's leading dental advertising and
marketing firms has already prepared professional advertising
and training materials, and consumer education tools. A
national detailing force is being developed, and Zila Dental
Supply is well equipped to handle national OraTest(R)
distribution, direct mail promotion, sophisticated
telemarketing, outside sales force, and Internet selling.
PROFESSIONAL PRODUCTS GROUP
Both Cygnus and PracticeWorks(TM) expend considerable effort
educating their distributors about the quality, reliability
and features of its products. They both advertise their
products through industry publications and direct mail and
exhibit their products at industry trade shows. In addition,
Cygnus and PracticeWorks(TM) seek to stimulate interest in
their products by providing information and marketing
materials to influential and prominent experts and consultants
in the dental industry. Zila Dental Supply markets its
products directly to the end user primarily by direct mail,
outside sales force, trade shows and telemarketing.
NUTRACEUTICALS GROUP
Oxycal's manufacturing and marketing division, Inter-Cal
Corporation, supports education and sales of its value-added
vitamin C products with a multi-million dollar advertising
program. Inter-Cal promotes the patented Ester-C(R) ingredient
on behalf of more than one hundred manufacturers and marketers
of finished Ester-C(R) products. National radio advertising
with targeted print advertising is utilized in both the United
States and Canada. The advertising is assisting the transition
as an industry leading product in natural food outlets to more
broad-based availability in mass market and chain stores.
Education and promotion to the trade is primarily accomplished
through several national trade shows in the U.S. and Canada.
Print advertising in trade journals is also used.
International sales activities are managed by local
distributors and are encouraged by advertising assistance and
rebate programs. Some corporate sponsored public relations and
advertising is done in the U.K.
MANUFACTURING AND SUPPLY
PHARMACEUTICALS GROUP
The Company employs a network of outside manufacturers to
produce and package all of its products within the
Pharmaceuticals Group. The following is a breakdown by product
line.
- - Zilactin(R) Arizona Natural Resources of Phoenix, Arizona manufactures the
Zilactin(R) line of products, and Clinipad Corporation
("Clinipad") of Charlotte, North Carolina manufactures all
Zilactin(R) sample packets. National Health Care of Antioch,
Illinois manufactures the Zilactin(R) Toothache Swabs. 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. Secondary
suppliers are maintained as alternate supply sources, and are
an integral part of the Company's strategy to maintain its
product pipeline.
- - Peridex(R) Xttrium of Chicago, Illinois is the primary manufacturer of
Peridex(R). Accupac of Mainland, Pennsylvania is the Company's
secondary manufacturer of Peridex(R). Peridex(R) was
manufactured by Procter & Gamble through June 1998.
- - OraTest(R) Fleet Laboratories Ltd. of Watford, Herts, United Kingdom,
("Fleet") produces and packages the OraTest(R) product under
the name OraScreen(TM) for distribution in the U.K. by the
Company's licensee, Stafford-Miller Ltd. (a division of Block
Drug Company, Inc.). Fleet also manufactures the OraTest(R)
product for sale to other countries including Taiwan and
Australia.
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Germiphene Corporation of Brantford, Ontario, Canada,
continues to produce and package the OraScan(R) product at its
facility. The Company has also identified a U.S.-based company
with the capacity to manufacture the OraTest(R) kits.
In order to ensure an available and stable supply of Zila(R)
Tolonium Chloride, the world's only pharmaceutical grade
toluidine blue, the active ingredient in the OraTest(R)
product, the Company established its own manufacturing
facility. In February 1999, the FDA performed a Pre-Approval
Inspection and no deficiencies or "required corrective
actions" were identified by FDA personnel. Several test
batches of Zila(R) Tolonium Chloride have already been
manufactured at the Company's facility and all have met
specifications. In preparation for the U.S. marketing of the
OraTest(R) product and increasing global sales, the Company
has expanded its Phoenix manufacturing facility with the
addition of a second production line.
PROFESSIONAL PRODUCTS GROUP
Products distributed by Zila Dental Supply are manufactured by
over 500 dental manufacturers. The Company's intraoral cameras
are manufactured by Cygnus at its Scottsdale, Arizona facility
and the CygnusRay2(TM) is manufactured by Panasonic.
NUTRACEUTICALS GROUP
All products within the Nutraceuticals Group are manufactured
at Oxycal's Prescott, Arizona location.
COMPETITION
PHARMACEUTICALS GROUP
All industries in which the Company sells its products are
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.
- - Zilactin(R) Numerous products exist for treatment of herpes simplex virus
I ("HSV I") symptoms (i.e., cold sores, fever blisters),
including the following products: Orajel and Tanac by Del
Pharmaceuticals, Inc., Herpecin-L by Anthem, Inc., and Carmex
by Carma Lab, Inc. Although there can be no assurance in this
regard, management of the Company believes that there is a
substantial potential demand for products that are effective
in the treatment of these conditions. The Company does not
believe that any of these treatments have achieved a dominant
market share. 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 and 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.
- - Peridex(R) Peridex(R)competitors include generic versions and name brands
such as Periogard, made by Colgate Oral Pharmaceuticals. Many
of the competitors possess greater financial resources than
the Company. However, the Company believes that Peridex's(R)
reputation as the "gold standard" of prescription
antibacterial oral rinse and the detailing sales force will
allow the Company to compete effectively in the marketplace.
- - OraTest(R) OraTest(R), was introduced in Canada in May 1993, in Australia
in 1993 and in the U.K. in April 1998. In April 1998,
regulatory approvals were obtained in Portugal, Belgium,
Luxembourg, Holland, Finland and Greece. Regulatory approval
was obtained in China during the 1999 fiscal year. The Company
intends to distribute the OraTest(R) product in those
countries not covered in
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the license agreement with Stafford-Miller.
Zila(R) Tolonium Chloride is the active ingredient in the
Company's oral cancer detection system, OraTest(R). Zila(R)
Tolonium Chloride is the world's only pharmaceutical grade
toluidine blue, produced in compliance with stringent FDA
current Good Manufacturing Practices ("GMP") regulations.
Zila(R) Tolonium Chloride and its technology are protected by
issued and pending patents. See also "Business -- Patents and
Trademarks."
PROFESSIONAL PRODUCTS GROUP
- - Dental Zila Dental Supply competes with approximately 200 dental
Supplies 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 domestic 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 two public companies: Patterson
Dental Company and Henry Schein, Inc., both of which are very
active in the acquisition market in an effort to gain market
share.
- - Dental There are many companies marketing dental practice management
Software software with the major competitors to PracticeWorks(TM) being
Dentrix, sold by Henry Schein, Inc., EagleSoft, owned by
Patterson Dental Company and SoftDent, purchased by Dentsply
New Image. All of these companies possess greater financial
resources than the Company. However, the Company believes that
PracticeWorks(TM)' unique product features, expanded selling
organization and increasingly experienced support staff make
it well positioned to compete with these larger competitors.
- - Dental Cygnus' competitors in both the intraoral camera and digital
Imaging x-ray markets include Dentsply New Image, Schick Technologies,
Henry Schein, Inc., Trophy Radiology, and Welch Allyn Dental
Systems. Many of these companies possess greater financial
resources than the Company.
NUTRACEUTICALS GROUP
- - Ester-C Within the vitamin C market, the Company's competitors include
all other vitamin C manufacturers, such as Roche and Takeda.
Many of the Company's competitors, particularly those in
markets other than the health food and vitamin store market,
have substantially greater financial resources than the
Company. The Company believes that the growing number of
health food and vitamin distributors and retailers are
increasingly likely to align themselves with producers that
offer a wide variety of high quality products, have a loyal
customer base, support their brands with strong marketing and
advertising programs and provide consistently high levels of
customer service. The Company believes that it competes
favorably with other producers of vitamin C because of the
positive attributes of its Ester-C(R)product, high
customer-order fill rate, strong distribution network, and
advertising and promotional support.
LICENSING
PHARMACEUTICALS GROUP
In certain instances the Company has expanded the distribution
of its products by licensing certain of its patents to other
companies.
In 1991, the Company acquired ownership of certain exclusive
rights to the patents, technology and process embodying the
formulation and the application of the OraTest(R) product. The
Company is obligated to pay royalties to the National
Technical Information Service based upon certain usages of the
OraTest(R) product. During the 1995 fiscal year, the Company
entered into a licensing agreement pursuant to which
Stafford-Miller Ltd. (a division of Block Drug Company, Inc.)
("Block") was given the right to distribute the OraTest(R)
product under the name
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<PAGE> 10
OraScreen(TM) in certain markets not previously pursued by the
Company. The Company receives royalties from Block equal to a
set percentage of the net sales of OraScreen(TM) by Block. In
April 1998, OraScreen(TM) was launched at the British Dental
Association ("BDA") meeting held in Harrogate in the United
Kingdom. Following this meeting the BDA created and
distributed a booklet titled "Guidelines for Early Detection."
This booklet outlined the education and application of
OraScreen(TM) in the dental office head and neck examination.
In August 1998, the Company entered into a license agreement
with Nippon Shoji Kaishi, Ltd. (now known as Azwell, Inc.) to
obtain regulatory approval and market the OraTest(R) product
in Japan.
GOVERNMENT REGULATIONS
General The Company's operations are subject to extensive regulation
by governmental authorities in the United States and other
countries with respect to the testing, approval, manufacture,
labeling, marketing, distribution and sale of its products.
The Company devotes significant time, effort and expense
addressing the extensive government regulations applicable to
its business, and in general, the trend is towards more
stringent regulation.
On an ongoing basis, the FDA reviews the safety and efficacy
of marketed pharmaceutical products and monitors labeling,
advertising and other matters related to the promotion of such
products. The FDA also regulates the facilities and procedures
used to manufacture pharmaceutical products in the United
States or for sale in the United States. Such facilities must
be registered with the FDA and all products made in such
facilities must be manufactured in accordance with "good
manufacturing practices" established by the FDA. Compliance
with good manufacturing practices guidelines requires the
dedication of substantial resources and requires significant
costs. The FDA periodically inspects the Company's contract
manufacturing facilities and procedures to assure compliance.
The FDA may cause a recall or withdraw product approvals if
regulatory standards are not maintained. FDA approval to
manufacture a drug is site specific. In the event an approved
manufacturing facility for a particular drug becomes
inoperable, obtaining the required FDA approval to manufacture
such drug at a different manufacturing site could result in
production delays, which could adversely affect the Company's
business and results of operations.
In connection with its activities outside the United States,
the Company is also subject to regulatory requirements
governing the testing, approval, manufacture, labeling,
marketing, distribution and sale of its products, which
requirements vary from country to country. Whether or not FDA
approval has been obtained for a product, approval of the
product by comparable regulatory authorities of foreign
countries may need to be obtained prior to marketing the
product in those countries. The approval process may be more
or less rigorous from country to country, and the time
required for approval may be longer or shorter than that
required in the United States. No assurance can be given that
clinical studies conducted outside of any country will be
accepted by such country, and the approval of any
pharmaceutical product in one country does not assure that
such product will be approved in another country. The Company
is also subject to worldwide governmental regulations and
controls relating to product safety, efficacy, packaging,
labeling and distribution. While not all of the products which
the Company plans to introduce into the market are "new drugs"
or "new devices," those fitting the regulatory definitions are
subject to a stringent premarket approval process in most
countries. Submission of a substantial amount of preclinical
and clinical information prior to market introduction
significantly increases the amount of time and related costs
incurred for preparing such products for market.
The federal and state governments in the United States, as
well as many foreign governments, from time to time explore
ways to reduce medical care costs through health care reform.
These efforts have resulted in, among other things, government
policies that encourage the use of generic drugs rather than
brand name drugs to reduce drug reimbursement costs. Virtually
every state in the United States has a generic substitution
law which permits the dispensing pharmacist to substitute a
generic drug for the prescribed brand name product. The debate
to reform the
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<PAGE> 11
United States' health care system is expected to be protracted
and intense.
The Company submits data to the FDA as necessary in response
to the ongoing monograph review of the safety and efficacy of
all OTC drug products marketed in the United States. As a
responsible manufacturer, the Company is alert to the
possibility that the final monographs to be issued in the
foreseeable future may require formula modifications of
certain of its products to maintain compliance with these
regulations, a possibility facing competitive products as
well.
Manufacturing companies, especially those engaged in health
care related fields, are subject to a wide range of federal,
state and local laws and regulations. Concern for maintaining
compliance with federal, state, local and foreign regulations
on environmental protection, hazardous waste management,
occupational safety and industrial hygiene has also increased
substantially. The Company cannot predict what additional
legislation or governmental action, if any, will be enacted or
taken with respect to the above matters and what its effect,
if any, will be on the Company's consolidated financial
position, results of operations or cash flows.
- - 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 a New Drug Application ("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.
The FDA's regulation of most of the OTC drug products in the
United States (such as Zila's Zilactin(R) family of products)
has not been finalized. In addition, the FTC continually
monitors the advertising practices of consumer products
companies with respect to claims made relating to product
functionality and efficacy.
- - OraTest(R) In 1994, the FDA approved an Investigational New Drug
Application ("IND") for the Company's OraTest(R)product. This
approval is the first step in securing the data required to
support an NDA which will enable the Company to market
Oratest(R)in the United States and allow the Company to
manufacture the product domestically for use in clinical
studies and to market it in 21 countries overseas. In November
1998, the FDA notified the Company that the OraTest(R)NDA was
being given "priority review," which targeted agency review
within six months from September 3, 1998, the date when the
Company provided additional data to the FDA. On January 13,
1999, the FDA's Oncologic Drugs Advisory Committee (the
"Committee") met to review the OraTest(R)NDA and recommended,
among other things, that the FDA not approve the NDA as
submitted. Subsequent to the Committee meeting, Company
representatives engaged in a dialog with the FDA, culminating
in a meeting at the agency on March 1, 1999.
On March 3, 1999, the Company received an action letter from
the FDA outlining certain deficiencies in the OraTest(R) NDA
that prevented the FDA from approving the product at that
time. The FDA's letter detailed a procedure for amending the
NDA to rectify those matters. Following the March 1, 1999
meeting with the FDA, a new clinical research group was
engaged and a protocol for a supplemental clinical study was
prepared and submitted to the FDA for review. The FDA has
provided the Company with comments on the protocol and an
action plan is being developed. The Company intends to use the
data from this study to amend its present NDA. Also, as a
result of the March 1st meeting, the Company terminated the
12-site clinical study which began in 1995, and all the data
from this study will be submitted to the FDA as supplemental
information.
The Company received regulatory approval to market the
OraTest(R) product in Australia in 1993. Approval to market
the OraTest(R) product in certain Caribbean countries, Hungary
and Taiwan has also been received. The Medicines Control
Agency ("MCA"), which is the regulatory authority in the U.K.,
has also granted approval for the OraTest(R) product to be
marketed in the U.K. under the name OraScreen(R).
In January 1998, Zila submitted a Mutual Recognition Procedure
("MRP") application through the MCA for regulatory approval of
OraScreen(R) in the European Union ("EU"). In April 1998,
Belgium, the Netherlands, Luxembourg, Portugal, Finland and
Greece gave their regulatory
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<PAGE> 12
approval through this application. Zila has also received
licenses to sell in Greece, Luxembourg, Finland, Belgium,
Portugal and the Netherlands and is finalizing the license
procedure for the remaining EU member nations. The Company is
following up as the procedure warrants with all of the
remaining countries.
PATENTS AND TRADEMARKS
- - Zilactin(R) A comprehensive U.S. patent covering present film-forming
Zilactin(R)products was issued on January 14, 1992. The patent
was granted for a period of seventeen years from the grant
date and gives the Company the right to exclude others from
making, using or selling the patent-protected products in the
United States. A Canadian patent, which covers the composition
and extended applications, was granted on December 3, 1985.
Patent applications were filed in numerous foreign countries
and patents have issued or are expected to be issued on these
applications in the near future.
The Company has registered the trademarks Zila(R) and
Zilactin(R) in the United States, Canada and in several
important foreign countries and has applications pending to
register these trademarks in others. The Company believes that
widespread use of the Zila(R) and Zilactin(R) trademark alone
and as the dominant features of other marks, e.g.,
Zilactin(R)-B, Zilactin(R)-L, etc., affords reasonable
protection for the family of trademarks in which Zila(R) is
the dominant feature.
- - Peridex(R) Peridex(R)as a brand name has become the gold standard within
the dental industry for prescription oral rinses in both the
U.S. and Canada. Concurrent with the purchase of the
Peridex(R)brand from Procter & Gamble, Zila Pharmaceuticals
purchased the trademark rights to Peridex(R). Accordingly,
Procter & Gamble has assigned the Peridex(R)trademark to the
Company for each country where it has been previously
registered, except for certain countries in Western Europe.
The Company recorded its trademark assignment for
Peridex(R)with the U.S. Patent and Trademark office on June
26, 1998 and with the Canadian Registrar of Trademarks on July
3, 1998. Additionally, the Company is in the process of
recording trademark assignments in other countries where the
Peridex(R)trademark had been previously registered by Procter
& Gamble. As international sales opportunities continue to
develop, the Company intends to register the
Peridex(R)trademark in countries where it has not been
previously registered.
- - OraTest(R) The Company has issued patents in the United States and either
has patent applications or issued patents in major foreign
countries protecting the basic OraTest(R)oral diagnostic
product. The Company is the exclusive licensee of the National
Institutes of Health under its U.S. and Canadian patents
covering the use of toluidine blue for detection of oral
cancer. In addition, the Company has filed patent applications
in the United States and many foreign countries covering the
process the Company developed for manufacturing its
Zila(R)Tolonium Chloride drug substance and covering other
dyes which are chemically related to toluidine blue for use in
detecting epitheleal cancer.
The Company has registered the OraTest(R) trademark in the
United States and has either pending applications for
registration or issued registrations of this trademark in
major foreign countries in which this mark is being used or in
which it will be used. The Company licensed the use of the
trademark OraScreen(TM) in Europe and certain other foreign
countries and has obtained registrations of the OraScreen(TM)
trademark in all major European countries and in important
Pacific Rim countries.
- - Ester-C(R) Three U.S. patents were issued in connection with
Ester-C(R)nutritional ingredients, in 1989, 1990 and 1992. All
three patents expire in the year 2007. The first patent covers
compositions for administering vitamin C that contains
theonate or other vitamin C metabolites. The second and third
patents cover the metabolite technology which improved the
absorption of vitamin C from the Ester-C(R)formulation and is
applicable to a wide variety of other non-prescription and
prescription drugs. Oxycal has filed and is currently pursuing
corresponding patent applications in all major foreign
countries. Most patents have already been issued on these
foreign
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<PAGE> 13
applications and the remainder are being diligently
pursued.
Recently Oxycal developed Ester-C(R) Topical
Concentrate, a stable form of vitamin C that
penetrates the skin to help produce collagen and
supporting structures. Oxycal has filed U.S and
international patent applications for the Ester-C(R)
Topical Concentrate product and method of
manufacturing.
The Company has three major and several other
trademarks issued by the United States Patent and
Trademark office in the United States. The Ester-C(R)
trademark was issued in August 1985; the EC(R) logo
trademark was issued in August 1990; and the
CV-Flex(R) trademark was issued in August 1990. The
Company also has trademarks issued in 36 foreign
countries with trademarks pending in other countries.
- - PracticeWorks(TM) PracticeWorks(TM) is a registered trademark of
Integrated Dental Technologies, Inc.
PRODUCT LIABILITY INSURANCE
The Company faces an inherent risk of exposure to product liability
claims in the event that the use of one or more of its products is alleged to
have resulted in adverse effects. Such risk exists even with respect to those
products that are manufactured in licensed and regulated facilities or that
otherwise received regulatory approval for commercial sale. There can be no
assurance that the Company will not be subject to significant product liability
claims. Many of the Company's customers require the Company to maintain product
liability insurance coverage as a condition to their conducting business with
the Company. As the loss of such insurance coverage could result in a loss of
such customers, the Company intends to take all reasonable steps necessary to
maintain such insurance coverage. There can be no assurance that insurance
coverage will be available in the future on commercially reasonable terms, or at
all, or that such insurance will be adequate to cover potential product
liability claims. The loss of insurance coverage or the assertion of a product
liability claim or claims could have a material adverse effect on the Company's
business, financial condition and results of operations.
EMPLOYEES
As of July 31, 1999, the Company and its operating subsidiaries had 286
employees in the following categories:
<TABLE>
<CAPTION>
Categories Number of Employees
------------------------------ -------------------
<S> <C>
Executive Officers 8
Sales 113
Accounting and Administration 79
Purchasing and Distribution 41
Manufacturing 45
</TABLE>
No employees are represented by a labor union, nor are there any
current labor relations complaints on file with any agency. The Company believes
its relationship with its employees is good.
CAUTIONARY FACTORS THAT MAY AFFECT FUTURE RESULTS
The disclosure and analysis in this report and in the
Company's other reports, press releases and public
statements of our officers contain some
forward-looking statements. Forward-looking
statements give the Company's current expectations or
forecasts of future events, and may be identified by
the fact that they do not relate strictly to
historical or current facts. In particular,
forward-looking statements include statements
relating to future actions, prospective products or
product approvals, future performance or results of
current and anticipated products, sales efforts,
expenses, the outcome of contingencies such as legal
proceedings, and financial results. Many factors
discussed in Part I of this report, for example
government
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<PAGE> 14
regulation, competition, and the supply of raw
materials, will be important in determining future
results.
Any or all forward-looking statements in this report,
any other report, and in any other public statements
may turn out to be wrong. They can be affected by
inaccurate assumptions or by known or unknown
uncertainties. No forward-looking statement can be
guaranteed, and actual results may differ materially.
The Company undertakes no obligation to publicly
update forward-looking statements. Shareholders are
advised to consult further disclosures on related
subjects in the Company's other reports to the
Securities and Exchange Commission. The following
cautionary discussion of risks, uncertainties and
possible inaccurate assumptions are factors that the
Company's management believes could cause actual
results to differ materially from expected and
historical results. Factors other than those included
below could also adversely affect the Company's
business results. The following discussion is
provided pursuant to the Private Securities
Litigation Reform Act of 1995.
- - Uncertainties of The rigorous clinical testing and an extensive
Regulatory Approval regulatory approval process mandated by the FDA and
equivalent foreign authorities before the Company can
market any drug can take a number of years and
require the expenditure of substantial resources.
Obtaining such approvals and completing such testing
is a costly and time consuming 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.
A marketed product, its manufacturer and its
manufacturing facilities are also 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.
- - Introduction Zila has not received final FDA approval for
of OraTest(R) in OraTest(R) and is in the process of initiating
the United States additional studies to include an amended NDA. As of
July 31, 1999, Zila expensed approximately $11.8
million in OraTest(R) including a significant
financial investment towards obtaining FDA approval
of OraTest(R) and to prepare for the introduction of
OraTest(R) to the United States market. There can be
no assurance that the FDA will issue a final approval
of OraTest(R), and the failure of the FDA to approve
OraTest(R) would make it impossible for Zila to
recoup its investment through sales of OraTest(R) in
the United States. The failure of the FDA to finally
approve OraTest(R) will have a material adverse
effect on the Company's results of operations. If
regulatory approval 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 reporting, and may require
surveillance programs to monitor the usage or side
effects of OraTest(R).
If FDA approval of OraTest(R) 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 is no assurance that the Company will be
successful in gaining market acceptance of
OraTest(R).
- - Dependence on A large percentage of the Company's revenues result
Key Products from sales of Ester-C, Peridex(R), and the
Zilactin(R) family of products. If any of these major
products were to become subject to a problem such as
loss of patent protection, unexpected side effects,
regulatory proceedings,
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<PAGE> 15
publicity affecting user confidence, or pressure from
competing products, or if a new, more effective
treatment should be introduced, the impact on the
Company's revenues could be significant.
- - Possible Claims The Company could be exposed to possible claims for
Relating to personal injury resulting from allegedly defective
Products 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, the Company could 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.
- - Competition; The pharmaceutical industry is highly competitive. A
Research and number of companies, many of which have greater
Development 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 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, Zila
Dental Supply faces significant competition,
primarily from a various number of dental supply
dealers and mail order supply houses in the United
States. PracticeWorks(TM) 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 PracticeWorks(TM) and
Cygnus. In addition, new competitors may enter into
Cygnus' and PracticeWorks(TM)' markets from time to
time. It may be difficult for PracticeWorks(TM) and
Cygnus to maintain or increase sales volume and
market share due to such competition.
- - Generic In the U.S., competition with producers of generic
Competition products is a major challenge. The Company's loss of
any of its product's patent protection could lead to
a dramatic loss in sales of the product in the U.S.
market.
- - Dependence on Zila relies on a combination of patent, copyright,
Proprietary Rights 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. Whether 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 is uncertain. Furthermore,
any patents that may be issued to Zila may be
challenged, invalidated or circumvented. Litigation
may result from the Company's use of registered
trademarks or common law marks and, if litigation
against Zila were successful, a resulting loss of the
right to use a trademark could reduce sales of Zila's
products and could result in a significant damages
award. Although Zila intends to defend the
proprietary rights, policing unauthorized use of
proprietary technology and products is difficult.
International operations may be affected by changes
in intellectual property legal protections and
remedies in foreign countries in which in the Company
does business.
- - Raw Materials Raw materials essential to the Company's business are
generally readily available. However, certain raw
materials and components used in the manufacture of
the pharmaceutical products are available from
limited sources, and in some cases, a single source.
Any curtailment in the availability of such raw
materials could be accompanied by production delays,
and in the case of products for which only one raw
material supplier exists, could result in a material
loss of sales. In addition, because raw material
sources for pharmaceutical products must generally be
approved by regulatory authorities, changes in raw
material suppliers could result in production delays,
higher raw material costs and loss of sales and
customers.
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<PAGE> 16
- - Future Capital The development of the Company's products will
Requirements and require the commitment of substantial resources to
Uncertainty of conduct the time-consuming research and development,
Future Funding 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. 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.
- - Possible Volatility The market price for the Company's common stock has
of Common Stock fluctuated significantly in the past. Management of
Price 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 its common stock may continue to be
volatile.
- - Issuance The Company's Board of Directors has the authority,
of Preferred Stock 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 rights, voting rights, rights and terms of
redemption, redemption price and liquidation
preference. On October 17, 1997, the Company issued
30,000 shares of its Series A Convertible Preferred
Stock as well as warrants to purchase 360,000 shares
of common stock to various investors for
consideration of $30.0 million. As of July 31, 1999,
22,518 shares of the Series A Preferred Stock have
been converted into shares of the Company's common
stock.
The Preferred Stock is convertible into shares of the
Company's common stock at a conversion rate based on
the price of such common stock at the date of
issuance. However, if the market price of the
Company's common stock does not appreciate by a fixed
percentage at various measurement dates, the holders
of the Preferred Stock have the right to receive
additional shares of the Company's common stock upon
conversion, based on a repricing formula. Per
guidance from the Emerging Issues Task Force, the
intrinsic value of the beneficial conversion feature
of the Preferred Stock has been measured and
recognized as an embedded dividend in fiscal year
1998 and such non-cash embedded dividend has been
deducted from net income in the accompanying
consolidated statement of operations to arrive at the
amount of net income attributable to common
shareholders. Additionally, because the Preferred
Stock has conditions for redemption that are not
solely within the control of the Company, it has been
classified outside of permanent equity in the
accompanying consolidated balance sheet and has been
accreted to its redemption value.
- - Environmental The Company is subject to federal, state and local
and Controlled laws and regulations governing the use, generation,
Use of Hazardous manufacture, storage, discharge, handling and
Materials disposal of certain materials and wastes used in its
operations, some of which are classified as
"hazardous." The Company could be required to incur
significant costs to comply with environmental laws
and regulations as its research activities are
increased, and the operations, business and future
profitability of the Company could 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.
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<PAGE> 17
- - Year 2000 The Company is currently working to evaluate and
Compliance mitigate the extent of any "Year 2000" problems that
may exist at the Company or that may have an effect
on its business, but it has not yet completed this
evaluation and there can be no assurance that such
evaluation will be timely completed. While the
Company does not expect the costs to address the
problem will be material, and it does not expect that
the consequences of incomplete or untimely resolution
of the problem will materially impact the operation
of its business, there can be no assurance that the
costs and liabilities associated with Year 2000
issues will not have a material impact on its
business, prospects, revenues or financial position.
The Company has not incurred, and does not expect to
incur, any specific quantifiable cost that can be
directly and solely related to the Year 2000 issue.
The Company does not yet have a contingency plan to
handle a worst case scenario.
ITEM 2. PROPERTIES For further discussion of Year 2000 Impact see
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations.
- - Corporate Headquarters 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 with Bank One, Arizona (the
"Bank"). The terms of the refinancing include
interest to be payable monthly on the unpaid balance
at an interest rate of nine percent (9.00%). The
refinanced mortgage loan is amortized over 20 years
and is due on April 1, 2001.
- - Manufacturing Facility The Company leases 7,040 square feet for a
manufacturing facility in Phoenix, Arizona. This
facility produces toluidine blue which will be used
in the manufacture of OraTest(R). The facility is
leased under a three year agreement which expires
September 30, 2002, 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 $4,640. 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."
- - Oxycal The Company's Oxycal subsidiary, owns 2.79 acres and
occupies a 27,440 square foot facility located at 533
Madison Avenue, Prescott, Arizona 86301. There are no
liens on this property. This facility manufactures
and distributes a patented and enhanced form of
Vitamin C under the trademark Ester-C(R). In April
1999, a five acre lot was purchased slated to
accommodate a new 65,000 square-foot building. The
new building will feature larger production,
laboratory, packaging, storage and shipping areas as
well as a controlled environment. The construction is
scheduled for completion in the summer of 2000.
- - Other The Company's subsidiaries hold additional leases on
seven 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 $3,124 per month,
and expires on October 31, 2000. On December 1, 1998,
Zila Dental Supply entered into a three-year lease
for 3,915 square feet at 4544 South Pinemont, Suite
204, Houston, Texas for their Houston branch office.
The current lease rate is $2,145 per month. On June
1, 1999, IDT entered into a five year lease for 5,600
square feet at 11344 Coloma Road, Suite 650, Gold
River, California. The current lease rate is $7,320
per month and increases every twelve months with the
monthly lease payment to be $8,109 in the final year.
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<PAGE> 18
On February 1, 2000 the lease will include an
additional 1,635 square feet at a rate of $2,126 per
month increasing every twelve months beginning August
1, 2000 with the monthly lease payment to be $2,354
per month in the final year. IDT also occupies an
office complex at 6021-A West 71st Street,
Indianapolis, Indiana on a month-to-month basis at a
rate of $3,566. 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 $4,048 per month and increases every twelve
months with the monthly lease payment to be $4,350 in
the final year. Oxycal leases 14,400 square feet of
warehouse space located at 1066 Spire Drive,
Prescott, Arizona. The facility is leased under a
one-year agreement which expires April 30, 2000.
Monthly lease payments are $7,055 and will continue
on a month-to-month basis beginning May 1, 2000.
ITEM 3. LEGAL PROCEEDINGS
The Company and certain officers of the Company have been named as
defendants in a consolidated First Amended Class Action Compliant filed July 6,
1999 in the United States District Court for the District of Arizona, under the
caption In re Zila Securities Litigation, No. CIV 99 0115 PHX EHC. The First
Amended Class Action Compliant seeks damages in an unspecified amount on behalf
of a class consisting of purchasers of the Company's securities from November
14, 1996 through January 13, 1999 for alleged violations of the federal
securities laws. Specifically, the plaintiffs allege that in certain public
statements and filings with the Securities and Exchange Commission the
defendants made false or misleading statements and concealed material adverse
information related to OraTest(R) that artificially inflated the price of the
Company's securities. The Company and the individual defendants deny all
allegations of wrongdoing and are defending themselves vigorously. On September
10, 1999, the Company and the individual defendants filed with the Court a
motion to dismiss the First Amended Class Action Complaint in its entirety. It
is not possible to predict with any degree of certainty when the Court will rule
on the defendants' motion to dismiss.
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. In February 1997, the plaintiffs
started the process to appeal the judgment. Subsequently, the appellate court
upheld the lower court's summary judgment in favor of Bio-Dental. Accordingly,
in fiscal year 1998, Bio-Dental reversed the amount of the accrued liability.
On September 8, 1999, the Securities and Exchange Commission (the
"Commission") entered an order directing investigation entitled "In the Matter
of Zila, Inc." The Commission is investigating whether (i) there were purchases
or sales of securities of the Company by persons while in possession of material
non-public information concerning the prospects that the Oncologic Drugs
Advisory Committee for the FDA would recommend approval of the OraTest(R) NDA
and whether the FDA would subsequently approve the NDA; (ii) such persons
conveyed information regarding these matters to other persons who effected
transactions in securities of the Company without disclosing the information;
and (iii) there were false and misleading statements in press releases, filings
with the Commission, or elsewhere concerning these matters. The Company does not
believe it has violated any of the federal securities laws and is cooperating
fully with the Commission in its investigation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company did not submit any matter to a vote of its security holders
during the fourth quarter of the fiscal year covered by this report.
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<PAGE> 19
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Information regarding the market for Zila's Common Stock and related
stockholder matters is set forth below. The following table sets forth, for the
fiscal periods shown, the high and low quotations in dollars per share for the
Common Stock as reported by the National Association of Securities Dealers
Automated Quotation System ("NASDAQ").
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL YEAR ENDED JULY 31, 1999
First Quarter 6.625 3.875
Second Quarter 12.063 4.125
Third Quarter 5.000 3.250
Fourth Quarter 4.000 2.750
FISCAL YEAR ENDED JULY 31, 1998
First Quarter 8.875 6.000
Second Quarter 8.000 5.625
Third Quarter 8.375 7.000
Fourth Quarter 8.250 6.250
</TABLE>
The number of stockholders of record of the Common Stock as of July 31,
1999 and September 30, 1999 were approximately 3,369 and 3,356, respectively. As
of July 31, 1999 there are 7,482 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: 1999 1998(1) 1997 1996 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net Sales $ 71,159,241 $ 61,972,765 $ 38,592,252 $ 37,479,546 $ 35,064,245
Licensing Fees and Royalty Revenue 135,510 164,345 72,640 2,100,484 1,956,654
Net Income (Loss) (1,966,982) 2,301,068 (6,458,377) 1,217,298 (1,282,357)
Net Income (Loss) Attributable
to Common Shareholder (1,966,982) (5,013,532) (6,458,377) 1,217,298 (1,282,357)
Net Income (Loss) Per Share
Attributable To Common Shareholder (0.05) (0.15) (0.20) 0.04 (0.04)
</TABLE>
<TABLE>
<CAPTION>
AT JULY 31
-------------------------------------------------------------------
BALANCE SHEET DATA: 1999 1998(1) 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Current Assets $30,750,624 $27,992,138 $10,779,049 $13,251,960 $12,010,497
Current Liabilities 8,704,760 8,777,242 5,804,965 6,672,497 6,401,072
Total Assets 76,555,933 69,863,877 23,604,032 25,309,781 16,691,859
Long-Term Debt 9,577,755 1,355,547 375,908 382,006 1,136,239
Total Liabilities 18,282,515 10,132,789 6,180,873 7,054,503 7,537,311
Series A Convertible Redeemable
Preferred Stock 8,787,191 33,801,930
Shareholders' Equity 49,486,227 25,929,158 17,423,159 18,255,278 9,154,548
</TABLE>
(1) The increase in the amounts above between 1997 and 1998 is primarily
the result of the acquisitions discussed in Note 2 to the financial
statements.
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<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Form 10-K contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference include the following: prospective products and
regulatory approval of such products, approval or disapproval of OraTest(R) by
the FDA, future performance or results of current and anticipated products,
product liability claims, unavailability of raw materials, Year 2000 issues,
sales efforts, expenses, the outcome of contingencies such as legal proceedings,
financial results and competition.
COMPANY OVERVIEW
The following discussion and analysis should be read in conjunction
with "Selected Financial Data" and the audited Consolidated Financial Statements
and Notes thereto.
Zila is a world-wide manufacturer and marketer of pharmaceutical,
biomedical, dental and nutritional products. The Company has three major
operating groups: Pharmaceuticals, Professional Products and Nutraceuticals. The
Pharmaceuticals Group consists of over-the-counter and prescription products,
including the Zilactin(R) family of over-the-counter products, Peridex(R)
prescription mouth rinse, and OraTest(R), an oral cancer detection system. The
Professional Products Group includes Zila Dental Supply, a national distributor
of professional dental supplies, Cygnus Imaging ("Cygnus"), a manufacturer and
marketer of digital x-ray systems and intraoral cameras, and Integrated Dental
Technologies, Inc., which distributes PracticeWorks(TM), a dental practice
management software product. The Nutraceuticals Group is comprised of Oxycal
Laboratories, Inc. ("Oxycal") and its Inter-Cal Subsidiary, which are
manufacturers and distributors of a patented and unique form of vitamin C under
the trademark Ester-C(R).
On November 5, 1997, the Company's Zila Pharmaceuticals, Inc. ("Zila
Pharmaceuticals") subsidiary completed its acquisition of the Peridex(R) product
line, a prescription anti-bacterial oral rinse from The Procter & Gamble Company
("P&G"). The purchase price was $12.0 million plus the value of acquired
inventory. The Company has paid $11.0 million as of July 31, 1999 and final
payment of $1.0 million is due November 1999.
On November 10, 1997, the Company acquired Oxycal, paying $28.0 million
for all outstanding shares of Oxycal. The Company raised the funds to consummate
the merger through a private placement of 30,000 shares of the Company's Series
A Convertible Redeemable Preferred Stock ("Preferred Stock") and warrants to
purchase 360,000 shares of the Company's Common Stock for $30.0 million.
The Peridex(R) and Oxycal acquisitions were accounted for using the
purchase method of accounting for business combinations. In connection with the
Oxycal acquisition, the excess of assets over liabilities assumed relate
principally to trademarks and goodwill, which are amortized over 25 and 20
years, respectively. In connection with the Peridex(R) acquisition, the excess
has been allocated to goodwill and is being amortized over 12 years. Results of
operations of Peridex(R) and Oxycal have been included in the Company's
statement of operations from their respective acquisition dates.
OPERATING RESULTS
Fiscal year ended July 31, 1999. Net revenues during the 1999 fiscal
year totaled $71.3 million compared to net revenues of $62.1 million for the
prior fiscal year, an increase of 14.8%. Net revenues in 1999 for Zila Dental
Supply were $31.5 million compared to $28.1 million for the previous fiscal
year, an increase of 12.4%. The increase is mainly due to improved mail order
sales, expansion of the sales force in conjunction with the opening of two
additional branch offices and increased internet sales. Zila Pharmaceuticals,
marketer of Peridex(R)and the Zilactin(R) family of products had net revenues of
$18.1 million for the fiscal year ended July 31, 1999, an increase of 17.5% over
fiscal year 1998 sales of $15.4 million. The main increase in net revenues was
due to the acquisition of Peridex(R) in the second quarter of fiscal year 1998.
As a result, the twelve months ended July 31, 1998 reflect nine months of
Peridex(R) revenues whereas the twelve months ended July 31, 1999 reflect a full
twelve months of Peridex(R) revenues. Also contributing to the increased
revenues was the addition of the Zilactin(R) Toothache Swab product launched
during fiscal year 1999, increased revenues in the Zilactin(R)-L, Zilactin(R)
Baby and Zilactin(R)-B product
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<PAGE> 21
lines. Net revenues in 1999 for Oxycal were $15.0 million compared to $12.2
million for the previous fiscal year, an increase of 22.6%. Oxycal was acquired
during the second quarter of fiscal year 1998 and therefore the net revenues for
fiscal year 1998 reflects nine months of revenues whereas the twelve months
ended July 31, 1999 reflect a full twelve months of Oxycal revenues.
PracticeWorks(TM) had net revenues of $4.5 million for fiscal year 1999, an
increase of 32.1% over net revenues of $3.4 million in fiscal year 1998. The
increase was primarily due to expansion of its dealer network and increased
demand for Windows based and Year 2000 ready dental software systems. Net
revenues in 1999 for Cygnus were $1.8 million compared to $2.7 million for the
previous fiscal year, a decrease of 34.4%. Technical difficulties with the
digital x-ray systems were the primary reason for the decrease in sales as
compared to the previous year.
Cost of products sold were $34.3 million for the fiscal year ended July
31, 1999, an increase of 11.9% as compared to $30.7 million for the previous
fiscal year. Cost of products sold as a percentage of net revenues decreased to
48.2% compared to 49.4% in fiscal year 1998. Cost of products sold as a
percentage of net revenues for Zila Dental Supply decreased to 74.6% in fiscal
year 1999 from 75.8% in fiscal year 1998. This decrease is mainly due to reduced
costs resulting from vendor rebate programs. Cost of products sold as a
percentage of net revenues for Zila Pharmaceuticals increased to 17.9% in
fiscal year 1999 as compared to 16.7% in fiscal year 1998. This increase is due
mainly to the introduction and market expansion of newer products, which have
higher costs as compared to the existing products. Also contributing to the
increase in 1999, were promotions for Peridex(R), which offered the product at
reduced pricing throughout fiscal year 1999. Cost of products sold as a
percentage of net revenues for Oxycal decreased to 27.9% in fiscal year 1999 as
compared to 29.7% in fiscal year 1998. The decrease is a result of favorable raw
materials purchase contracts in effect for fiscal year 1999 as compared to
fiscal year 1998. PracticeWorks(TM) had a decrease in cost of products sold as a
percentage of net revenues from 10.3% in fiscal year 1998 to 6.2% in fiscal year
1999. The decrease is mainly due to an increase in higher software and support
revenue and lower training costs. Cygnus had an increase in cost of sales as a
percentage of net revenues from 76.9% in fiscal year 1998 to 98.8% in fiscal
year 1999. The increase is primarily related to the technical difficulties with
the digital x-ray systems and related inventory write-offs.
The Company incurred selling, general and administrative expenses of
$31.9 million or 44.7% of net revenues during the fiscal year ended July 31,
1999 compared to $25.5 million or 41.0% of net revenues in the fiscal year ended
July 31, 1998. This increase is mainly attributable to selling, general and
administrative expenses resulting from the Oxycal and Peridex(R) acquisitions in
the second quarter of fiscal year 1998, corporate regulatory affairs, legal,
public relations and professional services as well as increased selling expense
at Zila Dental Supply. Costs associated with resolving technical problems with
the CygnusRay2(TM), Cygnus's digital x-ray system, also contributed to the
increase.
Research and development expenses increased $1.3 million, or 49.9%,
from $2.7 million in fiscal year 1998 to $4.0 million in fiscal year 1999. The
increase was mainly related to research and clinical activities associated with
OraTest(R) and Ester-C(R), as well as product development expenses related to
the digital x-ray systems and dental practice management software.
Depreciation and amortization expenses increased $800,000 from $2.8
million in fiscal year 1998 to $3.6 million in fiscal year 1999. The increase is
mainly due to the additional amortization of intangibles and goodwill from the
Oxycal and Peridex(R) acquisitions, which occurred during the second quarter of
fiscal year 1998.
Interest income decreased $31,000 from $320,000 in the prior fiscal
year to $289,000 during the fiscal year 1999 due to decreased bank balances.
Interest expense increased from $335,000 in fiscal year 1998 to $393,000 in
fiscal year 1999. The increase was attributable to additional debt obligations
during fiscal year 1999 related to the funding of a new manufacturing and
laboratory facility for Oxycal and additional financing to support OraTest(R)
clinical, regulatory, manufacturing and marketing costs.
The benefit for income taxes was $846,000 ($250,000 of which was
attributable to the exercise of common stock options and therefore credited to
capital in excess of par value) for the fiscal year ended July 31, 1999 compared
to an income tax benefit of $2.6 million ($800,000 of which was attributable to
the exercise of common stock options and therefore credited to capital in excess
of par value) during the year ended July 31, 1998. In the past, the Company had
offset its net deferred tax asset with valuation allowance due to the Company's
lack of earnings history.
-19-
<PAGE> 22
For the fiscal year ended July 31, 1999, the Company had a net loss of
$2.0 million compared to net income of $2.3 million for 1998. The decrease in
profitability is primarily due to increased spending in OraTest(R), increased
losses at Cygnus resulting from the technical difficulties with the digital
x-ray system and lower tax benefit recognized in 1999 compared to 1998. In
fiscal year 1998, net income has been reduced in the amount of $7.3 million by
the accretion of an embedded dividend on the Series A Preferred Stock issued in
November 1997 to arrive at net loss attributable to common shareholder. As a
result, for the fiscal year 1998, the Company had a net loss attributable to
common shareholders of $5.0 million after taking into account the embedded
dividend.
Fiscal year ended July 31, 1998. Net revenues during the 1998 fiscal
year totaled $62.1 million compared to net revenues of $38.7 million for the
prior fiscal year, an increase of 60.6%. Net revenues in 1998 for Zila Dental
Supply were $28.1 million compared to $26.5 million in fiscal year 1997, a 5.7%
increase. The increase is due primarily to increased sales overall in the dental
supply market. Zila Pharmaceuticals net revenues in 1998 were $15.4 million
compared to $6.7 million in 1997, a 129.8% increase. The increase is primarily
due to the acquisition in the second quarter of 1998 of Peridex(R) and continued
growth in the Zilactin(R) line of products. Net revenues in 1998 for Oxycal were
$12.2 million and are directly attributable to the acquisition of Oxycal in the
second fiscal quarter of 1998. PracticeWorks(TM) had net revenues of $3.4
million in 1998, an increase of 55.8% when compared to the net revenues of $2.2
million in 1997 due primarily to an expansion of the sales force. Net revenues
in 1998 for Cygnus were $2.7 million, a 15.1% decrease over the $3.2 million of
net revenues in 1997 due primarily to decreased camera sales.
Cost of products sold were $30.7 million for the fiscal year ended July
31, 1998, a 30.3% increase from $23.5 million for the fiscal year ended July 31,
1997 due to increased sales resulting primarily from the acquisitions of Oxycal
and Peridex(R). Cost of sales as a percentage of net revenues decreased to 49.4%
during fiscal year 1998 compared to 60.9% in fiscal year 1997. This decrease is
primarily due to lower costs as a percentage of net revenues relating to the
Oxycal and Peridex(R) product lines. Cost of products sold as a percentage of
net revenues for Zila Dental Supply increased slightly to 75.8% in 1998 from
74.0% in 1997 primarily due to the inability to pass on price increases from
suppliers to customers. Cost of products sold as a percentage of net revenues
for Zila Pharmaceuticals decreased slightly to 16.7% in 1998 from 17.9% in 1997
primarily due to the increased costs associated with the launch of the
Zilactin(R)-Baby in 1998. Cost of products sold as a percentage of net revenues
for PracticeWorks(TM) decreased to 10.3% in 1998 from 24.9% in 1997 primarily
due to the discontinuation in 1997 of hardware sales which carried a higher
percentage of cost of products sold. Cost of products sold as a percentage of
net revenues for Cygnus increased to 76.9% in 1998 from 71.4% in 1997 primarily
due to pricing pressures and the phase-out of a line of cameras.
The Company incurred selling, general and administrative expenses of
$25.5 million or 41.0% of net revenues during the fiscal year ended July 31,
1998, compared to $20.1 million or 52.1% of net revenues, an increase of $5.4
million over the prior fiscal year. This increase reflects primarily an increase
in the marketing and administrative personnel and other selling and
administrative costs necessary to support the consolidated businesses of the
acquired companies. The decrease in selling, general and administrative expenses
as a percentage of net revenues reflects the Company's ability to take advantage
of economies of scale resulting from the larger installed customer base and a
higher base of revenue realized from the Oxycal and Peridex(R) acquisitions.
Research and development expenses increased $1.7 million from $972,000
in fiscal 1997 to $2.7 million in fiscal 1998. The increase is mainly associated
to research and clinical activities associated with OraTest(R) and the addition
of Oxycal research expenses.
Depreciation and amortization expenses increased $1.6 million from $1.2
million in the prior fiscal year to $2.8 million in fiscal year 1998. The
increases are mainly due to the additional amortization of intangibles and
goodwill associated with the Oxycal and Peridex(R) acquisitions.
Interest income increased $118,000 from $202,000 in the prior fiscal
year to $320,000 during fiscal year 1998 due to higher cash balances. Interest
expense increased from $79,000 in fiscal year 1997 to $335,000 in fiscal year
1998. The increase was attributable to additional debt obligations during fiscal
year 1998 related to the Peridex(R) acquisition.
During the year ended July 31, 1998, the Company recorded an income tax
benefit of $2.6 million ($800,000 of which was attributable to the exercise of
common stock options and therefore was credited to capital in
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<PAGE> 23
excess of par value). In the past, the Company had offset its net deferred tax
asset with valuation allowance due to the Company's lack of earnings history.
For the fiscal year ended July 31, 1998, the Company had net income of
$2.3 million compared to net loss of $6.5 million for 1997. Net income
attributable to common shareholders has been reduced in the amount of $7.3
million by the accretion of an embedded dividend on the Series A Preferred Stock
issued in November 1997. As a result, for the fiscal year 1998, the Company had
a net loss attributable to common shareholders of $5.0 million after the
reduction for the non-cash embedded dividend.
INFLATION AND SEASONALITY
Inflation has had no material effect on the operations or financial
condition of the Company. The Company's operations are not considered seasonal
in nature.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1999, the Company held cash and cash equivalents of $5.8
million compared to $5.2 million at July 31, 1998. The Company's working capital
was $22.0 million at July 31, 1999 as compared to $19.2 million at July 31, 1998
representing an increase of $2.8 million. The increase in working capital is due
primarily to an increase in accounts receivable - net of $1.6 million.
Net cash used in operating activities was $792,000 during 1999 and was
attributable to the net loss of $2.0 million as adjusted for the effects of
non-cash items of $3.0 million and changes in operating assets and liabilities
totaling $1.9 million. Significant changes in operating assets and liabilities
were comprised of an increase in accounts receivable of $1.6 million related to
higher fourth quarter sales in 1999 than in 1998, and an increase in deferred
revenue of $414,000 related to software support.
Net cash used in investing activities was approximately $2.5 million
consisting of $1.8 million in capital expenditures for the OraTest(R) and Oxycal
product lines and $686,000 of capitalized patent and license costs.
The net cash of $3.8 million provided in financing activities for the
year ended July 1999 was comprised of net borrowings of $8.3 million partially
offset by the proceeds from the Oxycal bond transaction, which are held by the
trustee of $4.8 million. In addition, the Company received $259,000 from the
issuance of common stock related to the exercise of stock options.
At July 31, 1999, the Company had income tax net operating loss
carryforwards of approximately $24.0 million which expire in years 2000 through
2019.
In February 1999, the Company increased its line of credit with Bank
One Corporation to $9 million and extended the commitment period to December 1,
2000. Additionally, the interest rate was reduced to the prime rate (8.0% at
July 31, 1999) plus .25%. At July 31, 1999, the Company had borrowings of $4.2
million against the line of credit. The loan covenants remain essentially
unchanged from the prior commitment.
In April 1999, Oxycal entered into a transaction with The Industrial
Development Authority of the County of Yavapai (the "Authority") in which the
Authority issued $5.0 million in Industrial Development Revenue Bonds
(the"Bonds"), the proceeds of which were loaned to Oxycal for the construction
of a new manufacturing and laboratory facility. The Bond proceeds are being held
by the trustee, Bank One, Arizona until such time as construction costs are
incurred. The Bonds consist of $3.9 million Series A and $1.1 million Taxable
Series B which, as of April 30, 1999, carried interest rates of 3.6% and 5.0%,
respectively. The Bonds were marketed and sold by Banc One Capital Markets and
carry a maturity of 20 years. In connection with the issuance of the Bonds, the
Authority required that Oxycal obtain, for the benefit of the Bond holders, an
irrevocable direct-pay letter of credit to secure payment of principal and
interest. The letter of credit is guaranteed by the Company.
On November 10, 1997, the Company completed a $30.0 million financing
involving the private placement of Series A Convertible Redeemable Preferred
Stock. Proceeds from the sale were used primarily to acquire all the outstanding
shares of Oxycal.
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<PAGE> 24
The Company believes that cash generated from its operations and the
availability of cash under its line of credit as of July 31, 1999 are sufficient
to finance its level of operations and currently anticipated capital
expenditures through the next 12 months. The Company may require additional
financing to support the production and future OraTest(R) clinical, regulatory,
manufacturing and marketing costs or to make any significant acquisitions. There
can be no assurance that such funds would be available on terms acceptable to
the Company.
YEAR 2000 IMPACT. The Year 2000 issue is the result of computer
programs being written using two digits rather than four to define the
applicable year. The Company recognizes that the impact of the Year 2000 issue
extends beyond traditional computer hardware and software to automated plant
systems and instrumentation, as well as third parties. The Year 2000 issue has
been addressed within the Company by its individual business units, and progress
is reported periodically to management. The Company has contracted with
independent experts as considered necessary.
The Company has substantially completed the process of evaluating the
capabilities of its internal computer systems, software and equipment to process
the Year 2000 correctly. The Company believes that most vendor developed
software which it utilizes in its internal operations has been made Year 2000
compliant through vendor provided updates. Additionally, the Company has tested
its internally developed software and hardware, which are included in the
products sold to its customers. Those systems and applications identified as
needing remediation will be modified and tested prior to December 31, 1999.
In addition to risks associated with the Company's own computer
systems, software and equipment, the Company's business may be adversely
affected by any third party with whom it transacts business that have not
resolved the Year 2000 issue. These include financial institutions, suppliers,
vendors and governmental agencies. The Company is reviewing the efforts of its
vendors and customers to become Year 2000 compliant. Letters and questionnaires
have been sent to most critical entities with which the Company does business to
assess their Year 2000 readiness. Responses to the questionnaires arrive
periodically and are helping the Company evaluate the extent to which it maybe
vulnerable to its vendors' own Year 2000 issues. As of July 31, 1999, the
Company's individual business units have reported that a majority of the
responses have been received and the Company has not discovered any significant
negative third party Year 2000 compliance issues. Although this review is
continuing, the Company is not currently aware of any vendor or customer
circumstances that may have a material adverse impact on the Company. The
Company can provide no assurance that Year 2000 compliance plans will be
successfully completed by suppliers and customers in a timely manner. If a
significant number of the Company's suppliers and customers were to experience
business disruptions as a result of their lack of Year 2000 readiness, their
problems could have a material adverse effect on the financial position and
results of operations of the Company.
Costs
The total cost of Year 2000 activities is not expected to be material
to the Company's operations, liquidity or capital resources. Costs are managed
within each business unit. The total estimated cost for the Company's Year 2000
work is approximately $200,000, of which approximately $175,000 has been
incurred as of July 31, 1999; however, such costs are subject to change as a
result of ongoing evaluation of the extent of the Year 2000 problem at the
Company. The total costs of the Year 2000 systems upgrades and assessments are
currently funded through cash flow from operating activities.
Risks
The Company believes that the Year 2000 issue will not pose significant
operational problems for the Company. However, there can be no assurances that
the Year 2000 compliance activities performed by the Company will adequately
identify and test all of the Company's critical internal and external systems to
ensure Year 2000 compliance. Additionally, due to the general uncertainty
inherent in the Year 2000 issue, there can be no assurance that the Year 2000
issues of other entities will not have a material adverse impact on the
Company's systems or results of operations.
Contingency Plan
The Company believes that its most significant risk with respect to
Year 2000 issues relates to the performance and readiness status of third
parties. Such risks include the inability to process and deliver customer
-22-
<PAGE> 25
orders and payments, procure salable merchandise and perform other critical
business functions which could have a material impact on the financial
performance of the Company. Currently, the Company is formulating plans to
assure adequate inventory to meet customer needs, identifying and securing
alternate sources of critical services, materials and utilities when possible
and establishing crisis teams to address unexpected problems. Due diligence and
monitoring with respect to third parties is scheduled to be performed on a
continuous basis until the end of 1999. A formal plan will be adopted if it
becomes evident that there will be an area of non-compliance in the Company's
systems or at a critical third party which will impact its operations.
New Accounting Pronouncements. In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities.
SFAS No. 133 requires that an enterprise recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. The statement is effective for the Company's fiscal
quarters and fiscal years beginning after June 15, 2000. The Company has not
completed evaluating the impact of implementing the provisions of SFAS No. 133.
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.
-23-
<PAGE> 26
PART III
The information called for by this Part III is, in accordance with
General Instruction G(3) to Form 10-K, incorporated herein by reference to the
information contained in the Company's definitive proxy statement for the annual
meeting of stockholders of Zila to be held December 9, 1999, which will be filed
with the SEC not later than 120 days after July 31, 1999.
-24-
<PAGE> 27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
METHOD OF FILING
----------------
<S> <C> <C>
(a) Financial Statements
(1) Report of Deloitte & Touche LLP Filed herewith
(2) Consolidated Financial Statements and Notes thereto of the
Company including Consolidated Balance Sheets as of July 31, 1999 and
1998 and related Consolidated Statements of Operations, Shareholders'
Equity, and Cash Flows for each of the years in
the three-year period ended July 31, 1999 Filed herewith
(b) Reports on Form 8-K for the quarter ended July 31, 1999.
None.
(c) Exhibits.
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION METHOD OF FILING
- ------- ----------- ----------------
<S> <C> <C>
3-A Certificate of Incorporation, as amended *
3-B Bylaws *
3-C Certificate of Designations, Preferences and Rights of Series A
Convertible Preferred Stock D
4-A Specimen Stock Certificate *
4-B Form Stock Purchase Warrant re Series A Preferred Stock D
4-C Deere Park Capital Management Warrant C
4-D Bartholomew Investment, L.P. Warrant C
10-A Revolving Line of Credit Loan Agreement dated February 1, 1999 between
Zila, Inc. and Bank One, Arizona *
10-B# Stock Option Award Plan (as amended through April 10, 1991) A
10-C# Non-Employee Directors Stock Option Plan (as amended through April 10, 1991) A
10-D# 1997 Stock Option Award Plan D
10-E Agreement dated November 26, 1996 between Cheseborough Ponds USA Co
and Zila Pharmaceuticals, Inc B
10-F Private Equity Line of Credit between Deere Park Capital Management
and Zila, Inc. Dated as of April 30, 1997 C
10-G Amendment to Private Equity Line of Credit Agreement C
10-H Registration Rights Agreement dated as of May 9, 1997 between Zila,
Inc. and Deere Park Capital Management C
10-I Registration Rights Agreement dated as of May 9, 1997 between Zila,
Inc. and Bartholomew Investment, L.P C
10-J Securities Purchase Agreement dated as of October 17, 1997 by and
among Zila, Inc. and certain investors D
10-K Registration Rights Agreement dated October 17, 1997 by and among
Zila, Inc. and certain investors D
10-L Asset Purchase Agreement dated October 28, 1999 between Zila, Inc.,
Cygnus Imaging, Inc. and Procare Laboratories, Inc. *
10-M Promissory Note dated October 28, 1999 between Zila, Inc. and
Procare Laboratories, Inc. *
21 Subsidiaries of Registrant E
23 Consent of Deloitte & Touche LLP (regarding Form S-8 and Form S-3
Registration Statements) *
</TABLE>
-25-
<PAGE> 28
<TABLE>
<S> <C> <C>
24-A Power of Attorney of Joseph Hines *
24-B Power of Attorney of Bradley C. Anderson *
24-C Power of Attorney of Carl A. Schroeder *
24-D Power of Attorney of Patrick M. Lonergan *
24-E Power of Attorney of Michael S. Lesser *
24-F Power of Attorney of Curtis M. Rocca *
24-G Power of Attorney of Christopher D. Johnson
24-H Power of Attorney of Kevin J. Tourek *
27 Financial Data Schedule *
</TABLE>
* Filed herewith
A Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarterly period ended January 31, 1996, as amended
B Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarterly period ended October 31, 1996, as amended
C Incorporated by reference to the Company's Form S-3 Registration
Statement No. 333-31651
D Incorporated by reference to the Company's Annual Report on Form 10-K
for fiscal year ended July 31, 1997
E Incorporated by reference to the Company's Annual Report on Form 10-K
for fiscal year ended July 31, 1998.
-26-
<PAGE> 29
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized, this 29th
day of October, 1999.
ZILA, INC., a Delaware corporation
By /s/ BRADLEY C. ANDERSON
--------------------------------------
Bradley C. Anderson
Vice President
and Chief Financial Officer (Principal
Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report on Form 10-K has been signed below by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JOSEPH HINES Chairman of the Board, October 29, 1999
- -------------------------------------- President, Chief Executive
Joseph Hines Officer
/s/ BRADLEY C. ANDERSON Vice President and Chief October 29, 1999
- -------------------------------------- Financial Officer
Bradley C. Anderson
* Director October 29, 1999
- --------------------------------------
Carl A. Schroeder
* Director October 29, 1999
- --------------------------------------
Patrick M. Lonergan
* Director October 29, 1999
- --------------------------------------
Michael S. Lesser
* Director October 29, 1999
- --------------------------------------
Curtis M. Rocca III
* Director October 29, 1999
- --------------------------------------
Christopher D. Johnson
* Director October 29, 1999
- --------------------------------------
Kevin J. Tourek
*By /s/ BRADLEY C. ANDERSON October 29, 1999
--------------------------------------
Bradley C. Anderson
Attorney-in-Fact
</TABLE>
-27-
<PAGE> 30
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, 1999 and 1998, and the related consolidated
statements of operations, convertible redeemable preferred stock and
shareholders' equity, and of cash flows for each of the three years in the
period ended July 31, 1999. 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 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Zila, Inc. and subsidiaries at July
31, 1999 and 1998, and the results of their operations and their cash flows for
each of the three years in the period ended July 31, 1999 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
October 29, 1999
F-1
<PAGE> 31
ZILA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 1999 AND 1998
<TABLE>
<CAPTION>
ASSETS 1999 1998
---------------------- ----------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 5,770,970 $ 5,241,201
Trade receivables, less allowance for doubtful accounts
of $459,083 (1999) and $493,520 (1998) 8,741,283 7,161,240
Inventories - Net 11,405,883 11,550,009
Prepaid expenses and other current assets 1,126,773 1,254,258
Deferred income taxes 3,705,715 2,785,430
---------------------- ----------------------
Total current assets 30,750,624 27,992,138
---------------------- ----------------------
PROPERTY AND EQUIPMENT - Net 5,680,281 4,955,861
PURCHASED TECHNOLOGY RIGHTS - Net 6,037,415 6,473,854
GOODWILL - Net 15,679,969 17,009,914
TRADEMARKS - Net 10,782,029 11,131,925
OTHER INTANGIBLE ASSETS - Net 2,432,607 2,173,352
CASH HELD BY TRUSTEE 4,834,755
OTHER ASSETS 358,253 126,833
---------------------- ----------------------
TOTAL $ 76,555,933 $ 69,863,877
====================== ======================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,680,639 $ 4,917,626
Accrued liabilities 2,760,735 2,251,105
Deferred revenue 982,037 567,956
Short-term borrowings 116,950 87,598
Current portion of long-term debt 1,164,399 952,957
---------------------- ----------------------
Total current liabilities 8,704,760 8,777,242
LONG-TERM DEBT - Net of current portion 9,577,755 1,355,547
---------------------- ----------------------
Total liabilities 18,282,515 10,132,789
---------------------- ----------------------
COMMITMENTS AND CONTINGENCIES
SERIES A CONVERTIBLE REDEEMABLE PREFERRED STOCK:
Issued 30,000; outstanding 7,482 shares (1999) and
28,800 shares (1998); liquidation preference value:
$1,220 per share 8,787,191 33,801,930
---------------------- ----------------------
SHAREHOLDERS' EQUITY:
Preferred stock, $.001 par value - authorized
2,500,000 shares; issued 30,000 shares of Series A
Preferred Stock
Common stock, $.001 par value - authorized,
65,000,000 shares; issued 40,378,588 shares
(1999) and 34,743,575 shares (1998) 40,379 34,744
Capital in excess of par value 69,395,976 43,877,560
Deficit (19,949,703) (17,982,721)
---------------------- ----------------------
49,486,652 25,929,583
Less 42,546 shares of common stock held by wholly-owned
subsidiary (at cost) (425) (425)
---------------------- ----------------------
Total shareholders' equity 49,486,227 25,929,158
---------------------- ----------------------
TOTAL $ 76,555,933 $ 69,863,877
====================== ======================
</TABLE>
See notes to consolidated financial statements.
F-2
<PAGE> 32
ZILA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JULY 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
NET REVENUES $ 71,294,751 $ 62,107,110 $ 38,664,892
------------ ------------ ------------
OPERATING COSTS AND EXPENSES:
Cost of products sold 34,335,344 30,676,673 23,542,342
Selling, general and administrative 31,853,421 25,469,787 20,141,557
Research and development 3,988,028 2,660,135 972,221
Depreciation and amortization 3,581,768 2,769,956 1,154,428
------------ ------------ ------------
73,758,561 61,576,551 45,810,548
------------ ------------ ------------
(LOSS) INCOME FROM OPERATIONS (2,463,810) 530,559 (7,145,656)
------------ ------------ ------------
OTHER INCOME (EXPENSES):
Interest income 288,918 319,774 201,630
Interest expense (392,805) (334,646) (79,450)
Other expense 4,715 (14,619) (24,832)
------------ ------------ ------------
(99,172) (29,491) 97,348
------------ ------------ ------------
(LOSS) INCOME BEFORE INCOME
TAX BENEFIT (2,562,982) 501,068 (7,048,308)
INCOME TAX BENEFIT 596,000 1,800,000 589,931
------------ ------------ ------------
NET (LOSS) INCOME (1,966,982) 2,301,068 (6,458,377)
PREFERRED STOCK DIVIDEND REQUIREMENT:
SERIES A EMBEDDED DIVIDEND (NOTE 9) 7,314,600
------------ ------------ ------------
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS $ (1,966,982) $ (5,013,532) $ (6,458,377)
============ ============ ============
BASIC AND DILUTED LOSS PER SHARE $ (0.05) $ (0.15) $ (0.20)
============ ============ ============
BASIC AND DILUTED SHARES OUTSTANDING 38,013,058 33,990,947 31,530,096
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 33
ZILA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CONVERTIBLE REDEEMABLE
PREFERRED STOCK AND SHAREHOLDERS' EQUITY
YEARS ENDED JULY 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
SHAREHOLDERS' EQUITY
-------------------------------------------------
CONVERTIBLE REDEEMABLE
PREFERRED STOCK COMMON STOCK
-------------------------- -----------------------------
CAPITAL IN
PAR EXCESS OF
SHARES AMOUNT SHARES VALUE PAR VALUE
------ ---------- ---------- ------ ----------
<S> <C> <C> <C> <C> <C>
BALANCE, JULY 31, 1996 -- -- 31,077,329 $ 31,078 $ 24,760,269
Issuance of common stock 810,094 810 4,550,171
Exercise of common stock warrants 153,665 154 478,211
Exercise of common stock options 285,493 285 571,795
Change in unrealized loss on
securities available-for-sale
Net loss
------ ---------- ---------- ------ ----------
BALANCE, JULY 31, 1997 -- -- 32,326,581 32,327 30,360,446
Issuance of preferred stock 30,000 $ 36,555,000
Preferred stock issuance fees (1,352,750)
Conversion of preferred stock into
common stock (1,200) (1,400,320) 190,543 190 1,400,130
Issuance of common stock 1,588,869 1,589 10,177,534
Exercise of common stock warrants 214,609 215 609,862
Exercise of common stock options 422,973 423 529,588
Income tax benefit - stock options 800,000
Net income
Series A Embedded dividend
------ ---------- ---------- ------ ----------
BALANCE, JULY 31, 1998 28,800 33,801,930 34,743,575 34,744 43,877,560
Conversion of preferred stock into
common stock (21,318) (25,014,739) 5,483,371 5,483 25,009,256
Exercise of common stock warrants 35,975 36 107,889
Exercise of common stock options 115,667 116 151,271
Income tax benefit - stock options 250,000
Net loss
----- ------------ ---------- ------------ ------------
BALANCE, JULY 31, 1999 7,482 $ 8,787,191 40,378,588 $ 40,379 $ 69,395,976
===== ============ ========== ============ ============
</TABLE>
<TABLE>
<CAPTION>
SHAREHOLDERS' EQUITY
------------------------------------------------------------------------
COMMON STOCK UNREALIZED
HELD BY LOSS ON TOTAL
WHOLLY-OWNED SECURITIES COMMON
SUBSIDIARY AVAILABLE- SHAREHOLDERS'
DEFICIT (AT COST) FOR-SALE EQUITY
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE, JULY 31, 1996 $ (6,510,812) $ (425) $ (24,832) $ 18,255,278
Issuance of common stock 4,550,981
Exercise of common stock warrants 478,365
Exercise of common stock options 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 (12,969,189) (425) -- 17,423,159
Issuance of preferred stock
Preferred stock issuance fees
Conversion of preferred stock into
common stock 1,400,320
Issuance of common stock 10,179,123
Exercise of common stock warrants 610,077
Exercise of common stock options 530,011
Income tax benefit - stock options 800,000
Net income 2,301,068 2,301,068
Series A Embedded dividend (7,314,600) (7,314,600)
------------ ------------ ------------ ------------
BALANCE, JULY 31, 1998 (17,982,721) (425) -- 25,929,158
Conversion of preferred stock into
common stock 25,014,739
Exercise of common stock warrants 107,925
Exercise of common stock options 151,387
Income tax benefit - stock options 250,000
Net loss (1,966,982) (1,966,982)
------------ ------------ ------------ ------------
BALANCE, JULY 31, 1999 $(19,949,703) $ (425) $ -- $ 49,486,227
============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 34
ZILA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net (loss) income $ (1,966,982) $ 2,301,068 $ (6,458,377)
Adjustments to reconcile net (loss) income to
net cash (used in) provided by operating activities:
Depreciation and amortization 3,581,768 2,769,956 1,154,428
Impairment of assets -- -- 587,659
Other -- -- 47,381
Discount on contractual obligation 117,046 288,365 --
Deferred income taxes (670,285) (1,800,000) 715,485
Change in assets and liabilities:
Receivables - net (1,580,043) 1,766,866 353,713
Inventories 144,126 (3,010,557) 129,965
Prepaid expenses and other assets (103,935) (418,875) 288,086
Accounts payable and accrued liabilities (727,357) 585,526 593,105
Income taxes payable -- -- (2,471,126)
Deferred revenue 414,081 172,362 208,033
------------ ------------ ------------
Net cash (used in) provided by operating activities (791,581) 2,654,711 (4,851,648)
------------ ------------ ------------
INVESTING ACTIVITIES:
Purchases of short-term investments -- -- (222,615)
Proceeds from sales of short-term investments -- -- 934,085
Purchases of property and equipment (1,762,927) (1,276,262) (601,172)
Acquisitions, net of cash acquired -- (33,595,322) 18,142
Purchases of intangible assets (686,236) (942,284) (118,465)
------------ ------------ ------------
Net cash (used in) provided by investing activities (2,449,163) (35,813,868) 9,975
------------ ------------ ------------
FINANCING ACTIVITIES:
Net proceeds from short-term borrowings 29,352 87,598 41,298
Net proceeds from issuance of common stock 259,312 10,559,611 3,833,755
Net proceeds from issuance of preferred stock -- 28,647,250 --
Net proceeds from issuance of long-term debt 9,209,486 93,753 --
Cash held by trustee (4,834,755) -- --
Principal payments on long-term debt (892,882) (3,059,417) (453,721)
------------ ------------ ------------
Net cash provided by financing activities 3,770,513 36,328,795 3,421,332
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 529,769 3,169,638 (1,420,341)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD $ 5,241,201 $ 2,071,563 $ 3,491,904
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,770,970 $ 5,241,201 $ 2,071,563
============ ============ ============
CASH PAID FOR INTEREST $ 229,318 $ 46,029 $ 79,450
============ ============ ============
CASH PAID FOR INCOME TAXES $ -- $ 23,000 $ 1,165,710
============ ============ ============
</TABLE>
(continued)
F-5
<PAGE> 35
ZILA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED
YEARS ENDED JULY 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND
FINANCING ACTIVITIES FOR 1999, 1998 and 1997: 1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Income tax benefit attributable to exercise of common stock options $ 250,000 $ 800,000
=========== ===========
Conversion of Series A Convertible Redeemable Preferred stock $25,014,739 $ 1,400,320
=========== ===========
Non-cash aspects of Oxycal acquisition:
Fair value of assets acquired other than cash and cash
equivalents $12,787,836
===========
Liabilities assumed $ 1,213,729
===========
Intangible assets recorded in connection with acquisition of Oxycal $14,795,040
===========
Non-cash aspects of Peridex acquisition:
Fair value of assets acquired other than cash and cash
equivalents $ 220,000
===========
Contractual obligation recorded in connection with the acquisition
of Peridex $ 5,570,000
===========
Goodwill recorded in connection with the acquisition of Peridex $11,570,637
===========
Embedded dividend recorded in connection with issuance of
Series A Convertible Redeemable Preferred Stock $ 7,314,600
===========
Non-cash aspects of Cygnus acquisition:
Stock issued $ 1,725,000
===========
Fair value of assets acquired other than cash and cash
equivalents $ 342,567
===========
Liabilities assumed $ 737,200
===========
Goodwill recorded in connection with the acquisition of Cygnus $ 2,101,491
===========
</TABLE>
See notes to consolidated financial statements. (Concluded)
F-6
<PAGE> 36
ZILA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1999, 1998 AND 1997
1. NATURE OF BUSINESS ACTIVITIES AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business Activities -- Zila, Inc. ("Zila" or the "Company"), a
Delaware corporation, is a manufacturer and marketer of pharmaceutical,
biomedical, dental and nutritional products. The Company has three major
operating groups: Pharmaceuticals, Professional Products and Nutraceuticals. The
Pharmaceuticals Group consists of over-the-counter and prescription products,
including the Zilactin(R) family of over-the-counter products, Peridex(R)
prescription mouth rinse, and OraTest(R), an oral cancer detection system. The
Professional Products Group includes Zila Dental Supply, a national distributor
of professional dental supplies, Cygnus Imaging ("Cygnus"), a manufacturer and
marketer of digital x-ray systems and intra-oral cameras, and Integrated Dental
Technologies, Inc., which distributes PracticeWorks(TM), a dental practice
management software product. The Nutraceuticals Group is presently comprised of
Oxycal Laboratories, Inc. ("Oxycal") and its Inter-Cal subsidiary, which are
manufacturers and distributors of a patented and unique form of Vitamin C
under the trademark Ester-C(R).
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"), Cygnus, and Oxycal. Zila International
Inc. has no operations and its assets at July 31, 1999 and 1998 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 fiscal
1997 consolidated financial statements give retroactive effect to the Bio-Dental
merger and include the combined operations of the Company and Bio-Dental for the
entire fiscal year.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles necessarily requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities, disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents -- The Company considers highly liquid investments
purchased with original maturities of three months or less to be cash
equivalents.
Inventories, which consist of finished goods and raw materials, are stated
at the lower of cost (first-in, first-out method) or market.
F-7
<PAGE> 37
Property and equipment are stated at cost and are depreciated using
straight-line methods over their respective estimated useful lives, ranging from
2 to 40 years. Leasehold improvements are depreciated over the lease term or the
estimated useful life, whichever is shorter.
Goodwill and Trademarks are being amortized on a straight-line basis over 12
to 40 years.
Other intangible assets consist of deferred patent and licensing costs,
software rights, 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 $3,988,028, $2,660,135 and $972,221 in 1999, 1998 and
1997, respectively, were expensed as incurred.
Net (loss) income per common share - Basic net (loss) income per common
share is computed by dividing net (loss) income attributable to common
shareholders by the weighted average number of common shares outstanding during
the year before giving effect to stock options considered to be dilutive common
stock equivalents. Diluted net (loss) income per common share is computed by
dividing net (loss) income attributable to common shareholders by the weighted
average number of common shares outstanding during the year after giving effect
to stock options and warrants considered to be dilutive common stock
equivalents. For the years ended July 31, 1999, 1998 and 1997, 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.
New Accounting Pronouncements -- In June 1998, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities.
SFAS No. 133 requires that an enterprise recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. The statement is effective for the Company's fiscal
quarters and fiscal years beginning after June 15, 2000. The Company has not
completed evaluating the impact of implementing the provisions of SFAS No. 133.
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 and short-term borrowings are
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.
F-8
<PAGE> 38
Certain reclassifications have been made to the 1998 and 1997 financial
statements to conform to the classifications used in 1999.
2. ACQUISITIONS
On November 5, 1997, the Company's Zila Pharmaceuticals, Inc. subsidiary
completed its acquisition of the Peridex(R) product line ("Peridex"), a
prescription anti-bacterial oral rinse from The Procter & Gamble Company
("P&G"). The purchase price was $12.0 million plus the value of acquired
inventory. The Company has paid $11.0 million as of July 31, 1999 and final
payment of $1.0 million is due in November 1999.
On November 10, 1997, the Company acquired, by merger, Oxycal. Oxycal
develops, manufactures and markets a patented, unique form of Vitamin C under
the trademark Ester-C(R). The Company paid $28,000,000 for all outstanding
shares of Oxycal. The Company raised the funds to consummate the merger in a
private placement of 30,000 shares of the Company's Series A Convertible
Redeemable Preferred Stock ("Preferred Stock") and warrants to purchase 360,000
shares of the Company's common stock for $30,000,000.
The Peridex and Oxycal acquisitions were accounted for using the purchase
method of accounting for business combinations. In connection with the Oxycal
acquisition, trademarks and goodwill of $11,096,280 and $3,698,760,
respectively, were recorded and are amortized on a straight-line basis over 25
and 20 years. In connection with the Peridex acquisition, goodwill of
$11,570,637 was recorded and is amortized on a straight-line basis over 12
years. Results of operations of Peridex and Oxycal have been included in the
Company's statement of operations from their respective acquisition dates.
The following unaudited pro forma summary presents the consolidated results
of operations as if the acquisitions had occurred as of the beginning of each
period presented and do not purport to be indicative of what would have occurred
had the acquisitions been made as of those dates or of results which may occur
in the future. The unaudited pro forma summary data for the year ended July 31,
1997 combines historical financial information of the Company for the year ended
July 31, 1997 and Peridex and Oxycal for the year ended June 30, 1997. The
unaudited pro forma summary data for the year ended July 31, 1998 combines
actual financial results of the Company for the year ended July 31, 1998, which
includes Peridex and Oxycal results for the nine months ended July 31, 1998, and
Peridex and Oxycal for the three months ended September 30, 1997. The embedded
dividend for the year ended July 31, 1998 and 1997 represents 270 days of
accretion and is based on the assumption that the Preferred Stock had been
issued at the beginning of each period.
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Revenues $ 68,329,759 $ 65,757,902
Net income $ 4,991,556 $ 3,942,566
Series A Preferred Stock embedded dividend $ 7,314,600 $ 7,314,600
Net loss attributable to common shareholders $ (2,323,044) $ (3,372,034)
Basic loss per share $ (0.07) $ (0.11)
</TABLE>
F-9
<PAGE> 39
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 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 is amortized on a
straight-line basis over 15 years.
3. INVENTORIES
Inventories consist of the following at July 31:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Finished goods $ 7,531,175 $ 7,048,539
Raw materials 4,174,321 4,807,214
Inventory reserves (299,613) (305,744)
------------ ------------
Total inventories $ 11,405,883 $ 11,550,009
============ ============
</TABLE>
Amounts reflected in cost of products sold related to inventory reserves during
fiscal 1999, 1998 and 1997 were $-0-, $129,880 and $396,996, respectively.
4. PROPERTY AND EQUIPMENT
Property and equipment consists of the following at July 31:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Land $1,221,097 $ 817,911
Building and improvements 2,112,065 2,069,626
Furniture and equipment 2,989,752 2,700,739
Leasehold improvements and other assets 526,828 374,229
Production and warehouse equipment 2,715,507 1,912,037
---------- ----------
Total property and equipment 9,565,249 7,874,542
Less accumulated depreciation 3,884,968 2,918,681
---------- ----------
Property and equipment -- net $5,680,281 $4,955,861
========== ==========
</TABLE>
Depreciation expense for 1999, 1998, and 1997 was $1,038,507, $769,866,
and $498,342, respectively.
F-10
<PAGE> 40
5. INTANGIBLE ASSETS
Intangible assets consist of the following at July 31:
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Purchased technology rights -- net of accumulated
amortization of $1,382,058 (1999) and $945,619 $ 6,037,415 $ 6,473,854
(1998) =========== ===========
Goodwill -- net of accumulated amortization of
$2,535,283 (1999) and $1,205,338 (1998) $15,679,969 $17,009,914
=========== ===========
Trademarks - net of accumulated amortization of
$765,936 (1999) and $427,193 (1998) $10,782,029 $11,131,925
=========== ===========
Other intangible assets:
Patents $ 1,370,300 $ 1,110,644
Licensing costs 1,648,133 1,692,853
Other 748,299 265,844
----------- -----------
Total other intangible assets 3,766,732 3,069,341
Less accumulated amortization 1,334,125 895,989
----------- -----------
Other intangible assets -- net $ 2,432,607 $ 2,173,352
=========== ===========
</TABLE>
Licensing costs consist primarily of professional fees associated with
obtaining FDA approval for a new product, OraTest(R). 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(R) (see
Note 11). Purchased technology rights relate to the acquisition of CTM, Inc in
fiscal year 1996.
Amortization of the Company's intangible assets during fiscal 1999, 1998 and
1997, was $2,543,261, $2,000,090 and $656,086, respectively.
6. SHORT-TERM BORROWINGS AND LONG-TERM DEBT
Short-term borrowings consisted of $116,950 at July 31, 1999 and $87,598 at
July 31, 1998, for installments due on the Company's various insurance policies.
<TABLE>
<CAPTION>
Long-term debt consisted of the following at July 31: 1999 1998
----------- ------------
<S> <C> <C>
Revolving line of credit, (1) $ 4,200,000 --
IDA Bond Payable, Series A, (2) 3,900,000 --
IDA Bond Payable, Series B, (2) 1,100,000 --
Mortgage note payable, interest rate 9%, monthly payments of
$2,315 with a balloon due April 1, 2001 326,440 $ 354,223
Note payable, P&G, final payment due November 1999, net of
unamortized discount (see Note 2) 975,411 1,858,365
Notes payable for equipment with interest rates between 3.06%
and 9.44% with maturities no later than 2001 240,303 95,916
----------- -----------
10,742,154 2,308,504
Less current portion 1,164,399 952,957
----------- -----------
Long term portion $ 9,577,755 $ 1,355,547
----------- -----------
</TABLE>
F-11
<PAGE> 41
(1) The Company obtained a $9,000,000 bank line of credit in February 1999,
which is collateralized by trade accounts receivable, inventories and rights to
payment. This line of credit expires December 1, 2000. Interest is payable
monthly on the unpaid balance outstanding at the bank's prime rate (8.00% at
July 31, 1999) plus .25%. At July 31, 1999, the Company had borrowings of
$4,200,000 against this line. All borrowings are secured by Zila, Inc. corporate
assets and guarantees of its subsidiaries.
(2) In April 1999, Oxycal entered into a transaction with The Industrial
Development Authority of the County of Yavapai (the "Authority") in which the
Authority issued $5.0 million in Industrial Development Revenue Bonds (the
"Bonds"), the proceeds of which were loaned to Oxycal for the construction of a
new manufacturing and laboratory facility. The Bond proceeds are being held by
the trustee, Bank One, Arizona until which time construction costs are incurred.
The Bonds consist of $3.9 million Series A and $1.1 million Taxable Series B
which, as of April 30, 1999, carried interest rates of 3.60% and 5.00%,
respectively. The Bonds were marketed and sold by Banc One Capital Markets and
carry a maturity of 20 years. In connection with the issuance of the Bonds, the
Authority required that Oxycal obtain, for the benefit of the Bond holders, an
irrevocable direct-pay letter of credit to secure payment of principal and
interest. The letter of credit is guaranteed by the Company.
Aggregate annual maturities of long-term debt for the years ending July 31
are as follows:
<TABLE>
<S> <C>
2000 $ 1,164,399
2001 4,926,854
2002 436,589
2003 457,203
2004 453,469
2005 and beyond 3,303,640
-----------
Total $10,742,154
Less current portion 1,164,399
-----------
Long-term portion $ 9,577,755
===========
</TABLE>
Under the mortgage note and line of credit, the Company is required to
comply with financial covenants based on certain financial ratios. At July 31,
1999, the Company was not in compliance with one of these covenants. The Company
has received a waiver from the bank with respect to this covenant at July 31,
1999 and the covenant has been modified for measurement dates subsequent to July
31, 1999.
7. STOCK OPTIONS AND WARRANTS
As a result of the merger with Bio-Dental, 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 directors of the Company to
purchase up to 1,000,000 shares of the Company's common stock. The options are
issuable at 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, 1999, 231,474 shares were available for grant under this plan.
F-12
<PAGE> 42
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 are
issuable at 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, 1999, no 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 are
issuable at 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, 1999, 57,500 shares were available for grant under this plan.
A summary of the status of the option plans as of July 31, 1999, 1998 and
1997 and changes during the years then ended is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------- ---------------------------- -----------------------------
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 2,195,918 $ 5.25 2,281,373 $ 4.03 2,036,002 $ 2.81
Granted 419,500 7.40 586,000 5.97 712,558 6.98
Exercised (115,667) 2.61 (422,973) 3.15 (285,493) 1.90
Forfeited (239,828) 6.34 (248,482) 3.87 (181,694) 3.93
--------- --------- ---------
Outstanding at end of year 2,259,923 5.38 2,195,918 5.26 2,281,373 4.03
========= ========= =========
Options exercisable at year-end 1,488,078 1,494,866 1,703,267
========= ========= =========
Weighted average fair value of
options granted during the year $ 5.98 $ 1.96 $ 2.54
========== ========== ==========
</TABLE>
The following table summarizes information about fixed stock options
outstanding at July 31, 1999:
<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, 1999 CONTRACTUAL LIFE PRICE JULY 31, 1999 PRICE
--------------- ------------- ---------------- -------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
$ .12 - 1.31 249,752 1.43 $ 1.19 249,752 $ 1.19
2.42 - 4.00 511,076 5.05 3.21 411,076 3.16
4.24 - 6.13 664,137 7.12 5.52 457,337 5.48
6.50 - 8.19 580,958 5.13 6.97 252,578 6.97
9.88 254,000 9.37 9.88 117,335 9.88
---------- ---------
.12 - 9.88 2,259,923 5.76 5.38 1,488,078 4.72
========= =========
</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 employee compensation
plans. Had compensation cost been computed based on the fair value of awards on
the
F-13
<PAGE> 43
date of grant, utilizing the Black-Scholes option-pricing model, consistent with
the method stipulated by SFAS No. 123, the Company's net loss attributable to
common shareholders and loss per share attributable to common shareholders for
the years ended July 31, 1999, 1998 and 1997 would have been reduced (increased)
to the pro forma amounts indicated below, followed by the model assumptions
used:
<TABLE>
<CAPTION>
JULY 31,
-------------------------------------------------
1999 1998 1997
------------- ------------- -----------
<S> <C> <C> <C>
Net loss attributable
to common shareholders:
As reported $(1,967,000) $(5,014,000) $(6,458,000)
Pro forma $(2,838,440) $(6,114,000) $(7,791,000)
Net loss attributable
to common shareholder per
basic shares outstanding:
As reported $ (.05) $ (.15) $ (.20)
Pro forma $ (.07) $ (.18) $ (.25)
Black-Scholes model assumptions:
Risk-free interest rate 4.4 - 4.5% 4.2 - 4.4% 5.5 - 6.0%
Expected volatility 82% 38% 39%
Expected term 3 - 6 years 2 - 6 years 2 - 6 years
Dividend yield 0% 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>
Outstanding, August 1, 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
Issued 456,000 7.625 - 9.92
Exercised (214,609) .60 - 3.00
----------
Outstanding, July 31, 1998 1,143,406 3.00 - 9.915
Exercised (35,975) 3.00
----------
Outstanding, July 31, 1999 1,107,431 $3.00 - 9.915
==========
</TABLE>
F-14
<PAGE> 44
8. INCOME TAXES
The consolidated income tax (benefit) provision consists of the following
for the years ended July 31:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Current:
Federal $ 63,000 $ (51,000) $ (312,000)
State 11,000 (9,000) --
----------- ----------- -----------
Total current 74,000 (60,000) (312,000)
----------- ----------- -----------
Deferred:
Federal (570,000) (1,479,000) (304,000)
State (100,000) (261,000) 26,000
----------- ----------- -----------
Total deferred (670,000) (1,740,000) (278,000)
----------- ----------- -----------
Total consolidated income tax
benefit $ (596,000) $(1,800,000) $ (590,000)
=========== =========== ===========
</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>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Federal statutory rate (34)% 34% (34)%
Adjustments:
State income taxes -- net of federal
benefit (6) 6 (6)
Non-deductible meal and entertainment
expenses 4 7 2
Non-deductible acquisition expenses and
other 16 14
Non-deductible goodwill amortization 23 74
(Decrease) increase in valuation
allowance (26) (494) 30
---- ---- ----
Effective tax rate (23)% (359)% (8)%
==== ==== ====
</TABLE>
The components of the Company's deferred income tax assets and liabilities
for the years ended July 31 are shown below:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Current deferred income tax assets:
Net operating loss carryforwards $ 6,635,000 $ 7,062,000 $ 6,810,000
Allowance for obsolete or
discontinued inventory 164,000 146,000 219,000
Book basis vs. tax basis differences 370,000 49,000 227,000
Reserve for litigation 29,000 27,000 180,000
Product warranty allowance 78,000 45,000 173,000
Allowance for doubtful accounts 151,000 112,000 140,000
Accrued vacation 78,000 79,000 40,000
Other 61,000 36,000 20,000
----------- ----------- -----------
Total current deferred income tax assets 7,566,000 7,556,000 7,809,000
Valuation allowance (3,860,000) (4,771,000) (7,563,000)
----------- ----------- -----------
Net deferred income tax asset $ 3,706,000 $ 2,785,000 $ 246,000
=========== =========== ===========
</TABLE>
F-15
<PAGE> 45
Approximately $2,063,000 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.
Deferred income taxes reflect the tax effect of temporary differences
between the amounts of assets and liabilities recognized for financial reporting
and tax purposes. In the past, the Company had offset its net deferred tax asset
with a valuation allowance due to the Company's lack of earnings history. The
benefit for income taxes was $846,000 ($250,000 of which was attributable to the
exercise of common stock options and therefore credited to capital in excess of
par value) for the fiscal year ended July 31, 1999 compared to an income tax
benefit of $2.6 million ($800,000 of which was attributable to the exercise of
common stock options and therefore credited to capital in excess of par value)
during the year ended July 31, 1998.
At July 31, 1999, the Company had federal net operating loss carryforwards
totaling approximately $18,561,000 which expire, if not previously utilized,
from 2000 through 2019. Net operating loss carryforwards for state income tax
purposes, totaling approximately $5,411,000, must be utilized within five years
of the date of their origination, and expire from 2000 through 2004.
9. REDEEMABLE PREFERRED STOCK
On November 10, 1997, the Company completed a $30,000,000 financing
involving the private placement of Series A Convertible Redeemable Preferred
Stock. Proceeds from the sale were used primarily to acquire all the outstanding
shares of Oxycal. The Preferred Stock is convertible into shares of the
Company's common stock at a conversion rate based on the price of such common
stock at the date of issuance. However, if the market price of the Company's
common stock does not appreciate by a fixed percentage at various measurement
dates, the holders of the Preferred Stock have the right to receive additional
shares of the Company's common stock upon conversion, based on a repricing
formula. Per guidance from the Emerging Issues Task Force, the intrinsic value
of the beneficial conversion feature of the Preferred Stock has been measured
and recognized as an embedded dividend and such non-cash embedded dividend has
been deducted from net income in the accompanying fiscal 1998 consolidated
statement of operations to arrive at the amount of net loss attributable to
common shareholders. Additionally, because the Preferred Stock has conditions
for redemption that are not solely within the control of the Company, it has
been classified outside of permanent equity in the accompanying consolidated
balance sheet and has been accreted to its redemption value. During the year
ended July 31, 1999, 21,318 shares of the Preferred Stock were converted into
common stock.
10. COMMITMENTS AND CONTINGENCIES
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
F-16
<PAGE> 46
increase the maximum amount of marketing funds potentially available to the
Company to be raised to $2,250,000.
At July 31, 1999, 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. The Company has paid commissions
to the Partnership of approximately $31,000, $16,000 and $64,000, for the years
ended July 31, 1999, 1998 and 1997, respectively.
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, a royalty of 5% of gross sales of the treatment
composition. Royalty expense to Dr. Tinnell for the years ended July 31, 1999,
1998 and 1997 was $390,170, $371,943 and $310,827, respectively.
The Company is pursuing approval of a New Drug Application ("NDA") pending
with the FDA for OraTest(R). The initiation of the marketing of OraTest(R) in
the United States is dependent upon the approval of the NDA 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. In November
1998, the FDA notified the Company that the OraTest(R) NDA was being given
"priority review," which targeted agency review within six months from September
3, 1998, the date when the Company provided additional data to the FDA. On
January 13, 1999, the FDA's Oncologic Drugs Advisory Committee (the "Committee")
met to review the OraTest(R) NDA and recommended, among other things, that the
FDA not approve the NDA as submitted. Subsequent to the Committee meeting,
Company representatives engaged in a dialog with the FDA, culminating in a
meeting at the agency on March 1, 1999.
On March 3, 1999, the Company received an action letter from the FDA
outlining certain deficiencies in the OraTest(R) NDA that prevented the FDA from
approving the product at that time. The FDA's letter detailed a procedure for
amending the NDA to rectify those matters. Following the March 1, 1999 meeting
with the FDA, a new clinical research group was engaged and a protocol for a
supplemental clinical study was prepared and submitted to the FDA for review.
The FDA has provided the Company with comments on the protocol and an action
plan is being developed. The Company intends to use the data from this study to
amend its present NDA. Also, as a result of the March 1st meeting, the Company
has terminated the 12-site clinical study begun in 1995, and all the data from
this study will be submitted to the agency as supplemental information.
Management is committed to completing the FDA review process.
The Company leases a manufacturing facility in Phoenix, Arizona under a
three year agreement which expires September 30, 2002. 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 2004. Future minimum lease payments under these
non-cancelable leases are as follows:
<TABLE>
<S> <C>
2000 $393,939
2001 236,388
2002 154,316
2003 113,352
2004 104,630
----------
Total $1,002.625
==========
</TABLE>
F-17
<PAGE> 47
Rent expense for the years ended July 31, 1999, 1998 and 1997 totaled
$340,170, $270,297 and $209,110, respectively.
The Company and certain of its officers have been named as defendants in a
consolidated First Amended Class Action Compliant filed July 6, 1999 in the
United States District Court for the District of Arizona, under the caption In
re Zila Securities Litigation, No. CIV 99 0115 PHX EHC. The First Amended Class
Action Compliant seeks damages in an unspecified amount on behalf of a class
consisting of purchasers of the Company's securities from November 14, 1996
through January 13, 1999 for alleged violations of the federal securities laws.
Specifically, the plaintiffs allege that in certain public statements and
filings with the Securities and Exchange Commission the defendants made false or
misleading statements and concealed material adverse information related to
OraTest(R) that artificially inflated the price of the Company's securities. The
Company and the individual defendants deny all allegations of wrongdoing and are
defending themselves vigorously. On September 10, 1999, the Company and the
individual defendants filed with the Court a motion to dismiss the First Amended
Class Action Complaint in its entirety. It is not possible to predict with any
degree of certainty when the Court will rule on the defendants' motion to
dismiss.
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. In February 1997, the plaintiffs
started the process to appeal the judgment. Subsequently, the appellate court
upheld the lower court's summary judgment in favor of Bio-Dental. Accordingly,
Bio-Dental reversed the amount of accrued liability.
On September 8, 1999, the Securities and Exchange Commission (the
"Commission") entered an order directing an investigation entitled "In the
Matter of Zila, Inc." The Commission is investigating whether (i) there were
purchases or sales of securities of the Company by persons while in possession
of material non-public information concerning the prospects that the Oncologic
Drugs Advisory Committee for the FDA would recommend approval of the OraTest(R)
NDA and whether the FDA would subsequently approve the NDA; (ii) such persons
conveyed information regarding these matters to other persons who effected
transactions in securities of the Company without disclosing the information;
and (iii) there were false and misleading statements in press releases, filings
with the Commission, or elsewhere concerning these matters. The Company does not
believe it has violated any of the federal securities laws and is cooperating
fully with the Commission in its investigation.
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.
F-18
<PAGE> 48
11. EMPLOYEE BENEFIT PLAN
The Company, except for Oxycal, has adopted the Zila, Inc. 401(k) Savings
and Retirement Plan (the "Zila Plan") for the benefit of eligible employees.
Participants may contribute, through payroll deductions, up to 15% of their
basic compensation not to exceed Internal Revenue Code limitations. The Company
may make matching or profit sharing contributions to the Zila Plan. During 1999,
1998, and 1997, the Company contributed approximately $62,000, $39,600 and
$19,000, respectively, to the Zila Plan. Oxycal adopted a 401(k) defined
contribution plan (the "Oxycal Plan") effective November 1, 1995 for all
eligible employees. An employee may contribute up to a certain maximum amount
each year. During 1999 and 1998, Oxycal contributed approximately $60,488 and
$40,653, respectively to the Oxycal Plan. Effective July 1, 1999, the Oxycal
Plan was merged into the Zila Plan.
F-19
<PAGE> 49
12. IMPAIRMENT OF ASSETS
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 Integrated Dental Technologies, Inc.
("IDT"), a wholly-owned subsidiary of Bio-Dental, would not likely be
recoverable. 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.
13. EQUITY LINE INVESTMENT AGREEMENT
In April 1997, the Company entered into an investment agreement (the
"Investment Agreement") with Deere Park Capital Management (the "Investor")
which allowed the Company to sell up to $25,000,000 of the Company's common
stock with the proceeds to be used to fund OraTest(R) marketing and general
corporate purposes. Under the Investment Agreement the Company sold $13,000,000
of common stock. The option to sell stock to the Investor expired in September
1998.
As a commitment fee for keeping the equity line available for the 12 Month
Period, the Company 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.
14. SUBSEQUENT EVENT
On October 28, 1999, Cygnus completed the sale of substantially all of its
assets and certain of its liabilities to Procare Laboratories, Inc. ("Procare"),
of Scottsdale, Arizona for approximately $4.0 million. Procare is controlled by
the former owner and President of Cygnus, Egidio Cianciosi. The purchase price
was paid through the issuance of a note receivable which is collateralized by
the assets of Procare and matures November 10, 1999.
15. SEGMENT INFORMATION
In fiscal 1999, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". SFAS No. 131 supersedes FAS
No. 14, "Financial Reporting for Segments of a Business Enterprise", replacing
the "industry segment" approach with the "management" approach. The management
approach designates the internal organization that is used by management for
making operating decisions and assessing performance as the source of the
Company's reportable segments.
The Company is organized into three major product groups and further
organized into six segments, all of which have distinct product lines, brand
names and are managed as autonomous business units. The Company has identified
the following segments for purposes of applying SFAS No. 131: Pharmaceuticals
which includes Zila Pharmaceuticals, Inc., OraTest products, Dental Supply which
includes Bio-Dental Technologies Corporation and Ryker Dental of Kentucky, Inc.
which does business under the name Zila Dental Supply, Dental Software, which
includes Integrated Dental Technologies, Inc., the distributor for
PracticeWorks, Dental Imaging which includes Cygnus Imaging, Inc. and
Nutraceuticals which includes Oxycal Laboratories, Inc. The Company evaluates
performance and allocates resources to segments based on operating results.
Corporate overhead expenses have been combined with the OraTest segment.
F-20
<PAGE> 50
The table below presents information about reported segments for the three years
ended July 31 (in thousands):
<TABLE>
<CAPTION>
DENTAL DENTAL DENTAL
PHARMACEUTICALS ORATEST SUPPLY SOFTWARE IMAGING NUTRACEUTICALS TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
Net Revenues:
1999 .......................... $ 18,148 $ 311 $ 31,534 $ 4,516 $ 1,781 $ 15,005 $ 71,295
1998 .......................... 15,439 237 28,055 3,418 2,716 12,242 62,107
1997 .......................... 6,719 20 26,532 2,194 3,200 -- 38,665
Income (loss) before income taxes:
1999 .......................... 5,801 (8,872) 658 509 (3,662) 3,003 (2,563)
1998 .......................... 5,046 (5,727) 854 (273) (1,573) 2,174 501
1997 .......................... 1,699 (6,624) 678 (2,091) (710) -- (7,048)
Identifiable assets:
1999 .......................... 13,157 18,861 10,136 871 3,734 29,797 76,556
1998 .......................... 15,223 12,888 7,962 618 4,973 28,200 69,864
1997 .......................... 6,598 5,586 7,883 534 3,003 -- 23,604
Capital expenditures:
1999 .......................... 13 681 115 85 79 790 1,763
1998 .......................... 57 399 70 76 230 444 1,276
1997 .......................... 43 296 178 73 11 -- 601
Depreciation and amortization:
1999 .......................... 1,011 920 293 103 422 833 3,582
1998 .......................... 760 830 274 61 237 608 2,770
1997 .......................... 54 720 224 27 129 -- 1,154
</TABLE>
F-21
<PAGE> 51
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial information is presented in the following summary:
<TABLE>
<CAPTION>
1998
------------------------------------------------------------------------
Quarters Ended
------------------------------------------------------------------------
October 31 January 31 April 30 July 31
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Revenues $ 10,800,182 $ 16,940,983 $ 17,723,721 $ 16,642,224
Gross Profit 4,222,924 8,822,177 9,799,328 8,586,008
Net income (loss) (429,790) 1,281,999 220,661 1,228,198
Net loss attributable to common
shareholders (429,790) (1,872,693) (2,667,430) (43,619)
Net loss attributable to common
shareholders - basic (0.01) (0.05) (0.08) (0.00)
Net loss attributable to common
shareholder - diluted (0.01) (0.05) (0.08) (0.00)
</TABLE>
<TABLE>
<CAPTION>
1999
------------------------------------------------------------------------
Quarters Ended
------------------------------------------------------------------------
October 31 January 31 April 30 July 31
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net Revenues $ 16,502,808 $ 18,121,619 $ 16,916,658 $ 19,753,666
Gross Profit 8,644,162 9,496,567 8,481,157 10,337,521
Net income (loss) 755,508 (1,147,298) (2,420,984) 845,792
Net income (loss) attributable to
common shareholders 755,508 (1,147,298) (2,420,984) 845,792
Net income (loss) attributable to
common shareholders - basic .02 (0.03) (0.06) 0.02
Net income (loss) attributable to
common shareholder - diluted .02 (0.03) (0.06) 0.02
</TABLE>
F-22
<PAGE> 52
Exhibits Index
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION METHOD OF FILING
- ------ ----------- ----------------
<S> <C> <C>
3-A Certificate of Incorporation, as amended *
3-B Bylaws *
3-C Certificate of Designations, Preferences and Rights of Series A
Convertible Preferred Stock D
4-A Specimen Stock Certificate *
4-B Form Stock Purchase Warrant re Series A Preferred Stock D
4-C Deere Park Capital Management Warrant C
4-D Bartholomew Investment, L.P. Warrant C
10-A Revolving Line of Credit Loan Agreement dated February 1, 1999 between
Zila, Inc. and Bank One, Arizona *
10-B# Stock Option Award Plan (as amended through April 10, 1991) A
10-C# Non-Employee Directors Stock Option Plan (as amended through April 10, 1991) A
10-D# 1997 Stock Option Award Plan D
10-E Agreement dated November 26, 1996 between Cheseborough Ponds USA Co
and Zila Pharmaceuticals, Inc B
10-F Private Equity Line of Credit between Deere Park Capital Management
and Zila, Inc. Dated as of April 30, 1997 C
10-G Amendment to Private Equity Line of Credit Agreement C
10-H Registration Rights Agreement dated as of May 9, 1997 between Zila,
Inc. and Deere Park Capital Management C
10-I Registration Rights Agreement dated as of May 9, 1997 between Zila,
Inc. and Bartholomew Investment, L.P C
10-J Securities Purchase Agreement dated as of October 17, 1997 by and
among Zila, Inc. and certain investors D
10-K Registration Rights Agreement dated October 17, 1997 by and among
Zila, Inc. and certain investors D
10-L Asset Purchase Agreement dated October 28, 1999 between Zila, Inc., Cygnus
Imaging Inc. and Procare Laboratories, Inc. *
10-M Secured Note dated October 28, 1999 between Zila, Inc. and Procare
Laboratories, Inc. *
21 Subsidiaries of Registrant E
23 Consent of Deloitte & Touche LLP (regarding Form S-8 and Form S-3
Registration Statements) *
</TABLE>
<TABLE>
<S> <C> <C>
24-A Power of Attorney of Joseph Hines
24-B Power of Attorney of Bradley C. Anderson
24-C Power of Attorney of Carl A. Schroeder
24-D Power of Attorney of Patrick M. Lonergan
24-E Power of Attorney of Michael S. Lesser
24-F Power of Attorney of Curtis M. Rocca
24-G Power of Attorney of Christopher D. Johnson
24-H Power of Attorney of Kevin J. Tourek
27 Financial Data Schedule
</TABLE>
* Filed herewith
A Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarterly period ended January 31, 1996, as amended
B Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarterly period ended October 31, 1996, as amended
C Incorporated by reference to the Company's Form S-3 Registration
Statement No. 333-31651
D Incorporated by reference to the Company's Annual Report on Form 10-K
for fiscal year ended July 31, 1997
E Incorporated by reference to the Company's Annual Report on Form 10-K
for fiscal year ended July 31, 1998.
<PAGE> 1
Exhibit 3-A
STATE OF DELAWARE
OFFICE OF SECRETARY OF STATE
I, MICHAEL HARKINS, SECRETARY OF STATE OF THE STATE 0F DELAWARE DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF CORRECTION
OF ZILA INC. FILED IN THIS OFFICE ON THE FIRST DAY OF SEPTEMBER, A.D. 1988, AT
10 O'CLOCK. A.M.
(Delaware Department of State s/s
Office of the Secretary of State ----------------------------------------
Seal) Michael Harkins, Secretary of State
AUTHENTICATION: 1846937
738245027 DATE: 09/01/1988
<PAGE> 2
CERTIFICATE OF CORRECTION TO
CERTIFICATE OF INCORPORATION OF
ZILA INC.
DATED SEPTEMBER 1, 1988
Zila Inc., a corporation organized and existing under and by virtue of the
General Corporation Law of the State of Delaware, HEREBY CERTIFIES THAT:
1. The name of the Corporation is Zila Inc.
2. A Certificate of Incorporation (the "Certificate") dated November 6,
1987 was filed in the office of the Secretary of State of the State of Delaware
on November 6, 1987, and filed for recording in the office of the Recorder of
Deed for New Castle County, Delaware on November 6, 1987. Section 1 of such
Certificate requires correction of punctuation associated with the company's
name as permitted by Section 103(f) of the General Corporation Law of the State
of Delaware.
3. Section 1 of the Certificate is corrected as follows:
1. The name of the Corporation is Zila, Inc.
IN WITNESS WHEREOF, said Corporation has caused this Certificate of
Correction to be signed by Joseph Hines, its President, and attested by Clarence
J. Baudhuin, its Secretary, this 31st day of August, 1988.
ZILA INC.
By s/s
-------------------------------------
Joseph Hines, President
ATTEST:
s/s
- -------------------------------
Clarence J. Baudhuin, Secretary
1
<PAGE> 3
STATE OF DELAWARE
OFFICE OF SECRETARY OF STATE
I, MICHAEL HARKINS, SECRETARY OF STATE OF THE STATE OF DELAWARE DO HEREBY
CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
INCORPORATION OF ZILA INC. FILED IN THIS OFFICE ON THE SIXTH DAY OF NOVEMBER,
A.D. 1987, AT 10 O'CLOCK A.M.
(Delaware Department of State s/s
Office of the Secretary of State ----------------------------------------
Seal) Michael Harkins, Secretary of State
AUTHENTICATION: 1460997
737310027 DATE: 11/06/1987
2
<PAGE> 4
CERTIFICATE OF INCORPORATION
OF
ZILA INC.
1. The name of the corporation is:
ZILA INC.
2. The address of its registered office in the State of Delaware is Corporation
Trust Center, 1209 Orange Street, in the City of Wilmington, County of New
Castle. The name of its registered agent at such address is The Corporation
Trust Company.
3. The purpose of the Corporation is to engage in any lawful act or activity for
which corporations may be organized under the General Corporation Law of
Delaware.
4. The total number of shares of capital stock which the Corporation shall have
authority to issue is 52,500,000, divided into 50,000,000 shares of common stock
of the par value of $.01 per share and 2,500,000 shares of preferred stock of
the par value of $.05 per share.
As to the preferred stock of the Corporation, the power to issue any
shares of preferred stock of any class or any series of any class and
designations, voting powers, preferences, and relative participating, optional
or other rights, if any, or the qualifications, limitations, or restrictions
thereof, shall be determined by the Board of Directors.
Cumulative voting as provided for by Section 214 of Title 8 of the
Delaware Code shall not apply to this Corporation. Preemptive rights as provided
for by Section 102(b)(3) of Title 8 of the Delaware Code shall not be granted
and are hereby expressly denied.
The Board of Directors shall have sole authority to create a Stock Option
Plan to create and issue any shares of stock of the Corporation, rights or
options entitling directors, officers or employees as such of the Corporation of
any affiliate thereof to purchase from the Corporation any
-3-
<PAGE> 5
share of its capital stock. The terms of such rights and options, including the
time or times, which may be limited or unlimited in duration, at or within
which, and the price or prices at which any such shares may be purchased from
the Corporation upon the exercise of any such right or option, shall be such as
shall be stated in a Stock Option Plan adopted by a resolution of the Board of
Directors providing for the creation and issue of such rights or options.
5. The name and mailing address of each incorporator is:
<TABLE>
<CAPTION>
NAME MAILING ADDRESS
---- ---------------
<S> <C>
J. L. Austin Corporation Trust Center
1209 Orange Street
Wilmington, Delaware 19801
M. C. Kinnamon Corporation Trust Center
1209 Orange Street
Wilmington, Delaware 19801
T. L. Coles Corporation Trust Center
1209 Orange Street
Wilmington, Delaware 19801
</TABLE>
6. The name and mailing address of each person who is to serve as a director
until the first annual meeting of the stockholders or until a successor is
elected and qualified is:
<TABLE>
<CAPTION>
NAME MAILING ADDRESS
---- ---------------
<S> <C>
Dr. James E. Tinnell 2225 East Flamingo, #101
Las Vegas, Nevada 89119
Joseph Hines 777 East Thomas Road, Suite 250
Phoenix, Arizona 85014
Clarence J. Baudhuin 777 East Thomas Road, Suite 250
Phoenix, Arizona 85014
</TABLE>
The Board of Directors shall have sole authority to determine the number
of Directors serving on the Board, and may increase or decrease the exact number
of Directors from time to time
-4-
<PAGE> 6
by resolution duly adopted by such Board. No decrease in the number of Directors
shall have the effect of shortening the term of any incumbent Director.
7. The Corporation shall have perpetual existence.
8. The Corporation shall be managed by the Board of Directors, which shall
exercise all powers conferred under the laws of the State of Delaware. The Board
of Directors shall have authority to make, alter or repeal the Bylaws of the
Corporation.
9. Elections of directors need not be by written ballot unless the Bylaws of the
Corporation shall so provide.
10. Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the corporation.
11. No director of the Corporation shall be personally liable to the Corporation
or its stockholders for monetary damages for breach of fiduciary duty as a
director; provided, however, that nothing contained herein shall eliminate or
limit the liability of a director of the Corporation to the extent provided by
applicable laws (i) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or knowing violation of law, (iii) for
authorizing the payment of a dividend or repurchase of stock, or (iv) for any
transaction from which the director derived an improper personal benefit. The
limitation of liability provided herein shall continue after a director has
ceased to occupy such position as to acts or omissions occurring during such
director's term or terms of office.
-5-
<PAGE> 7
12. The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon stockholders
herein are granted subject to this reservation.
The undersigned, being each of the incorporators hereinbefore named, for
the purpose of forming a corporation pursuant to the General Corporation Law of
the State of Delaware, do hereby declare and certify that this is our act and
deed and the facts herein stated are true, and accordingly have hereunto set our
hands this 6th day of November 1987.
J. L. Austin
----------------------------------------
M.C. Kinnamon
----------------------------------------
T.L. Coles
----------------------------------------
INCORPORATORS
(Received for Record
Nov. 10, 1987
William M. Honey, Recorder)
-6-
<PAGE> 1
Exhibit 3-B
BYLAWS
OF
ZILA INC.
ARTICLE I
OFFICES
1. Registered Office.
The registered office of the Corporation shall be in the City of
Wilmington, County of New Castle, State of Delaware.
2. Other Offices.
The Corporation may also have offices at such other places both within
and without the State of Delaware as the Board of Directors may from time to
time determine or the business of the Corporation may require.
ARTICLE II
SHAREHOLDERS
1. Annual Meeting.
The annual meeting of the stockholders shall be held on the first
Tuesday of October of each year, or if that day is a legal holiday in Delaware,
then on the next day thereafter which is not a legal holiday, or at such other
date as the Board of Directors shall determine, for the purpose of electing
Directors and for the transaction of such other business as may properly come
before the meeting. If the election of Directors is not held on the day
designated herein for any annual meeting of the stockholders, or any adjournment
hereof, the Directors shall cause the election to be held at a special meeting
of the stockholders as soon thereafter as convenient.
2. Special Meetings.
Special meetings of the stockholders may be called for any purpose or
purposes at any time by the Board of Directors, Chairman of the Board or the
President, and shall be called by the Chairman of the Board or the President at
the request of the holders of not less than one-tenth (1/10) of all outstanding
stock of the Corporation entitled to vote at such meeting, or otherwise as
provided by the Delaware General Corporation Law and Section 12 of Article III
of these Bylaws. Such request shall state the purpose or purposes of the
proposed meeting.
<PAGE> 2
3. Place of Meetings.
Annual and special meetings of the stockholders shall be held at the
general office of the Corporation, unless otherwise specified in the notice
calling any such meeting, or in the event of a waiver of notice of such meeting,
in such waiver of notice.
4. Notice of Meeting.
Written notice stating the place, date and hour of the meeting and, in
the case of a special meeting, the purpose or purposes for which the meeting is
called, shall be delivered to each stockholder of record entitled to vote at
such meeting not less than ten (10) nor more than fifty (50) days before the
date of the meeting. Notice may be delivered either personally or by first
class, certified or registered mail, by an officer of the Corporation at the
direction of the person or persons calling the meeting. If mailed, notice shall
be deemed to be delivered when mailed to the stockholders at his or her address
as it appears on the stock transfer books of the Corporation. Notice need not be
given of an adjourned meeting if the time and place thereof are announced at the
meeting at which the adjournment is taken, provided that such adjournment is for
less than thirty days and further provided that a new record date is not fixed
for the adjourned meeting, in either of which events, written notice of the
adjourned meeting shall be given to each stockholder of record entitled to vote
at such meeting. At any adjourned meeting, any business may be transacted which
might have been transacted at the meeting as originally noticed. A written
waiver of notice, whether given before or after the meeting to which it relates,
shall be equivalent to the giving of notice of such meeting to the stockholder
or stockholders signing such waiver. Attendance of a stockholder at a meeting
shall constitute a waiver of notice of such meeting, except when the stockholder
attends for the express purpose of objecting to the transaction of any business
because the meeting is not lawfully called or convened.
5. Fixing Date for Determination of Shareholders Record.
In order that the Corporation may determine the stockholders entitled
to notice of and to vote at any meeting of stockholders or any adjournment
thereof, or to express consent to corporate action in writing without a meeting,
or to receive payment of any dividend or other distribution or allotment of any
rights, or to exercise any rights in respect of any other change, conversion or
exchange of stock or for the purpose of any other lawful action, the Board of
Directors may fix in advance a record date, which shall not be more than sixty
(60) nor less than ten (10) days prior to the date of such meeting or such
action, as the case may be. If the Board has not fixed a record date for
determining the stockholders entitled to notice of and to vote at a meeting of
stockholders, the record date shall be at four o'clock in the afternoon on the
day before the day on which notice is given, or if notice is waived, at the
commencement of the meeting. If the Board has not fixed a record date for
determining the stockholders entitled to express consent to corporate action in
writing without a meeting, the record date shall be the time of the day on which
the first written consent is served on the Corporation in the manner provided by
the Delaware General Corporation Law. If the Board has not fixed a record date
for determining stockholders for any other purpose, the record date shall be at
the close of business on the day before the Board adopts the resolution relating
thereto. A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders
-2-
<PAGE> 3
shall apply to any adjournment of the meeting if such adjournment or
adjournments do not exceed thirty days in the aggregate; provided, however, that
the Board may fix a new record date for the adjourned meeting.
6. Record of Stockholders.
The Secretary or other officer having charge of the stock transfer
books of the Corporation shall make, or cause to be made, a complete record of
the stockholders entitled to vote at a meeting of stockholders or any
adjournment thereof, arranged in alphabetical order, with the address of and the
number of shares held by each stockholder. Such record shall be produced and
kept open at the time and place of the meeting and shall be subject to
inspection by the stockholders during the entire time of the meeting for the
purposes thereof. Failure to comply with the requirements of this Section 6,
however, shall not affect the validity of any action taken at any such meeting.
7. Quorum and Manner of Acting.
At any meeting of the stockholders, the presence, in person or by
proxy, of the holders of a majority of the outstanding stock entitled to vote
shall constitute a quorum. All shares represented and entitled to vote on any
single subject matter which may be brought before the meeting shall be counted
for quorum purposes. Only those shares entitled to vote on a particular subject
matter shall be counted for the purpose of voting on that subject matter.
Business may be conducted once a quorum is present and may continue to be
conducted until adjournment sine die, notwithstanding the withdrawal or
temporary absence of stockholders leaving less than a quorum. Except as
otherwise provided in the Delaware General Corporation Law, the affirmative vote
of the holders of a majority of the shares of stock then represented at the
meeting and entitled to vote on the subject matter under consideration shall be
the act of the stockholders; provided, however, that if the shares of stock then
represented are less than the number required to constitute a quorum, the
affirmative vote must be such as would constitute a majority if a quorum were
present, except that the affirmative vote of the holders of a majority of the
shares of stock then present is sufficient in all cases to adjourn a meeting.
8. Voting of Shares of Stock.
Each stockholder shall be entitled to one vote or corresponding
fraction thereof for each share of stock or fraction thereof standing in his or
her name on the books of the Corporation on the record date. A stockholder may
vote either in person or by proxy executed in writing by the stockholder or by
his or her duly authorized attorney in fact, but no such proxy shall be voted or
acted upon after three (3) years from the date of its execution unless the proxy
provides for a longer period. Shares of its own stock belonging to the
Corporation or to another corporation, if a majority of the shares entitled to
vote in the election of directors of such other corporation is held, directly or
indirectly, by the Corporation, shall neither be entitled to vote nor counted
for quorum purposes; provided, however, that the foregoing shall not limit the
right of any corporation to vote stock, including but not limited to its own
stock, when held by it in a fiduciary capacity. [Shares of stock standing in the
name of another corporation may be voted by such officer, agent or proxy as the
bylaws of such other corporation may prescribe or, in the absence of such
provision, as the board of directors of such other corporation may determine.
Shares of stock standing in the name of an administrator, executor,
-3-
<PAGE> 4
guardian, conservator, trustee, receiver, trustee in bankruptcy or assignee for
the benefit of creditors may be voted by such person, either in person or by
proxy. Shares of stock held by an administrator, executor, guardian or
conservator may be voted by such person, either in person or by proxy, without a
transfer of such shares into his or her name. Shares of stock held by a trustee,
other than a trustee in bankruptcy, may not be voted by such trustee without a
transfer of such shares into his or her name. Shares of stock held by or under
the control of a receiver or trustee in bankruptcy may be voted by such receiver
or trustee, either in person or by proxy, without a transfer thereof into his or
her name if authority so to do is contained in an appropriate order of the court
by which such receiver or trustee was appointed. A person whose stock is pledged
shall be entitled to vote su6 stock unless the stock has been transferred into
the name of the pledgee on the books of the Corporation, in which case only the
pledgee or his or her proxy shall be entitled to vote such stock.] If shares of
stock stand of record in the names of two or more persons, whether fiduciaries,
members of a partnership, joint tenants, tenants in common, tenants by the
entirety, tenants by community property or otherwise, or if two or more persons
have the same fiduciary relationship respecting the same shares of stock, unless
the Corporation is given written notice in the manner required by the Delaware
General Corporation Law to the contrary and is furnished with a copy of the
instrument or order appointing them or creating the relationship wherein it is
so provided, their acts with respect to voting shall have the following effect:
(i) if only one votes, his or her act binds all; (ii) if more than one vote, the
act of the majority so voting binds all; and (iii) if more than one vote, but
the vote is evenly split on any particular matter, each faction may vote the
shares in question proportionally. If any tenancy is held in unequal interests,
the majority or even split, for the purpose of the preceding sentence, shall be
a majority or even split in interest. Unless demanded by a stockholder present
in person or by proxy at any meeting of the stockholders and entitled to vote
thereat, or unless so directed by the chairman of the meeting, the vote thereat
on any question need not be by ballot. If such demand or direction is made, a
vote by ballot shall be taken, and each ballot shall be signed by the
stockholder voting, or by his or her proxy, and shall state the number of shares
voted.
9. Organization.
At each meeting of the stockholders, the Chairman of the Board, or, if
he or she is absent therefrom, the President, or, if he or she is absent
therefrom, another officer of the Corporation chosen as chairman of such meeting
by a majority in voting interest of the stockholders present in person or by
proxy and entitled to vote thereat, or, if all the officers of the Corporation
are absent therefrom, a stockholder of record so chosen, shall act as chairman
of the meeting and preside thereat. The Secretary, or, if he or she is absent
from the meeting or is required pursuant to the provisions of this Section 9 to
act as chairman of such meeting, the person (who shall be an Assistant
Secretary, if any and if present) whom the chairman of the meeting shall appoint
shall act as secretary of the meeting and keep the minutes thereof.
10. Order of Business.
The order of business at each meeting of the stockholders shall be
determined by the chairman of such meeting, but the order of business may be
changed by the vote of a majority in voting interest of those present in person
or by proxy at such meeting and entitled to vote thereat.
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11. Election of Directors.
At each election of Directors, each stockholder entitled to vote
thereat shall have the right to vote, in person or by proxy, the number of
shares of stock owned by such stockholder. Stockholders shall not have
cumulative voting rights with respect to the election of Directors. The
candidates receiving the greatest number of votes, up to the number of Directors
to be elected, shall be the Directors.
12. Action By Stockholders Without a Meeting.
Any action required or permitted to be taken at a meeting of the
stockholders may be taken without a meeting, without notice and without a vote,
if a consent in writing, setting forth the action so taken, is signed by the
number of stockholders as are required to pass such action and entitled to vote
with respect to the subject matter thereof.
13. Irregularities.
All informalities and irregularities at any meeting of the stockholders
with respect to calls, notices of meeting, the manner of voting, the form of
proxies and credentials, and the method of ascertaining those present shall be
deemed waived if no objection is made at the meeting.
ARTICLE III
BOARD OF DIRECTORS
1. General Powers.
The business and affairs of the Corporation shall be managed by the
Board of Directors.
2. Number. Term of Office and Qualifications.
Subject to the requirements of the Delaware General Corporation Law,
the Board of Directors may from time to time determine the number of Directors.
Until the Board shall otherwise determine, the number of Directors shall be that
number comprising the initial Board as set forth in the Certificate of
Incorporation. Each Director shall hold office until his or her successor is
elected or until his or her death, or until his or her resignation or removal in
the manner hereinafter provided. Directors need not be stockholders.
3. Place of Meeting.
The Board of Directors may hold its meetings at such place or places as
it may from time to time by resolution determine or as shall be designated in
any notices or waivers of notice thereof. Any such meeting, whether regular or
special, may be held by conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and participation in a meeting in such manner shall constitute presence in
person at such meeting.
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4. Annual Meetings.
As soon as practicable after each annual election of Directors and on
the same day, the Board of Directors may meet for the purpose of organization
and the transaction of other business at the place where regular meetings of the
Board of Directors are held, and no notice of such meeting shall be necessary in
order to legally hold the meeting, provided that a quorum is present. If such
meeting is not held as provided above, the meeting may be held at such time and
place as shall be specified in a notice given as hereinafter provided for a
special meeting of the Board of Directors, or in the event of waiver of notice
as specified in the written waiver of notice.
5. Regular Meetings.
Regular meetings of the Board of Directors may be held without notice
at such times as the Board of Directors shall from time to time by resolution
determine.
6. Special Meetings; Notice.
Special meetings of the Board of Directors shall be held whenever
called by the Chairman of the Board or a majority of the Directors at the time
in office. Notice shall be given, in the manner hereinafter provided, of each
such special meeting, which notice shall state the time and place of such
meeting, but need not state the purposes thereof. Except as otherwise provided
in Section 7 of this Article III, notice of each such meeting shall be mailed to
each Director, addressed to him or her at his or her residence or usual place of
business, at least two (2) days before the day on which such meeting is to be
held, or shall be sent addressed to him or her at such place by telegraph,
cable, wireless or other form of recorded communication or delivered personally
or by telephone not later than the day before the day on which such meeting is
to be held. A written waiver of notice, whether given before or after the
meeting to which it relates, shall be equivalent to the giving of notice of such
meeting to the Director or Directors signing such waiver. Attendance of a
Director at a special meeting of the Board of Directors shall constitute a
waiver of notice of such meeting, except when he or she attends the meeting for
the express purpose of objecting to the transaction of any business because the
meeting is not lawfully called or convened.
7. Quorum and Manner of Acting.
A majority of the whole Board of Directors shall be present in person
at any meeting of the Board of Directors in order to constitute a quorum for the
transaction of business at such meeting, and except as otherwise specified in
these Bylaws, and except also as otherwise expressly provided by the Delaware
General Corporation Law, the vote of a majority of the Directors present at any
such meeting at which a quorum is present shall be the act of the Board of
Directors. In the absence of a quorum from any such meeting, a majority of the
Directors present thereat may adjourn such meeting from time to time to another
time or place, without notice other than announcement at the meeting, until a
quorum shall be present thereat. The Directors shall act only as a Board and the
individual Directors shall have no power as such.
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8. Organization.
At each meeting of the Board of Directors, the Chairman of the Board of
Directors, or, if he or she is absent therefrom, the President, or if he or she
is absent therefrom, a Director chosen by a majority of the Directors present
thereat, shall act as chairman of such meeting and preside thereat. The
Secretary, or if he or she is absent, the person (who shall be an Assistant
Secretary, if any and if present) whom the chairman of such meeting shall
appoint, shall act as Secretary of such meeting and keep the minutes thereof.
9. Action by Directors Without a Meeting.
Any action required or permitted to be taken at a meeting of the Board
of Directors may be taken without a meeting, without prior notice and without a
vote, if a consent in writing, setting forth the action so taken, is signed by
all Directors entitled to vote with respect to the subject matter thereof.
10. Resignations.
Any Director may resign at any time by giving written notice of his or
her resignation to the Corporation. Any such resignation shall take effect at
the time specified therein, or, if the time when it shall become effective is
not specified therein, it shall take effect immediately upon its receipt by the
Chairman of the Board, the President or the Secretary; and, unless otherwise
specified therein, the acceptance of such resignation shall not be necessary to
make it effective.
11. Recording of a Negative Vote.
A Director who is present at a meeting of the Board of Directors at
which any action is taken shall be presumed to have assented to such action
unless his dissent to such action shall be entered in the minutes of the meeting
or unless he shall file his written dissent to such action with the Secretary
before the adjournment thereof or forward such dissent to the Secretary by
certified mail before 5:00 p.m. the next day which is not a holiday or Saturday
after the adjournment of the meeting. No right to dissent shall apply to a
Director who voted in favor of such action.
12. Removal of Directors.
Directors may be removed, with or without cause, as provided from time
to time by the Delaware General Corporation Law as then in effect.
13. Vacancies.
Any vacancy occurring in the Board of Directors, and any newly created
directorship, may be filled by a majority of the Directors then in office,
including any Director whose resignation from the Board of Directors becomes
effective at a future time, provided that the number of Directors then in office
is not less than a quorum of the whole Board, or by a sole remaining Director.
If at any time the Corporation has no Directors in office, any officer or any
shareholder or any fiduciary entrusted with responsibility for the person or
estate of a shareholder may call a special meeting of the shareholders for the
purpose of filling vacancies in the Board of Directors.
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14. Compensation.
Unless otherwise expressly provided by resolution adopted by the Board
of Directors, no Director shall receive any compensation for his or her services
as a Director. The Board of Directors may at any time and from time to time by
resolution provide that the Directors shall be paid a fixed sum for attendance
at each meeting of the Board of Directors or a stated salary as Director. In
addition, the Board of Directors may at any time and from time to time by
resolution provide that Directors shall be paid their actual expenses, if any,
of attendance at each meeting of the Board of Directors. Nothing in this section
shall be construed as precluding any Director from serving the Corporation in
any other capacity and receiving compensation therefor, but the Board of
Directors may by resolution provide that any Director receiving compensation for
his or her services to the Corporation in any other capacity shall not receive
additional compensation for his or her services as a Director.
ARTICLE IV
OFFICERS
1. Number.
The Corporation shall have the following officers: a Chairman of the
Board (who shall be a Director), a President, a Vice President, a Secretary and
a Treasurer. At the discretion of the Board of Directors, the Corporation may
also have additional Vice Presidents, one or more Assistant Vice Presidents, one
or more Assistant Secretaries and one or more Assistant Treasurers.
Any two or more offices may be held by the same person.
2. Election and Term of Office.
The officers of the corporation shall be elected annually by the Board
of Directors. Each such officer shall hold office until his or her successor is
duly elected or until his or her earlier death or resignation or removal in the
manner hereinafter provided.
3. Agents.
In addition to the officers mentioned in Section 1 of this Article IV,
the Board of Directors may appoint such agents as the Board of Directors may
deem necessary or advisable, each of which agents shall have such authority and
perform such duties as are provided in these Bylaws or as the Board of Directors
may from time to time determine. The Board of Directors may delegate to any
officer or to any committee the power to appoint or remove any such agents.
4. Removal.
Any officer may be removed, with or without cause, at any time by
resolution adopted by a majority of the whole Board of Directors.
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5. Resignations.
Any officer may resign at any time by giving written notice of his or
her resignation to the Board of Directors, the Chairman of the Board of
Directors, the President or the Secretary. Any such resignation shall take
effect at the times specified therein, or, if the time when it shall become
effective is not specified therein, it shall take effect immediately upon its
receipt by the Board of Directors, the Chairman of the Board, the President or
the Secretary; and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
6. Vacancies.
A vacancy in any office due to death, resignation, removal,
disqualification or any other cause may be filled for the unexpired portion of
the term thereof by the Board of Directors.
7. Chairman of the Board of Directors and President.
The Chairman of the Board shall be the chief executive officer of the
Corporation. The President shall be the chief operating officer of the
Corporation. Except as otherwise provided for in these Bylaws, the Chairman of
the Board, or in his or her absence, the President, shall preside at all
meetings of the stockholders and directors. Both shall have general and active
management of the business of the Corporation and shall carry into effect all
directions and resolutions of the Board of Directors.
Each may execute all bonds, notes, debentures, mortgages and other
contracts requiring a seal, under the seal of the Corporation, and may cause the
seal to be affixed thereto, and all other instruments for and in the name of the
Corporation, except that the President shall execute such instruments if, such
instruments are required by law to be executed only by the President.
Each, when authorized to do so by the Board of Directors, may execute
powers of attorney from, for, and in the name of the Corporation, to such proper
person or persons as he or she may deem fit, in order that the business of the
Corporation may be furthered or action taken as may be deemed by him or her
necessary or advisable in furtherance of the interests of the Corporation.
Each, except as may be otherwise directed by the Board of Directors, shall
attend meetings of stockholders of other corporations to represent this
Corporation thereat and to vote or take action with respect to the shares of any
such corporation owned by this Corporation in such manner as he or she shall
deem to be for the interest of the Corporation or as may be directed by the
Board.
The Chairman of the Board and, in his or her absence, the President,
shall, unless the Board of Directors otherwise provides, be ex officio a member
of all standing committees. Each of said officers shall have such general
executive powers and duties of supervision and management as are usually vested
in the office of a managing executive of a corporation, provided that the
President shall report to and follow the directives of the Chairman of the
Board.
Each shall have such other or further duties and authority as may be
prescribed elsewhere in these Bylaws or from time to time by the Board of
Directors, and the Board may from time to time
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divide the responsibilities, duties, and authority between them to such extent
as it may deem advisable.
Notwithstanding anything to the contrary hereinabove stated, the
Chairman of the Board shall not be authorized to do any act required or
permitted by Delaware Law to be done by the President of the Corporation until
his or her designation as chief executive officer has been filed in writing with
the Secretary of State of the State of Delaware and such notice attested to by
the Secretary of the Corporation.
8. Vice President.
The Vice President and any additional Vice Presidents shall have such
powers and perform such duties as the Chairman of the Board, the President or
the Board of Directors may from time to time prescribe and shall perform such
other duties as may be prescribed by these Bylaws. At the request of the
President, or in case of his or her absence or inability to act, the Vice
President shall perform the duties of the President and, when so acting, shall
have all the powers of, and be subject to all the restrictions upon, the
President.
9. Secretary.
The Secretary shall: (a) record all the proceedings of the meetings of
the stockholders, the Board of Directors and the Executive Committee, if any, in
one or more books kept for that purpose; (b) see that all notices are duly given
in accordance with the provisions of these Bylaws or as required by law; (c) be
the custodian of all contracts, deeds, documents, all other indicia of title to
properties owned by the Corporation and of its other corporate records (except
accounting records) and of the corporate seal, if any, and affix such seal to
all documents the execution of which on behalf of the Corporation under its seal
is duly authorized; (d) sign, with the Chairman of the Board, the President, the
Executive Vice President or a Vice President, certificates for stock of the
Corporation; (e) have charge, directly or through the transfer clerk or transfer
clerks, transfer agent or transfer agents and registrar or registrars appointed
as provided in Section 3 of Article VII of these Bylaws, of the issue, transfer
and registration of certificates for stock of the Corporation and of the records
thereof, such records to be kept in such manner as to show at any time the
amount of the stock of the Corporation issued and outstanding, the manner in
which and the time when such stock was paid for, the names, alphabetically
arranged, and the addresses of the holders of record thereof, the number of
shares held by each, and the time when each became a holder of record; (f) upon
request, exhibit or cause to be exhibited at all reasonable times to any
Director such records of the issue, transfer and registration of the
certificates for stock of the Corporation; (g) see that the books, reports,
statements, certificates and all other documents and records required by law are
properly kept and filed; and (h) see that the duties prescribed by Section 6 of
Article II of these Bylaws are performed. In general, the Secretary shall
perform all duties incident to the office of Secretary and such other duties as
from time to time may be assigned to him or her by the Chairman of the Board,
the President or the Board of Directors.
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10. Treasurer.
If required by the Board of Directors, the Treasurer shall give a bond
for the faithful discharge of his or her duties in such sum and with such surety
or sureties as the Board of Directors shall determine. The Treasurer shall: (a)
have charge and custody of, and be responsible for, all funds, securities, notes
and valuable effects of the Corporation; (b) receive and give receipt for moneys
due and payable to the Corporation from any sources whatsoever; (c) deposit all
such moneys to the credit of the Corporation or otherwise as the Board of
Directors, the Chairman of the Board or the President shall direct in such
banks, trust companies or other depositories as shall be selected in accordance
with the provisions of Article VI of these Bylaws; (d) cause such funds to be
disbursed by checks or drafts on the authorized depositories of the Corporation
signed as provided in Article VI of these Bylaws; (e) be responsible for the
accuracy of the amounts of, and cause to be preserved proper vouchers for, all
moneys so disbursed; (f) have the right to require from time to time reports or
statements giving such information as he or she may desire with respect to any
and all financial transactions of the Corporation from the officers or agents
transacting the same; (g) render to the Chairman of the Board, the President or
the Board, whenever they, respectively, shall request him or her so to do, an
account of the financial condition of the Corporation and of all his or her
transactions as Treasurer; and (h) upon request, exhibit or cause to be
exhibited at all reasonable times the cash books and other records to the
Chairman of the Board, the President or any of the Directors of the Corporation.
In general, the Treasurer shall perform all duties incident to the office of
Treasurer and such other duties as from time to time may be assigned to him or
her by the Chairman of the Board, the President or the Board of Directors.
11. Assistant Officers.
Any persons elected as assistant officers shall assist in the
performance of the duties of the designated office and such other duties as
shall be assigned to them by any Vice President, the Secretary or the Treasurer,
as the case may be, or by the Board of Directors, the Chairman of the Board, or
the President.
ARTICLE V
COMMITTEES
1. Executive Committee: How Constituted and Powers.
The Board of Directors, by resolution adopted by a majority of the
whole Board of Directors, may designate one or more of the Directors then in
office, who shall include the Chairman of the Board, to constitute an Executive
Committee, which shall have and may exercise between meetings of the Board of
Directors all the delegable powers of the Board of Directors to the extent not
expressly prohibited by the Delaware General Corporation Law or by resolution of
the Board of Directors. The Board may designate one or more Directors as
alternate members of the Committee who may replace any absent or disqualified
member at any meeting of the Committee. Each member of the Executive Committee
shall continue to be a member thereof only during the pleasure of a majority of
the whole Board of Directors.
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2. Executive Committee; Organization.
The Chairman of the Board shall act as chairman at all meetings of the
Executive Committee and the Secretary shall act as secretary thereof. In case of
the absence from any meeting of the Chairman of the Board or the Secretary, the
Committee may appoint a chairman or secretary, as the case may be, of the
meeting.
3. Executive Committee Meetings.
Regular meetings of the Executive Committee may be held without notice
on such days and at such places as shall be fixed by resolution adopted by a
majority of the Committee and communicated to all its members. Special meetings
of the Committee shall be held whenever called by the Chairman of the Board or a
majority of the members thereof then in office. Notice of each special meeting
of the Committee shall be given in the manner provided in Section 6 of Article
III of these Bylaws for special meetings of the Board of Directors. Notice of
any such meeting of the Executive Committee, however, need not be given to any
member of the Committee if waived by him or her in writing or by telegraph,
cable, wireless or other form of recorded communication either before or after
the meeting, or if he or she is present at such meetings, except when he or she
attends for the express purpose of objecting to the transaction of any business
because the meeting is not lawfully called or convened. Subject to the
provisions of this Article V, the Committee, by resolution adopted by a majority
of the whole Committee, shall fix its own rules of procedure and it shall keep a
record of its proceedings and report them to the board at the next regular
meeting thereof after such proceedings have been taken. All such proceedings
shall be subject to revision or alteration by the Board of Directors; provided,
however, that third parties shall not be prejudiced by any such revision or
alteration.
4. Executive-Committee; Quorum and Manner of Acting.
A majority of the Executive Committee shall constitute a quorum for the
transaction of business, and, except as specified in Section 3 of this Article
V, the act of a majority of those present at a meeting thereof at which a quorum
is present shall be the act of the Committee. The members of the Committee shall
act only as a committee, and the individual members shall have no power as such.
5. Other Committees.
The Board of Directors, by resolution adopted by a majority of the
whole Board, may constitute other committees, which shall in each case consist
of one or more of the Directors and, at the discretion of the Board of
Directors, such officers who are not Directors. The Board of Directors may
designate one or more Directors or officers who are not Directors as alternate
members of any committee who may replace any absent or disqualified member at
any meeting of the committee. Each such committee shall have and may exercise
such powers as the Board of Directors may determine and specify in the
respective resolutions appointing them; provided, however, that (a) unless all
of the members of any committee shall be Directors, such committee shall not
have authority to exercise any of the powers of the Board of Directors in the
management of the business and affairs of the Corporation, and (b) if any
committee shall have the power to determine the amounts of the respective fixed
salaries of the officers of the Corporation or any of
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them, such committee shall consist of not less than three (3) members and none
of its members shall have any vote in the determination of the amount that shall
be paid to him or her as a fixed salary. A majority of all the members of any
such committee may fix its rules of procedure, determine its action and fix the
time and place of its meetings and specify what notice thereof, if any, shall be
given, unless the Board of Directors shall otherwise by resolution provide.
6. Resignations.
Any member of the Executive Committee or any other committee may resign
therefrom at any time by giving written notice of his or her resignation to the
Chairman of the Board, the President or the Secretary. Any such resignation
shall take effect at the time specified therein, or if the time when it shall
become effective is not specified therein, it shall take effect immediately upon
its receipt by the Chairman of the Board or the Secretary; and, unless otherwise
specified therein, the acceptance of such resignation shall not be necessary to
make it effective.
7. Vacancies.
Any vacancy in the Executive Committee or any other committee shall be
filled by the vote of a majority of the whole Board of Directors.
8. Compensation.
Unless otherwise expressly provided by resolution adopted by the Board
of Directors, no member of the Executive Committee or any other committee shall
receive any compensation for his or her services as a committee member. The
Board of Directors may at any time and from time to time by resolution provide
that committee members shall be paid a fixed sum for attendance at each
committee meeting or a stated salary as a committee member. In addition, the
Board of Directors may at any time and from time to time by resolution provide
that such committee members shall be paid their actual expenses, if any, of
attendance at each committee meeting. Nothing in this section shall be construed
as precluding any committee member from serving the Corporation in any other
capacity and receiving compensation therefor, but the Board of Directors may by
resolution provide that any committee member receiving compensation for his or
her services to the Corporation in any other capacity shall not receive
additional compensation for his or her services as a committee member.
9. Dissolution of Committees; Removal of Committee Members.
The Board of Directors, by resolution adopted by a majority of the
whole Board, may, with or without cause, dissolve the Executive Committee or any
other committee, and, with or without cause, remove any member thereof.
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ARTICLE VI
MISCELLANEOUS
1. Execution of Contracts.
Except as otherwise required by law or by these Bylaws, any contract or
other instrument may be executed and delivered in the name of the Corporation
and on its behalf by the Chairman of the Board, the President, or any Vice
President. In addition, the Board of Directors may authorize any other officer
of officers or agent or agents to execute and deliver any contract or other
instrument in the name of the Corporation and on its behalf, and such authority
may be general or confined to specific instances as the Board of Directors may
by resolution determine.
2. Attestation.
Any Vice President, the Secretary, or any Assistant Secretary may
attest the execution of any instrument or document by the Chairman of the Board,
the President, or any other duly authorized officer or agent of the Corporation
and may affix the corporate seal, if any, in witness thereof, but neither such
attestation nor the affixing of a corporate seal shall be requisite to the
validity of any such document or instrument.
3. Loans.
Unless the Board of Directors shall otherwise determine, the Chairman
of the Board of Directors or the President, acting together with any one of the
following officers, to-wit: any Vice President, the Treasurer or the Secretary,
may effect loans and advances at any time for the Corporation from any bank,
trust company or other institution or from any firm or individual and, for such
loans and advances, may make, execute and deliver promissory notes or other
evidences of indebtedness of the Corporation, but no officer or officers shall
mortgage, pledge, hypothecate or otherwise transfer for security any property
owned or held by the Corporation except when authorized by resolution adopted by
the Board of Directors.
4. Checks, Drafts.
All checks, drafts, orders for the payment of money, bills of lading,
warehouse receipts, obligations, bills of exchange and insurance certificates
shall be signed or endorsed (except endorsements for collection for the account
of the Corporation or for deposit to its credit, which shall be governed by the
provisions of Section 5 of this Article VI) by such officer or officers or agent
or agents of the Corporation and in such manner as shall from time to time be
determined by resolution of the Board of Directors.
5. Deposits.
All funds of the Corporation not otherwise employed shall be deposited
from time to time to the credit of the Corporation or otherwise as the Board of
Directors, the Chairman of the Board of Directors, or the President shall direct
in general or special accounts at such banks, trust companies, savings and loan
associations, or other depositories as the Board of Directors may select or as
may be selected by any officer or officers or agent or agents of the Corporation
to whom power in that respect has been delegated by the Board of Directors. For
the purpose of deposit and for the purpose of collection for the account of the
Corporation, checks, drafts and other orders for the payment of money which are
payable to the order of the Corporation may be endorsed, assigned and
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delivered by any officer or agent of the Corporation. The Board of Directors may
make such special rules and regulations with respect to such accounts, not
inconsistent with the provisions of these Bylaws, as it may deem expedient.
6. Proxies in Respect of Stock or Other Securities of Other Corporations.
Unless otherwise provided by resolution adopted by the Board of
Directors, the Chairman of the Board of Directors, the President, or any Vice
President may exercise in the name and on behalf of the Corporation the powers
and rights which the Corporation may have as the holder of stock or other
securities in any other corporation, including without limitation the right to
vote or consent with respect to such stock or other securities.
7. Fiscal Year.
The fiscal year of the Corporation shall commence on the first day of
August and end on the last day of July.
ARTICLE VII
STOCK
1. Certificates.
Every holder of stock in the Corporation shall be entitled to have a
certificate signed by or in the name of the Corporation by the Chairman of the
Board of Directors, the President, or a Vice President and by the Secretary or
an Assistant Secretary. The signatures of such officers upon such certificate
may be facsimiles if the certificate is manually signed by a transfer agent or
registered by a registrar, other than the Corporation itself or one of its
employees. If any officer who has signed or whose facsimile signature has been
placed upon a certificate has ceased for any reason to be such officer prior to
issuance of the certificate, the certificate may be issued with the same effect
as if that person were such officer at the date of issue. All certificates for
stock of the Corporation shall be consecutively numbered, shall state the number
of shares represented thereby and shall otherwise be in such form as shall be
determined by the Board of Directors, subject to such requirements as are
imposed by the Delaware General Corporation Laws. The names and addresses of the
persons to whom the shares represented by certificates are issued shall be
entered on the stock transfer books of the Corporation, together with the number
of shares and the date of issue, and in the case of cancellation, the date of
cancellation. Certificates surrendered to the Corporation for transfer shall be
cancelled, and no new certificate shall be issued in exchange for such shares
until the original certificate has been cancelled; except that in the case of a
lost, destroyed or mutilated certificate, a new certificate may be issued
therefor upon such terms and indemnity to the Corporation as the Board of
Directors may prescribe.
2. Transfer of Stock.
Transfers of shares of stock of the Corporation shall be made only on
the stock transfer books of the Corporation by the holder of record thereof or
by his or her legal representative or attorney in fact, who shall furnish proper
evidence of authority to transfer to the Secretary, or a transfer clerk
-15-
<PAGE> 16
or a transfer agent, and upon surrender of the certificate or certificates for
such shares properly endorsed and payment of all taxes thereon. The person in
whose name shares of stock stand on the books of the Corporation shall be deemed
the owner thereof for all purposes as regards the Corporation.
3. Regulations.
The Board of Directors may make such rules and regulations as it may
deem expedient, not inconsistent with these Bylaws, concerning the issue,
transfer and registration of certificates for stock of the Corporation. The
Board of Directors may appoint, or authorize any officer or officers or any
committee to appoint, one or more transfer clerks or one or more transfer agents
and one or more registrars, and may require all certificates for stock to bear
the signature or signatures of any of them.
ARTICLE VIII
DIVIDENDS
The Board of Directors may from time to time declare, and the
Corporation may pay, dividends on its outstanding shares of stock in the manner
and upon the terms and conditions provided in the Delaware General Corporation
Law.
ARTICLE IX
SEAL
A corporate seal shall not be requisite to the validity of any
instrument executed by or on behalf of the Corporation. Nevertheless, if in any
instance a corporate seal is used, the same shall be in the form of a circle and
shall bear the full name of the Corporation and the year and state of
incorporation, or words and figures of similar import.
ARTICLE X
INDEMNIFICATION OF DIRECTORS AND OFFICERS
1. General.
The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of the Corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a
-16-
<PAGE> 17
presumption that the person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
2. Derivative Actions.
The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the Corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee or agent of
the Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the Court of
Chancery of the State of Delaware or the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper.
3. Indemnification in Certain Cases.
To the extent that a director, officer, employee or agent of the
Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in Sections 1 and 2 of this Article X, or
in defense of any claim, issue or matter therein, he shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection therewith.
4. Procedure.
Any indemnification under Sections 1 and 2 of this Article X (unless
ordered by a court) shall be made by the Corporation only as authorized in the
specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in such Sections 1 and 2. Such
determination shall be made (a) by the Board of Directors by a majority vote of
a quorum consisting of directors who were not parties to such action, suit or
proceeding, or (b) if such a quorum is not obtainable, or, even if obtainable a
quorum of disinterested directors so directs, by independent legal counsel in a
written opinion, or (c) by the stockholders.
5. Advances for-Expenses.
Expenses incurred in defending a civil or criminal action, suit or
proceeding shall be paid by the Corporation in advance of the final disposition
of such action, suit or proceeding upon receipt of an undertaking by or on
behalf of the director, officer, employee or agent to repay such amount
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<PAGE> 18
if it shall be ultimately determined that he is not entitled to be indemnified
by the Corporation as authorized in this Article X.
6. Rights Not-Exclusive.
The indemnification and advancement of expenses provided by or granted
pursuant to, the other Sections of this Article X shall not be deemed exclusive
of any other rights to which those seeking indemnification may be entitled under
any law, by-law, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in his official capacity and as to action in
another capacity while holding such office.
7. Insurance.
The Corporation shall have power to purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him
and incurred by him in any such capacity, or arising out of his status as such,
whether or not the Corporation would have the power to indemnify him against
such liability under the provisions of this Article X.
8. Definition of Corporation.
For the purposes of this Article X, references to "the Corporation"
include all constituent corporations absorbed in consolidation or merger as well
as the resulting or surviving corporation so that any person who is or was a
director, officer, employee or agent of such a constituent corporation or is or
was serving at the request of such constituent as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise shall stand in the same position under the provisions of this Article
X with respect to the resulting or surviving corporation as he would if he had
served the resulting or surviving corporation in the same capacity.
9. Other Definitions.
For purposes of this Article X, references to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the corporation" shall include any
service as a director, officer, employee or agent of the corporation which
imposes duties on, or involves services by, such director, officer, employee, or
agent with respect to an employee benefit plan, its participants, or
beneficiaries; and a person who acted in good faith and in a manner he
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the Corporation" as referred to in this Article
X.
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<PAGE> 19
10. Continuation of Rights.
The indemnification and advancement of expenses provided by, or granted
pursuant to this Article X shall continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such person. No amendment to or repeal of
this Article X shall apply to or have any effect on, the rights of any director,
officer, employee or agent under this Article X which rights come into existence
by virtue of acts or omissions of such director, officer, employee or agent
occurring prior to such amendment or repeal.
ARTICLE XI
AMENDMENTS
These Bylaws may be repealed, altered or amended by the affirmative
vote of the holders of a majority of the stock issued and outstanding and
entitled to vote at any meeting of Stockholders or by resolution duly adopted by
the affirmative vote of not less than a majority of the Directors in office at
any annual or regular meeting of the Board of Directors or at any special
meeting of the Board of Directors if notice of the proposed repeal, alteration
or amendment be contained in the notice of such special meeting, and new Bylaws
may be adopted, at any time only by the Board of Directors.
ADOPTED by the Board of Directors of the Corporation at Phoenix,
Arizona, this 10th day of November, 1987.
s/s _________________________________
DR. JAMES E. TINNELL
s/s _________________________________
JOSEPH HINES
s/s _________________________________
CLARENCE J. BAUDHUIN
DIRECTORS
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<PAGE> 1
Exhibit 4-A
COMMON STOCK COMMON STOCK
- ------------ ------------
| | | |
| NUMBER | | SHARES |
| ZI | | |
- ------------ ------------
INCORPORATED UNDER THE LAWS SEE REVERSE FOR
OF THE STATE OF DELAWARE CERTAIN DEFINITIONS
Z
ZILA, INC.
CUSIP 989513 20 5
- --------------------------------------------------------------------------------
| |
| This Certifies that |
| SPECIMAN |
| |
| is the record holder of |
| |
- --------------------------------------------------------------------------------
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $.001 PAR VALUE, OF
- -----------------------------------ZILA, INC.-----------------------------------
CERTIFICATE OF STOCK
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized Attorney upon surrender of this certificate properly
endorsed. This certificate is not valid until countersigned by the Transfer
Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated
SPECIMAN SPECIMAN
Janice L. Backus --------------- Joseph Hines
- ----------------------------- | ZILA, INC. | ------------------------------
SECRETARY | CORPORATE | PRESIDENT
| SEAL |
| 1998 |
| DELAWARE |
---------------
(C) SECURITY-COLUMBIAN UNITED STATES BANKNOTE COMPANY 1960
COUNTERSIGNED AND REGISTERED:
AMERICAN SECURITIES TRANSFER & TRUST, INC.
P.O. Box 1596
Denver, Colorado 80201
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE> 2
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of
survivorship and not as tenants
in common
UNIF GIFT MIN ACT -- _______________ Custodian____________
(Cust) (Minor)
under Uniform Gifts to Minors
Act ______________________
UNIF TRF MIN ACT -- _______ Custodian (until age ________)
(Cust)
______________under Uniform Transfers
(Minor)
to Minors Act _______________________
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ___________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
______________________________________
______________________________________
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated _________________________________
X _____________________________________
X _____________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By _____________________________________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION,
(BANKS, STOCK-BROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
<PAGE> 1
Exhibit 10A
LOAN AGREEMENT
<TABLE>
<S> <C>
BORROWER: ZILA, INC., A DELAWARE CORPORATION LENDER: BANK ONE, ARIZONA, NA
5227 NORTH 7TH STREET PHOENIX COMMERCIAL BANKING
PHOENIX, AZ 85014-2800 201 NORTH CENTRAL
PHOENIX, AZ 85004
</TABLE>
_______________________________________________________________________________
THIS LOAN AGREEMENT BETWEEN ZILA, INC., A DELAWARE CORPORATION ("BORROWER") AND
BANK ONE, ARIZONA, NA ("LENDER") IS MADE AND EXECUTED AS OF FEBRUARY 1, 1999.
THIS AGREEMENT GOVERNS ALL LOANS, CREDIT FACILITIES AND/OR OTHER FINANCIAL
ACCOMMODATIONS DESCRIBED HEREIN AND, UNLESS OTHERWISE AGREED TO IN WRITING BY
LENDER AND BORROWER, ALL OTHER PRESENT AND FUTURE LOANS, CREDIT FACILITIES AND
OTHER FINANCIAL ACCOMMODATIONS PROVIDED BY LENDER TO BORROWER. ALL SUCH LOANS,
OTHER FINANCIAL ACCOMMODATIONS, TOGETHER WITH ALL RENEWALS, EXTENSIONS AND
MODIFICATIONS THEREOF, ARE REFERRED TO IN THIS AGREEMENT INDIVIDUALLY AS THE
"LOAN" AND COLLECTIVELY AS THE "LOANS." BORROWER UNDERSTANDS AND AGREES THAT:
(a) IN GRANTING, RENEWING, OR EXTENDING ANY LOAN, LENDER IS RELYING UPON
BORROWER'S REPRESENTATIONS, WARRANTIES, AND AGREEMENTS, AS SET FORTH IN THIS
AGREEMENT; AND (b) ALL SUCH LOANS SHALL BE AND SHALL REMAIN SUBJECT TO THE
FOLLOWING TERMS AND CONDITIONS OF THIS AGREEMENT.
TERM. This Agreement shall be effective as of FEBRUARY 1, 1999, and shall
continue thereafter until all Loans and other obligations owing by Borrower to
Lender hereunder have been paid in full and Lender has no commitments or
obligations to make further Advances under the Loans to Borrower.
DEFINITIONS. The following words shall have the following meanings when used
in this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code as adopted in
the State of Arizona. All references to dollar amounts shall mean amounts in
lawful money of the United States of America.
AGREEMENT. The word "Agreement" means this Loan Agreement, as may be
amended or modified from time to time, together with all exhibits and
schedules attached hereto from time to time.
ACCOUNT. The word "Account" means a trade account receivable of
Borrower for goods sold or leased or for services rendered by Borrower
in the ordinary course of its business.
ACCOUNT DEBTOR. The words "Account Debtor" mean the person or entity
obligated upon an Account.
ADVANCE. The word "Advance" means any advance or other disbursement of
Loan proceeds under this Agreement.
BORROWER. The word "Borrower" means ZILA, INC., a Delaware corporation.
BORROWING BASE. The words "Borrowing Base" mean the sum of (i) 80.000%
of the aggregate amount of Eligible Accounts, plus (ii) 50.000% of the
aggregate amount of Eligible Inventory.
COLLATERAL. The word "Collateral" means and includes without
limitation all property and assets granted as collateral for any Loan,
whether real or personal property, whether granted directly or
indirectly, whether granted now or in the future, and whether granted
in the form of a security interest, mortgage, deed of trust,
assignment, pledge, chattel mortgage, chattel trust, factor's lien,
equipment trust, conditional sale, trust receipt, lien, charge, lien
or title retention contract, lease or consignment intended as a
security device, or any other security or lien interest whatsoever,
whether created by law, contract, or otherwise.
COMMITTED SUM. The words "Committed Sum" mean an amount equal to
$9,000,000.00.
ELIGIBLE ACCOUNTS. The words "Eligible Accounts" mean, at any time,
all of Borrower's Accounts which contain terms and conditions
acceptable to Lender and in which Lender has a first lien security
interest, less the amount of all returns, discounts, credits, and
offsets of any nature; provided, however, unless otherwise agreed to
by Lender in writing, Eligible Accounts do not include:
(a) Accounts with respect to which the Account Debtor is an
officer, an employee or agent of Borrower and to which the
Account Debtor is a subsidiary of, or affiliated with or
related to Borrower or its shareholders, officers, or
directors.
(b) All Accounts with respect to which Borrower has furnished
a payment and/or performance bond and that portion of any
Accounts for or representing retainage, if any, until all
prerequisites to the immediate payment of such retainage have
been satisfied.
(c) Accounts with respect to which goods are placed on
consignment or subject to a guaranteed sale or other terms by
reason of which the payment by the Account Debtor may be
conditional.
(d) Accounts with respect to which the Account Debtor is not
a resident of, or whose principal place of business is
located outside of, the United States or its territories,
except to the extent such Accounts are supported by
insurance, bonds or other assurances satisfactory to Lender
in its sole and absolute discretion.
(e) Accounts with respect to which Borrower is or may become
liable to the Account Debtor for goods sold or services
rendered by the Account Debtor to Borrower.
(f) Accounts which are subject to dispute, counterclaim, or
setoff.
(g) Accounts with respect to which all goods have not been
shipped or delivered, or all services have not been rendered,
to the Account Debtor.
(h) Accounts with respect to which Lender, in its sole
discretion, deems the creditworthiness or financial condition
of the Account Debtor to be unsatisfactory.
(i) Accounts of any Account Debtor who has filed or has had
filed against it a petition in bankruptcy or an application
for relief under any provision of any state or federal
bankruptcy, insolvency, or debtor-in-relief acts; or who has
had appointed a trustee, custodian, or receiver for the
assets of such Account Debtor; or who has made an assignment
for the benefit of creditors or has become insolvent or fails
generally to pay its debts (including its payrolls) as such
debts become due.
(j) Accounts with respect to which the Account Debtor is the
United States government or any department or agency of the
United States, except to the extent an acknowledgement of
assignment to Lender of any such Accounts in compliance with
the Federal Assignment of Claims Act and other applicable
laws has been received by Lender.
ELIGIBLE INVENTORY. The words "Eligible Inventory" mean, at any time,
the aggregate value of all of Borrower's Inventory as defined below
except:
(a) Inventory which is not owned by Borrower free and clear
of all security interests, liens, encumbrances, and claims of
third parties, except Lender's security interest.
(b) Inventory which Lender, in its sole and absolute
discretion, deems to be obsolete, unsalable, damaged,
defective, or unfit for further processing.
(c) Inventory which has been returned or rejected.
(d) Inventory which is held by others on consignment, sale on
approval or otherwise not in Borrower's physical possession,
except upon the written consent of Lender.
(e) Inventory located outside the United States.
For purposes of this Agreement, Eligible Inventory shall be valued at
the lower of cost or market value.
ERISA. The word "ERISA" means the Employee Retirement Income Security
Act of 1974, as amended.
GRANTOR. The word "Grantor" means and includes each and all of the
persons or entities granting a Security Interest in any Collateral for
any of the Loans.
GUARANTOR. The word "Guarantor" means and includes without limitation,
each and all of the guarantors, sureties, and accommodation parties
for any of the Loans.
INDEBTEDNESS. The word "Indebtedness" means the indebtedness evidenced
by the Note, including all principal and accrued interest thereon,
together with all other liabilities; costs and expenses for which
Borrower is responsible under this Agreement or under any of the
Related Documents. In addition, the word "Indebtedness" includes all
other obligations, debts and liabilities, plus any accrued interest
<PAGE> 2
LOAN AGREEMENT PAGE 2
(CONTINUED)
===============================================================================
thereon, owing by Borrower, or any one or more of them, to Lender of any
kind or character, now existing or hereafter arising, as well as all
present and future claims by Lender against Borrower, or any one or more of
them, and all renewals, extensions, modifications, substitutions and
rearrangements of any of the foregoing; whether such Indebtedness arises by
note, draft, acceptance, guaranty, endorsement, letter of credit,
assignment, overdraft, indemnity agreement or otherwise; whether such
Indebtedness is voluntary or involuntary, due or not due, direct or
indirect, absolute or contingent, liquidated or unliquidated; whether
Borrower may be liable individually or jointly with others; whether
Borrower may be liable primarily or secondarily or as debtor, maker,
comaker, drawer, endorser, guarantor, surety, accommodation party or
otherwise.
INVENTORY. The word "Inventory" means all raw materials and all tangible
personal property, goods, merchandise and other personal property now owned
or hereafter acquired by Borrower which is held for sale or lease in the
ordinary course of Borrower's business, excluding all work in progress,
spare parts, packaging materials, supplies and any advertising costs
capitalized into inventory.
LENDER. The word "Lender" means Bank One, Arizona, NA, its successors and
assigns.
LINE OF CREDIT. The words "Line of Credit" mean the credit facility
described in the Section titled "LINE OF CREDIT" below.
NOTE. The word "Note" means any and all promissory note or notes which
evidence Borrower's Loans in favor of Lender, as well as any amendment,
modification, renewal or replacement thereof.
PERMITTED LIENS. The words "Permitted Liens" mean: (a) liens and security
interests securing Indebtedness owed by Borrower to Lender; (b) liens for
taxes, assessments, or similar charges either (i) not yet due, or (ii)
being contested in good faith by appropriate proceedings and for which
Borrower has established adequate reserves; (c) purchase money liens or
purchase money security interests upon or in any property acquired or held
by Borrower in the ordinary course of business to secure any indebtedness
permitted under this Agreement; and (d) liens and security interests which,
as of the date of this Agreement, have been disclosed to and approved by
the Lender in writing.
RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation the Note and all credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now
or hereafter existing, executed in connection with the Note.
SECURITY AGREEMENT. The words "Security Agreement" mean and include
without limitation any agreements, promises, covenants, arrangements,
understandings or other agreements, whether created by law, contract, or
otherwise, evidencing, governing, representing, or creating a Security
Interest.
SECURITY INTEREST. The words "Security Interest" mean and include without
limitation any type of security interest, whether in the form of a lien,
charge, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt, lien or title retention contract, lease or consignment intended as
a security device, or any other security or lien interest whatsoever,
whether created by law, contract, or otherwise.
LINE OF CREDIT. Subject to the other terms and conditions herein, Lender hereby
establishes a Line of Credit for Borrower through which Lender agrees to make
advances to Borrower from time to time from the effective date of this Agreement
until the maturity date of the Note evidencing the Line of Credit, provided the
aggregate amount of such advances outstanding at any time does not exceed the
lesser of the amount equal to the Borrowing Base or an amount equal to the
Committed Sum. Within the foregoing limits, Borrower may borrow, partially or
wholly prepay, and reborrow under this Agreement.
BORROWING BASE COMPLIANCE. If at any time the aggregate principal amount
outstanding under the Line of Credit shall exceed the applicable Borrowing
Base, Borrower shall pay to Lender an amount equal to the difference
between the outstanding principal balance under the Line of Credit and the
Borrowing Base.
REPRESENTATIONS AND WARRANTIES CONCERNING ACCOUNTS. With respect to the
Accounts, Borrower represents and warrants to Lender: (a) Each Account
represented by Borrower to be an Eligible Account for purposes of this
Agreement conforms to the requirements of the definition of an Eligible
Account; and (b) All Account information listed on reports and schedules
delivered to Lender will be true and correct, subject to immaterial
variance.
REPRESENTATIONS AND WARRANTIES CONCERNING INVENTORY. With respect to the
Inventory, Borrower represents and warrants to Lender: (a) All Inventory
represented by Borrower to be Eligible Inventory for purposes of this
Agreement conforms to the requirements of the definition of Eligible
Inventory; (b) All Inventory values listed on schedules delivered to Lender
will be true and correct, subject to immaterial variance; (c) The value of
the Inventory will be determined on a consistent accounting basis; (d)
Except as reflected in the Inventory schedules delivered to Lender, all
Eligible Inventory is now and at all times hereafter will be of good and
merchantable quality, free from defects; and (e) Lender, its assigns, or
agents shall have the right at any time and at Borrower's expense to
inspect and examine the Inventory and to check and test the same as to
quality, quantity, value, and condition.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each request for an Advance, as
of the date of any renewal, extension or modification of any Loan, and at all
times any Loans or Lender's commitment to make Loans hereunder is outstanding:
ORGANIZATION. Borrower is a corporation which is duly organized, validly
existing, and in good standing under the laws of the State of Delaware, is
qualified to do business in the State of Arizona as a foreign corporation,
and is duly qualified and in good standing in all other states in which
Borrower is doing business. Borrower has the full power and authority to
own its properties and to transact the businesses in which it is presently
engaged or presently proposes to engage.
AUTHORIZATION. The execution, delivery, and performance of this Agreement
and all Related Documents to which Borrower is a party have been duly
authorized by all necessary action by Borrower; do not require the consent
or approval of any other person, regulatory authority or governmental body;
and do not conflict with, result in a violation of, or constitute a default
under (a) any provision of its articles of incorporation or organization,
or bylaws, or any agreement or other instrument binding upon Borrower or
(b) any law, governmental regulation, court decree, or order applicable to
Borrower. Borrower has all requisite power and authority to execute and
deliver this Agreement and all other Related Documents to which Borrower is
a party.
FINANCIAL INFORMATION. Each financial statement of Borrower supplied to
Lender truly and completely discloses Borrower's financial condition as of
the date of the statement, and there has been no material adverse change in
Borrower's financial condition subsequent to the date of the most recent
financial statement supplied to Lender. Borrower has no material contingent
obligations except as disclosed in such financial statements.
LEGAL EFFECT. This Agreement and all other Related Documents to which
Borrower is a party constitute legal, valid and binding obligations of
Borrower enforceable against Borrower in accordance with their respective
terms, except as limited by bankruptcy, insolvency or similar laws of
general application relating to the enforcement of creditors' rights and
except to the extent specific remedies may generally be limited by
equitable principles.
PROPERTIES. Except for Permitted Liens, Borrower is the sole owner of, and
has good title to, all of Borrower's properties free and clear of all
Security Interests, and has not executed any security documents or
financing statements relating to such properties. All of Borrower's
properties are titled in Borrower's legal name, and Borrower has not used,
or filed a financing statement under, any other name for at least the last
six (6) years.
COMPLIANCE. Except as disclosed in writing to Lender (a) Borrower is
conducting Borrower's businesses in material compliance with all applicable
federal, state and local laws, statutes, ordinances, rules, regulations,
orders, determinations and court decisions, including without limitation,
those pertaining to health or environmental matters, and (b) Borrower
otherwise does not have any known material contingent liability in
connection with the release into the environment, disposal or the improper
storage of any toxic or hazardous substance or solid waste.
LITIGATION AND CLAIMS. No litigation, claim, investigation, administrative
proceeding or similar action (including those for unpaid taxes) against
Borrower is pending or threatened, and no other event has occurred which
may in any one case or in the aggregate materially adversely affect
Borrower's financial condition or properties, other than litigation,
claims, or other events, if any, that have been disclosed to and
acknowledged by Lender in writing.
TAXES. All tax returns and reports of Borrower that are or were required
to be filed, have been filed, and all taxes, assessments and other
governmental charges have been paid in full, except those that have been
disclosed in writing to Lender which are presently being or to be contested
by Borrower in good faith in the ordinary course of business and for which
adequate reserves have been provided.
LIEN PRIORITY. Unless otherwise previously disclosed to and approved by
Lender in writing, Borrower has not entered into any Security Agreements,
granted a Security Interest or permitted the filing or attachment of any
Security Interests on or affecting any of the Collateral, except in favor
of Lender.
LICENSES, TRADEMARKS AND PATENTS. Borrower possesses and will continue to
possess all permits, licenses, trademarks, patents and rights thereto which
are needed to conduct Borrower's business and Borrower's business does not
conflict with or violate any valid rights of others with respect to the
foregoing.
<PAGE> 3
LOAN AGREEMENT Page 3
(Continued)
- -------------------------------------------------------------------------------
COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely for
business or commercial related purposes approved by Lender and such
proceeds will not be used for the purchasing or carrying of "margin stock"
as defined in Regulation U issued by the Board of Governors of the Federal
Reserve System.
INELIGIBLE SECURITIES. No portion or any advance or Loan made hereunder
shall be used directly or indirectly to purchase ineligible securities, as
defined by applicable regulations of the Federal Reserve Board,
underwritten by Lender or any other affiliate of Banc One Corporation
during the underwriting period and for 30 days thereafter.
EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which Borrower may
have any liability complies in all material respects with all applicable
requirements of law and regulations, and (i) no Reportable Event nor
Prohibited Transaction (as defined in ERISA) has occurred with respect to
any such plan, (ii) Borrower has not withdrawn from any such plan or
initiated steps to do so, (iii) no steps have been taken to terminate any
such plan, and (iv) there are no unfunded liabilities other than those
previously disclosed to Lender in writing.
LOCATION OF BORROWER'S OFFICES AND RECORDS. Borrower's place of business,
or Borrower's chief executive office if Borrower has more than one place of
business, is located at 5227 North 7th Street, Phoenix, AZ 85014-2800.
Unless Borrower has designated otherwise in writing this location is also
the office or offices where Borrower keeps its records concerning the
Collateral.
INFORMATION. All information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection with
this Agreement or any transaction contemplated hereby is, and all
information hereafter furnished by or on behalf of Borrower to Lender will
be, true and accurate in every material respect on the date as of which
such information is dated or certified; and none of such information is or
will be incomplete by omitting to state any material fact necessary to make
such information not misleading.
SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Borrower understands and agrees
that Lender, without independent investigation, is relying upon the above
representations and warranties in extending the Loans to Borrower. Borrower
further agrees that the foregoing representations and warranties shall be
continuing in nature and shall remain in full force and effect during the
term of this Agreement.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:
LITIGATION. Promptly inform Lender in writing of (a) all material adverse
changes in Borrower's financial condition, (b) all existing and all
threatened litigation, claims, investigations, administrative proceedings
or similar actions affecting Borrower or any Guarantor which could
materially affect the financial condition of Borrower or the financial
condition of any Guarantor, and (c) the creation, occurrence or assumption
by Borrower of any actual or contingent liabilities not permitted under
this Agreement.
FINANCIAL RECORDS. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent basis,
and permit Lender to examine, audit and make and take away copies or
reproductions of Borrower's books and records at all reasonable times. If
Borrower now or at any time hereafter maintains any records (including
without limitation computer generated records and computer software
programs for the generation of such records) in the possession of a third
party, Borrower, upon request of Lender shall notify such party to permit
Lender free access to such records at all reasonable times and to provide
Lender with copies of any records it may request, all at Borrower's
expense.
FINANCIAL STATEMENTS. Furnish Lender with, as soon as available, but in no
event later than one hundred twenty (120) days after the end of each fiscal
year, Borrower's balance sheet, income statement, and statement of changes
in financial position for the year ended, audited by a certified public
accountant satisfactory to Lender. All financial reports required to be
provided under this Agreement shall be prepared in accordance with
generally accepted accounting principles, applied on a consistent basis,
and certified by Borrower as being true and correct.
ADDITIONAL INFORMATION. Furnish such additional information and statements,
lists of assets and liabilities, agings of receivables and payables,
inventory schedules, budgets, forecasts, tax returns, and other reports
with respect to Borrower's financial condition and business operations as
Lender may request from time to time.
FINANCIAL COVENANTS AND RATIOS. Comply at all times with the following
covenants and ratios:
WORKING CAPITAL. Maintain, at all times, Working Capital in excess of
$10,000,000.00.
For purposes of this Agreement and to the extent the following terms are
utilized in this Agreement, the term "Tangible Net Worth" shall mean
borrower's total assets excluding all intangible assets (including, without
limitation, goodwill, trademarks, patents, copyrights, organization
expenses, and similar intangible items) less total liabilities excluding
Subordinated Debt. The term "Subordinated Debt" shall mean all indebtedness
owing by Borrower which has been subordinated by written agreement to all
indebtedness now or hereafter owing by Borrower to Lender, such agreement
to be in form and substance acceptable to Lender. The term "Working
Capital" shall mean Borrower's Liquid Assets plus inventory, less current
liabilities. The term "Liquid Assets" shall mean borrower's unencumbered
cash, marketable securities and accounts receivable net of reserves. The
term "Cash Flow" shall mean net income after taxes, and exclusive of
extraordinary items, plus depreciation and amortization. Except as provided
above, all computations made to determine compliance with the requirements
contained in this paragraph shall be made in accordance with generally
accepted accounting principles, applied on a consistent basis, and
certified by Borrower as being true and correct.
INSURANCE. Maintain fire and other risk insurance, public liability
insurance, and such other insurance as Lender may require with respect to
Borrower's properties and operations, in form, amounts, coverages and with
insurance companies reasonably acceptable to Lender. Borrower, upon request
of Lender, will deliver to Lender from time to time the policies or
certificates of insurance in form satisfactory to Lender, including
stipulations that coverages will not be cancelled or diminished without at
least thirty (30) days' prior written notice to Lender. In connection with
all policies covering assets in which Lender holds or is offered a Security
Interest for the Loans, Borrower will provide Lender with such loss payable
or other endorsements as Lender may require.
INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports on
each existing insurance policy showing such information as Lender may
reasonably request, including without limitation the following: (a) the
name of the insurer; (b) the risks insured; (c) the amount of the policy;
(d) the properties insured; (e) the then current property values on the
basis of which insurance has been obtained, and the manner of determining
those values; and (f) the expiration date of the policy.
GUARANTIES. Prior to or contemporaneously with the execution of this
Agreement, furnish to Lender guaranty agreements executed by the
guarantors named below covering such Loans or other Indebtedness and
otherwise being in form and substance satisfactory to Lender in its sole
and absolute discretion:
GUARANTORS
----------
ZILA PHARMACEUTICALS, INC.
CYGNUS IMAGING, INC.
INTER-CAL CORPORATION, INC.
OXYCAL LABORATORIES, INCORPORATED
OXYCAL EXPORT, INC.
INTEGRATED DENTAL TECHNOLOGIES, INC.
RYKER DENTAL OF KENTUCKY, INC.
BIO-DENTAL TECHNOLOGIES CORPORATION
OTHER AGREEMENTS. Comply with all terms and conditions of all other
agreements, whether now or hereafter existing, between Borrower and any
other party and notify Lender immediately in writing of any default in
connection with any other such agreements.
LOAN FEES AND CHARGES. In addition to all other agreed upon fees and
charges, pay the following: ONE TIME $35,000.00 COMMITMENT FEE PAYABLE UPON
CLOSING.
LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's business
operations, unless specifically consented to the contrary by Lender in
writing.
TAXES, CHARGES AND LIENS. Pay and discharge when due all of its
indebtedness and obligations, including without limitation all assessments,
taxes, governmental charges, levies and liens, of every kind and nature,
imposed upon Borrower or its properties, income, or profits, prior to the
date on which penalties would attach, and all lawful claims that, if
unpaid, might become a lien or charge upon any of Borrower's properties,
income, or profits; provided however, Borrower will not be required to pay
and discharge any such assessment, tax, charge, levy, lien or claim so long
as (a) the legality of the same shall be contested in good faith by
appropriate proceedings, and (b) Borrower shall have established on its
books adequate reserves with respect to such contested assessment, tax,
charge, levy, lien, or claim in accordance with generally accepted
accounting principles. Borrower, upon demand of Lender, will furnish to
Lender evidence of payment of the assessments, taxes, charges, levies,
liens and claims and will authorize the appropriate governmental official
to deliver to Lender at any time a written statement of any assessments,
taxes, charges, levies, liens and claims against Borrower's properties,
income, or profits.
PERFORMANCE. Perform and comply with all terms, conditions, and
provisions set forth in this Agreement and in the Related Documents in a
timely manner, and promptly notify Lender if Borrower learns of the
occurrence of any event which constitutes an Event of Default under
<PAGE> 4
LOAN AGREEMENT PAGE 4
(CONTINUED)
================================================================================
this Agreement or under any of the Related Documents.
OPERATIONS. Conduct its business affairs in a reasonable and prudent manner
and in compliance with all applicable federal, state and municipal laws,
ordinances, rules and regulations respecting its properties, charters,
businesses and operations, including without limitation, compliance with the
Americans With Disabilities Act, all applicable environmental statutes,
rules, regulations and ordinances and with all minimum funding standards and
other requirements of ERISA and other laws applicable to Borrower's employee
benefit plans.
COMPLIANCE CERTIFICATE. Unless waived in writing by Lender, provide Lender
forty five (45) days after each fiscal month with a certificate executed by
Borrower's chief financial officer, or other officer or person acceptable to
Lender, (a) certifying that the representations and warranties set forth in
this Agreement are true and correct as of the date of the certificate and
that, as of the date of the certificate, no Event of Default exists under
this Agreement, and (b) demonstrating compliance with all financial covenants
set forth in this Agreement.
ENVIRONMENTAL COMPLIANCE AND REPORTS. Borrower shall comply in all respects
with all federal, state and local environmental laws, statutes, regulations
and ordinances; not cause or permit to exist, as a result of an intentional
or unintentional action or omission on its part or on the part of any third
party, on property owned and/or occupied by Borrower, any environmental
activity where damage may result to the environment, unless such
environmental activity is pursuant to and in compliance with the conditions
of a permit issued by the appropriate federal, state or local governmental
authorities; and furnish to Lender promptly and in any event within thirty
(30) days after receipt thereof a copy of any notice, summons, lien,
citation, directive, letter or other communication from any governmental
agency or instrumentality concerning any intentional or unintentional action
or omission on Borrower's part in connection with any environmental activity
whether or not there is damage to the environment and/or other natural
resources.
BORROWING BASE CERTIFICATE. Within 45 days after each month, Borrower shall
deliver to Lender a borrowing base certificate, in form and detail
satisfactory to Lender, along with such supporting documentation as Lender
may request, including without limitation, an accounts receivable aging
report and/or a list or schedule of Borrower's accounts receivable, inventory
and/or equipment.
ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such promissory
notes, mortgages, deeds of trust, security agreements, financing statements,
instruments, documents and other agreements as Lender or its attorneys may
reasonably request to evidence and secure the Loans and to perfect all
Security Interests.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent
of Lender:
MAINTAIN BASIC BUSINESS. Engage in any business activities substantially
different than those in which Borrower is presently engaged.
CONTINUITY OF OPERATIONS. Cease operations, liquidate, dissolve or merge or
consolidate with or into any other entity.
LIENS. Mortgage, assign, pledge, grant a security interest in or otherwise
encumber Borrower's assets, except as allowed as a Permitted Lien.
TRANSFER OF ASSETS. Transfer, sell or otherwise dispose of any of Borrower's
assets other than in the ordinary course of business.
CHANGE IN MANAGEMENT. Permit a change in the senior executive or management
personnel of Borrower.
TRANSFER OF OWNERSHIP. Permit the sale, pledge or other transfer of any
ownership interest in Borrower.
CONDITIONS PRECEDENT TO ADVANCES. Lender's obligation to make any Advances or
to provide any other financial accommodations to or for the benefit of Borrower
hereunder shall be subject to the conditions precedent that as of the date of
such advance or disbursement and after giving effect thereto (a) all
representations and warranties made to Lender in this Agreement and the Related
Documents shall be true and correct as of and as if made on such date, (b) no
material adverse change in the financial condition of Borrower or any Guarantor
since the effective date of the most recent financial statements furnished to
Lender, or in the value of any Collateral, shall have occurred and be
continuing, (c) no event has occurred and is continuing, or would result from
the requested advance or disbursement, which with notice or lapse of time, or
both, would constitute an Event of Default, (d) no Guarantor has sought,
claimed or otherwise attempted to limit, modify or revoke such Guarantor's
guaranty of any Loan, and (e) Lender has received all Related Documents
appropriately executed by Borrower and all other proper parties.
ADDENDUM. An addendum, titled "ADDENDUM", is attached to this document and by
this reference is made a part of this document just as if all the provisions,
terms and conditions of the ADDENDUM had been fully set forth in this document.
RIGHT OF SETOFF. Unless a lien would be prohibited by law or would render a
nontaxable account taxable, Borrower grants to Lender a contractual security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or any other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future. Borrower authorizes Lender, to the extent
permitted by applicable law, to charge or setoff all sums owing on the
Indebtedness against any and all such accounts.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
DEFAULT ON INDEBTEDNESS. Failure of Borrower to make any payment when due on
any of the Indebtedness.
OTHER DEFAULTS. Failure of Borrower, any Guarantor or any Grantor to comply
with or to perform when due any other term, obligation, covenant or condition
contained in this Agreement, the Note or in any of the other Related
Documents, or failure of Borrower to comply with or to perform any other
term, obligation, covenant or condition contained in any other agreement now
existing or hereafter arising between Lender and Borrower.
FALSE STATEMENTS. Any warranty, representation or statement made or furnished
to Lender under this Agreement or the Related Documents is false or
misleading in any material respect.
DEFAULT TO THIRD PARTY. The occurrence of any event which permits the
acceleration of the maturity of any indebtedness owing by Borrower, Grantor
or any Guarantor to any third party under any agreement or undertaking.
BANKRUPTCY OR INSOLVENCY. If the Borrower, Grantor or any Guarantor: (i)
becomes insolvent, or makes a transfer in fraud of creditors, or makes an
assignment for the benefit of creditors, or admits in writing its inability
to pay its debts as they become due; (ii) generally is not paying its debts
as such debts become due; (iii) has a receiver, trustee or custodian
appointed for, or take possession of, all or substantially all of the assets
of such party or any of the Collateral, either in a proceeding brought by
such party or in a proceeding brought against such party and such appointment
is not discharged or such possession is not terminated within sixty (60) days
after the effective date thereof or such party consents to or acquiesces in
such appointment or possession; (iv) files a petition for relief under the
United States Bankruptcy Code or any other present or future federal or state
insolvency, bankruptcy or similar laws (all of the foregoing hereinafter
collectively called "APPLICABLE BANKRUPTCY LAW") or an involuntary petition
for relief is filed against such party under any Applicable Bankruptcy Law
and such involuntary petition is not dismissed within sixty (60) days after
the filing thereof, or an order for relief naming such party is entered
under any Applicable Bankruptcy Law, or any composition, rearrangement,
extension, reorganization or other relief of debtors now or hereafter
existing is requested or consented to by such party; (v) fails to have
discharged within a period of sixty (60) days any attachment, sequestration
or similar writ levied upon any property of such party; or (vi) fails to pay
within thirty (30) days any final money judgment against such party.
LIQUIDATION, DEATH AND RELATED EVENTS. If Borrower, Grantor or any Guarantor
is an entity, the liquidation, dissolution, merger or consolidation of any
such entity or, if any of such parties is an individual, the death or legal
incapacity of any such individual.
CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or forfeiture
proceedings, whether by judicial proceeding, self-help, repossession or any
other method, by any creditor of Borrower, any creditor of any Grantor
against any collateral securing the Indebtedness, or by any governmental
agency.
VIOLATION OF LAW. Any of the Real Property and/or Improvements, or any use of
any of the Real Property and/or Improvements violates any law, ordinance,
regulation or rule (Federal, state or local).
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, Lender may,
at its option, without further notice or demand, (a) terminate all commitments
and obligations of Lender to make Loans to Borrower, if any, (b) declare all
Loans and any other Indebtedness immediately due and payable, (c) refuse to
advance any additional amounts under the Note or to provide any other financial
accommodations under this Agreement, or (d) exercise all the rights and
remedies provided in the Note or in any of the Related Documents or available
at law, in equity, or otherwise; provided, however, if any Event of Default of
the type described in the "Bankruptcy or Insolvency" subsection above shall
occur, all Loans and any other Indebtedness shall automatically become due and
payable, without any notice, demand or action by Lender. Except as may be
prohibited by applicable law, all of Lender's rights and remedies shall be
cumulative and may be exercised singularly or concurrently. Election by Lender
to pursue any remedy shall not exclude pursuit of any other remedy, and an
election to make expenditures or to take action to perform an obligation of
Borrower or of any Grantor shall not affect Lender's rights to declare a
default and to exercise its rights and remedies.
MISCELLANEOUS PROVISIONS.
<PAGE> 5
LOAN AGREEMENT PAGE 5
(CONTINUED)
================================================================================
AMENDMENTS. This Agreement, together with any Related Documents, constitutes the
entire understanding and agreement of the parties as to the matters set forth in
this Agreement. No alteration of or amendment to this Agreement shall be
effective unless given in writing and signed by the party or parties sought to
be charged or bound by the alteration or amendment.
APPLICABLE LAW. This Agreement has been delivered to Lender and accepted by
Lender in the State of Arizona. Subject to the provisions on arbitration, this
Agreement shall be governed by and construed in accordance with the laws of the
State of Arizona without regard to any conflict of laws or provisions thereof.
JURY WAIVER. THE UNDERSIGNED AND LENDER (BY ITS ACCEPTANCE HEREOF) HEREBY
VOLUNTARILY, KNOWINGLY, IRREVOCABLY AND UNCONDITIONALLY WAIVE ANY RIGHT TO HAVE
A JURY PARTICIPATE IN RESOLVING ANY DISPUTE (WHETHER BASED UPON CONTRACT, TORT
OR OTHERWISE) BETWEEN OR AMONG THE UNDERSIGNED AND LENDER ARISING OUT OF OR IN
ANY WAY RELATED TO THIS DOCUMENT, AND ANY OTHER RELATED DOCUMENT, OR ANY
RELATIONSHIP BETWEEN LENDER AND THE BORROWER. THIS PROVISION IS A MATERIAL
INDUCEMENT TO LENDER TO PROVIDE THE FINANCING DESCRIBED HEREIN OR IN THE OTHER
RELATED DOCUMENTS.
ARBITRATION. Lender and Borrower agree that upon the written demand of either
party, whether made before or after the institution of any legal proceedings,
but prior to the rendering of any judgment in that proceeding, all disputes,
claims and controversies between them, whether individual, joint, or class in
nature, arising from this Agreement, any Related Document or otherwise,
including without limitation contract disputes and tort claims, shall be
resolved by binding arbitration pursuant to the Commercial Rules of the American
Arbitration Association ("AAA"). Any arbitration proceeding held pursuant to
this arbitration provision shall be conducted in the city nearest the
Borrower's address having an AAA regional office, or at any other place selected
by mutual agreement of the parties. No act to take or dispose of any Collateral
shall constitute a waiver of this arbitration agreement or be prohibited by this
arbitration agreement. This arbitration provision shall not limit the right of
either party during any dispute, claim or controversy to seek, use, and employ
ancillary, or preliminary rights and/or remedies, judicial or otherwise, for the
purposes of realizing upon, preserving, protecting, foreclosing upon or
proceeding under forcible entry and detainer for possession of, any real or
personal property, and any such action shall not be deemed an election of
remedies. Such remedies include, without limitation, obtaining injuctive relief
or a temporary restraining order, invoking a power of sale under any deed of
trust or mortgage, obtaining a writ of attachment or imposition of a
receivership, or exercising any rights relating to personal property, including
exercising the right of set-off, or taking or disposing of such property with or
without judicial process pursuant to the Uniform Commercial Code. Any disputes,
claims, or controversies concerning the lawfulness or reasonableness of an act,
or exercise of any right or remedy, concerning any Collateral, including any
claim to rescind, reform, or otherwise modify any agreement relating to the
Collateral, shall also be arbitrated; provided, however that no arbitrator shall
have the right or the power to enjoin or restrain any act of either party.
Judgment upon any award rendered by any arbitrator may be entered in any court
having jurisdiction. The statute of limitations, estoppel, waiver, laches and
similar doctrines which would otherwise be applicable in an action brought by a
party shall be applicable in any arbitration proceeding, and the commencement of
an arbitration proceeding shall be deemed the commencement of any action for
these purposes. The Federal Arbitration Act (Title 9 of the United States Code)
shall apply to the construction, interpretation, and enforcement of this
arbitration provision.
CAPTION HEADINGS. Caption headings in this Agreement are for convenience
purposes only and are not be used to interpret or define the provisions of this
Agreement.
CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to Lender's sale or
transfer, whether now or later, of one or more participation interests in the
Loans to one or more purchasers, whether related or unrelated to Lender. Lender
may provide, without any limitation whatsoever, to any one or more purchasers,
or potential purchasers, any information or knowledge Lender may have about
Borrower or about any other matter relating to the Loan, and Borrower hereby
waives any rights to privacy it may have with respect to such matters. Borrower
additionally waives any and all notices of sale of participation interests, as
well as all notices of any repurchase of such participation interests.
COSTS AND EXPENSES. Borrower agrees to pay upon demand all of Lender's expenses,
including attorneys' fees, incurred in connection with the preparation,
execution, enforcement, modification and collection of this Agreement or in
connection with the Loans made pursuant to this Agreement. Lender may hire one
or more attorneys to help collect the Indebtedness if Borrower does not pay, and
Borrower will pay Lender's reasonable attorneys' fees.
NOTICES. All notices required to be given under this Agreement shall be given in
writing, and shall be effective when actually delivered or when deposited with a
nationally recognized overnight courier or deposited in the United States mail,
first class, postage prepaid, addressed to the party to whom the notice is to be
given at the address shown above. Any party may change its address for notices
under this Agreement by giving formal written notice to the other parties,
specifying that the purpose of the notice is to change the party's address. To
the extent permitted by applicable law, if there is more than one Borrower,
notice to any Borrower will constitute notice to all Borrowers. For notice
purposes, Borrower will keep Lender informed at all times of Borrower's current
address(es).
SEVERABILITY. If a court of competent jurisdiction finds any provision of this
Agreement to be invalid or unenforceable as to any person or circumstance, such
finding shall not render that provision invalid or unenforceable as to any other
persons or circumstances. If feasible, any such offending provision shall be
deemed to be modified to be within the limits of enforceability or validity;
however, if the offending provision cannot be so modified, it shall be stricken
and all other provisions of this Agreement in all other respects shall remain
valid and enforceable.
COUNTERPARTS. This Agreement may be executed in one or more counterparts, each
of which shall be deemed an original and all of which together shall constitute
the same document. Signature pages may be detached from the counterparts to a
single copy of this Agreement to physically form one document.
SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on behalf
of Borrower shall bind its successors and assigns and shall inure to the benefit
of Lender, its successors and assigns. Borrower shall not, however, have the
right to assign its rights under this Agreement or any interest therein, without
the prior written consent of Lender.
SURVIVAL. All warranties, representations, and covenants made by Borrower in
this Agreement or in any certificate or other instrument delivered by Borrower
to Lender under this Agreement shall be considered to have been relied upon by
Lender and will survive the making of the Loan and delivery to Lender of the
Related Documents, regardless of any investigation made by Lender or on Lender's
behalf.
TIME IS OF THE ESSENCE. Time is of the essence in the performance of this
Agreement.
WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No delay
or omission on the part of Lender in exercising any right shall operate as a
waiver of such right or any other right. A waiver by Lender of a provision of
this Agreement shall not prejudice or constitute a waiver of Lender's right
otherwise to demand strict compliance with that provision or any other provision
of this Agreement. No prior waiver by Lender, nor any course of dealing between
Lender and Borrower, or between Lender and any Grantor or Guarantor, shall
constitute a waiver of any of Lender's rights or of any obligations of Borrower
or of any Grantor as to any future transactions. Whenever the consent of Lender
is required under this Agreement, the granting of such consent by Lender in any
instance shall not constitute continuing consent in subsequent instances where
such consent is required, and in all cases such consent may be granted or
withheld in the sole discretion of Lender.
<PAGE> 6
LOAN AGREEMENT PAGE 6
(CONTINUED)
================================================================================
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS LOAN AGREEMENT,
AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS EXECUTED AS OF THE DATE SET
FORTH ABOVE.
BORROWER:
ZILA, INC., A DELAWARE CORPORATION
BY: /s/ Joseph Hines
---------------------------------
JOSEPH HINES, PRESIDENT
LENDER:
BANK ONE, ARIZONA, NA
BY: /s/ Hope Berman Levin
---------------------------------
AUTHORIZED OFFICER
================================================================================
<PAGE> 7
ADDENDUM
- --------------------------------------------------------------------------------
Borrower: Zila, Inc., a Delaware Lender: Bank One, Arizona, NA
corporation Commercial Banking Group
5227 North 7th Street 201 N. Central Avenue
Phoenix, AZ 85014-2800 Phoenix, AZ 85004
This ADDENDUM is attached to and by this reference is made a part of the
Business Loan Agreement dated February 1, 1999, and executed by Bank One,
Arizona, NA and ZILA, INC., a Delaware corporation.
BORROWING BASE. The definition of Borrowing Base is hereby deleted and the
following is inserted in its place: The words "Borrowing Base" mean the sum of
(i) 80.0% of the aggregate amount of Eligible Accounts, plus (ii) the lesser of
(a) 50.0% of the aggregate amount of Eligible Inventory or (b) 50.0% of the
aggregate amount of Eligible Accounts.
ADDITIONAL AFFIRMATIVE COVENANT - CERTAIN REPORTS. Notwithstanding any other
provision to the contrary herein or in the Related Documents, with each
borrowing base certificate to be delivered by Borrower to Lender hereunder,
Borrower shall deliver to Lender an aging and listing of all accounts
receivable, which itemizes each account debtor by name, states the total amount
payable to Borrower and contains a breakdown indicating future amounts due and
when due, current amounts due, amounts 30-59 days past due, 60-89 days past due,
and 90 or more days past due, and reflecting any credit adjustments, returns and
allowances.
ADDITIONAL AFFIRMATIVE COVENANT - QUARTERLY FINANCIAL STATEMENTS. Borrower
further covenants and agrees with Lender that, while this Agreement is in
effect, Borrower will furnish Lender with, as soon as available, but in no event
later than forty-five (45) days after the end of each fiscal quarter, Borrower's
Form 10Q Financial Report.
ADDITIONAL AFFIRMATIVE COVENANT - CONSOLIDATING INTERIM FINANCIAL STATEMENTS.
Borrower further covenants and agrees with Lender that, while this Agreement is
in effect, Borrower will furnish Lender with, as soon as available, but in no
event later than SIXTY (60) days after the end of each fiscal quarter, the
balance sheet, income statement and statement of changes in financial position
of Borrower and each of its subsidiaries on a consolidating basis for the
quarter then ended, prepared and certified, subject to year end review
adjustments, as correct to the best knowledge and belief by Borrower's chief
financial officer or other officer or person acceptable to Lender.
ADDITIONAL AFFIRMATIVE COVENANT - TANGIBLE NET WORTH. Borrower further covenants
and agrees with Lender that, while this Agreement is in effect, Borrower will
comply at all times with the following covenant: Maintain, as of the end of each
fiscal quarter, a minimum Tangible Net Worth plus convertible preferred series A
stock of Borrower of not less than $18,000,000.00.
ADDITIONAL AFFIRMATIVE COVENANT - CURRENT RATIO. Borrower further covenants and
agrees with Lender that, while this Agreement is in effect, Borrower will comply
at all times with the following covenant: Maintain, as of the end of each fiscal
quarter, a ratio of current assets to current liabilities in excess of 2.0 to
1.0 (if the Line of Credit is classified as a long term debt), or 1.5 to 1.0 (if
the Line of Credit is classified as a current liability).
ADDITIONAL AFFIRMATIVE COVENANT - DEBT SERVICE COVERAGE RATIO. Borrower further
covenants and agrees with Lender that, while this Agreement is in effect,
Borrower will comply at all times with the following covenant: Maintain on a
consolidated basis, as of the end of each fiscal quarter, a ratio of (a) net
income plus Depreciation and Amortization plus nonrecurring merger related
expenses for the twelve month period then ending, to (b) current maturities of
long term debt for the same such twelve month period, of not less than 1.20 to
1.0.
AVAILABILITY FEE. Borrower shall pay to Lender an availability fee
("Availability Fee") with respect to each calendar quarter during the term of
the Note, based on the unused amount of the Note. The Availability Fee shall be
an amount equal to A x (B-C) x (D / E), where A equals thirty-five hundredths of
a percent (.35%); B equals the original amount of the Note; C equals the average
daily outstanding principal balance of the Line of Credit during the calendar
quarter; D equals the actual number of days elapsed during the calendar quarter;
and E equals 360. Each Availability Fee shall be due and payable to Lender
quarterly in arrears, within fifteen (15) days after Borrower's receipt of an
invoice for the Availability Fee from Lender.
ADDITIONAL NEGATIVE COVENANT - USE OF PROCEEDS. Borrower further covenants and
agrees with Lender that while this Agreement is in effect, Borrower shall not
use proceeds of the Line of Credit to purchase more than $2,500,000.00 of its
preferred stock.
<PAGE> 8
ADDITIONAL NEGATIVE COVENANT - CAPITAL EXPENDITURES. Borrower further covenants
and agrees with Lender that while this Agreement is in effect, Borrower and all
of its subsidiaries (excluding Oxycal Laboratories, Incorporated) shall not,
without the prior written consent of Lender, make or contract to make capital
expenditures, including leasehold improvements, during any fiscal year in excess
of $1,000,000.00, and Oxycal Laboratories, Incorporated shall not, without the
prior written consent of Lender, make or contract to make capital expenditures,
including leasehold improvements, during the two (2) fiscal year period ending
July 31, 2000 in excess of $5,000,000.00. This limitation is to be measured as
follows: current period net fixed assets plus 12 months depreciation expense
less prior period net fixed assets less gain (plus loss) on sale of assets less
capitalized interest.
ADDITIONAL NEGATIVE COVENANT - INDEBTEDNESS. Borrower further covenants and
agrees with Lender that while this Agreement is in effect, Borrower and all of
its subsidiaries shall not, without the prior written consent of Lender, create,
incur or assume additional indebtedness for borrowed money, including capital
leases, or guaranty any indebtedness owing by others, other than (A) current
unsecured trade debt incurred in the ordinary course of business, (B)
indebtedness owing to Lender, (C) borrowings outstanding as of the date hereof
and disclosed to Lender in writing, (D) operating lease indebtedness of up to
$600,000.00 (excluding operating leases from Bank One) in the aggregate, and (E)
borrowings from others approved by Lender in writing.
ADDITIONAL NEGATIVE COVENANT - ACQUISITIONS. Borrower further covenants and
agrees with Lender that while this Agreement is in effect Borrower shall not,
without the prior written consent of Lender, purchase or otherwise acquire any
interest in (a) any other enterprise or entity, or (b) any assets of any other
enterprise or entity, unless (i) the purchase price is less than $1,000,000.00,
(ii) such enterprise or entity is in the same line of business as Borrower or
its subsidiaries, (iii) Borrower has, at the time of such purchase or
acquisition, a ratio of total liabilities to Tangible Net Worth of less than 2.0
to 1.0, (iv) Borrower has, as of the end of the most recent fiscal quarter, a
ratio of (1) net income plus Depreciation and Amortization plus non-recurring
merger related expenses for the twelve month period ending with such fiscal
quarter to (2) current maturities of long term debt for the same such twelve
month period, of not less than 1.2 to 1.0; and (v) Borrower has, at the time of
such purchase or acquisition, a ratio of Liquid Assets plus inventory to current
liabilities either (1) in excess of 2.0 to 1.0 (if the Line of Credit is
classified as a long term debt), or (2) in excess of 1.5 to 1 (if the Line of
Credit is classified as a current liability).
ADDITIONAL EVENT OF DEFAULT. The occurrence of any event which permits the
acceleration of the maturity of any indebtedness owing by Oxycal Laboratories,
Incorporated to Lender under any agreement or undertaking shall constitute an
Event of Default under this Agreement.
Borrower:
ZILA, INC., a Delaware corporation
BY: /s/ Joseph Hines
--------------------------------
Joseph Hines, President
Lender:
Bank One, Arizona, NA
BY: /s/ Hope Berman Levin
-------------------------------
Hope Berman Levin, Vice President
<PAGE> 1
Exhibit 10-L
ASSET PURCHASE AGREEMENT
This ASSET PURCHASE AGREEMENT (this "Agreement") is made as of this ___
day of October, 1999, by and among ZILA, INC., a Delaware corporation ("Zila"),
CYGNUS IMAGING, INC., an Arizona corporation ("Seller"), and PROCARE
LABORATORIES, INC., an Arizona corporation ("Buyer").
RECITALS
WHEREAS, the Seller is the owner of certain assets comprising a
business known as Cygnus Imaging, Inc., a manufacturer and marketer of digital
x-ray systems and intraoral cameras (the "Business"); and
WHEREAS, Seller desires to sell to Buyer, and Buyer desires to purchase
from Seller, certain assets relating to the Business, on the terms and
conditions set forth herein.
NOW, THEREFORE, in consideration of the terms, conditions and mutual
covenants herein contained, it is agreed by and among the parties to this
Agreement as follows:
SECTION 1
DEFINITIONS
1.1 Defined Terms. As used herein, the terms below shall have the
following meanings. Any of such terms, unless the context otherwise requires,
may be used in the singular or plural, depending upon the reference.
"Affiliate" shall have the meaning set forth in the Securities
Exchange Act of 1934, as amended, and the rules and regulations thereunder.
"Assets" shall mean all of Seller's right, title and interest
in the following (but not including, in any case, the Excluded Assets):
(a) all Equipment;
(b) all Inventory;
(c) all Books and Records;
(d) all patents set forth on Schedule 1.1(f) (the "Patents");
(e) all available supplies, sales literature, promotional
literature, procedural and safety manuals, customer, supplier and distributor
lists, display units, telephone and facsimile numbers and purchasing records
related to the Business;
<PAGE> 2
(f) all rights under or pursuant to all warranties,
representations and guarantees made by suppliers in connection with the Assets
or services furnished to Seller pertaining to the Business or affecting the
Assets, to the extent such warranties, representations and guarantees (i) are
not required by Seller to fulfill its obligations under this Agreement and (ii)
are assignable;
(g) all claims, causes of action, chooses in action, rights of
recovery and rights of set-off of any kind, against any person or entity,
including without limitation the Panasonic settlement proceeds, any liens,
security interests, pledges or other rights to payment or to enforce payment in
connection with products delivered by Seller on or prior to the Closing Date;
and
(h) all accounts receivable as of the Closing Date.
"Books and Records" shall mean (i) all records and lists of
Seller pertaining to the Assets, (ii) all records and lists pertaining to the
Business, customers, suppliers or personnel of Seller, (iii) all product,
business and marketing plans of Seller and (iv) all books, ledgers, subledgers,
trial balances, files, reports, plans, drawings and operating records of every
kind maintained by Seller, but excluding the originals of Seller's minute books,
stock books, tax returns and accounting ledgers (provided that Buyer will be
provided copies of tax returns and accounting records if it so requests).
"Camera Warranties" means all warranty liability now existing
or hereafter arising with respect to the Seller's sale of intra-oral cameras
both prior to and after the Closing Date.
"Contract" shall mean any agreement, lease, contract, note,
loan, evidence of indebtedness, purchase, order, letter of credit, franchise
agreement, undertaking, covenant not to compete, employment agreement, license,
instrument, obligation or commitment to which Seller is a party or is bound and
which relates to the Business or the Assets, whether oral or written.
"Encumbrance" shall mean any claim, lien, pledge, option,
charge, easement, security interest, deed of trust, mortgage, right-of-way,
encroachment, building or use restriction, conditional sales agreement,
encumbrance or other right of third parties, whether voluntarily incurred or
arising by operation of law, and includes, without limitation, any agreement to
give any of the foregoing in the future, and any contingent sale or other title
retention agreement or lease in the nature thereof.
"Equipment" shall mean all of the furniture, fixtures,
furnishings, machinery, automobiles, trucks, spare parts, tools, supplies,
equipment and other tangible personal property owned by Seller and used in
connection with the Business.
"Excluded Assets," notwithstanding any other provisions of
this Agreement, shall mean the following Assets of Seller which are not to be
acquired by Buyer hereunder:
(a) all Permits and Contracts; and
(b) all claims, causes of action, choses in action, rights of
recovery and rights of set-off of any kind against any person or entity arising
out of or relating to the Assets to the extent related to the Excluded
Liabilities.
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"Facility" shall mean the facility which is used in the
conduct of the Business, and which is located at 8230 East Thoroughbred Trail,
Scottsdale, Arizona 85258.
"Inventory" shall mean all of Seller's inventory held for
resale and all of Seller's new repair or replacement parts, supplies and
packaging items and similar items with respect to the Business, in each case
wherever the same may be located.
"Panasonic Settlement Agreement" means the Settlement
Agreement relating to CCD X-ray sensors and related converter boards between
Matsushita Electric Corporation of America ("Panasonic") and Buyer, dated as of
October 28, 1999.
"Permits" shall mean all licenses, permits, franchises,
approvals, authorizations, consents or orders of, or filings with, any
governmental authority, whether foreign, federal, state or local, or any other
person, necessary or desirable for the past, present or anticipated conduct of,
or relating to the operation of, the Business.
"Prime Rate" means the "prime rate" published in the "Money
Rates" or equivalent section of the Western Edition of The Wall Street Journal.
"Tax" shall mean any federal, state, local, foreign or other
tax, levy, impost, fee, assessment or other government charge, including without
limitation income, estimated income, business, occupation, franchise, property,
payroll, personal property, sales, transfer, use, employment, commercial rent,
occupancy, franchise or withholding taxes, and any premium, including without
limitation interest, penalties and additions in connection therewith.
SECTION 2
SALE OF ASSETS
2.1 Transfer of Assets. Upon the terms and subject to the conditions
contained herein, at the Closing, Seller will sell, convey, transfer, assign and
deliver to Buyer, free and clear of any Encumbrance, and Buyer will acquire from
Seller, the Assets.
2.2 Assumption of Liabilities. Upon the terms and subject to the
conditions contained herein, at the Closing, Buyer shall assume only the
following obligations and liabilities (the "Assumed Liabilities") relating to
the Business:
(a) those solely accruing, arising out of, resulting from, or
relating to events or occurrences happening after the Closing Date; and
(b) the Camera Warranties.
2.3 Excluded Liabilities. Notwithstanding any other provision of this
Agreement, except for the Assumed Liabilities expressly specified in Section
2.2, Buyer shall not assume, or otherwise be responsible for, any of Seller's
liabilities or obligations, whether actual or contingent, matured or unmatured,
liquidated or unliquidated, known or unknown, or related or unrelated to the
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<PAGE> 4
Business or the Assets, accruing, arising out of, resulting from, or relating to
events or occurrences happening prior to the Closing Date (collectively,
"Excluded Liabilities").
2.4 Closing Costs; Transfer Taxes and Fees. Seller shall be responsible
for any documentary and transfer taxes and any sales, use or other taxes imposed
by reason of the transfers of Assets provided hereunder and any deficiency,
interest or penalty asserted with respect thereto. Seller shall pay the fees and
costs of recording or filing all applicable conveyancing instruments described
in Section 7.1 and shall pay the fees and costs of recording or filing all UCC
termination statements and other releases of Encumbrances.
2.5 Condition of Assets. Seller only makes the representations and
warranties included in Section 6 of this Agreement.
SECTION 3
PURCHASE PRICE
3.1 Purchase Price for Seller Assets. The purchase price (the "Purchase
Price") for the Assets described in Section 1.1 shall be Four Million Dollars
($4,000,000) payable by Buyer to Seller on the Closing Date by delivery of a
Secured Note ("Secured Note") in the form attached as Exhibit A in principal
amount of Four Million Dollars ($4,000,000).
3.2 Allocation of Purchase Price. The purchase price to be paid to
Seller for the Assets conveyed hereunder shall be allocated among the various
categories of Assets as set forth on Schedule 3.2, and no party shall take any
position inconsistent with such allocation.
SECTION 4
SUBLEASE
4.1 Sublease of Office Space. Subject to obtaining all necessary
consents, Seller shall sublease the Facility to Buyer upon the terms and
conditions that are substantially similar to Seller's lease of the Facility.
Seller shall make all reasonable efforts to obtain any consent required for such
sublease, and if such consent is not obtained as of the Closing Date, Seller
will make all reasonable attempts to obtain such consent after the Closing Date.
A copy of Seller's lease for the Facility is attached as Exhibit B.
SECTION 5
OPERATIONS
5.1 Transfer of Possession. At the end of normal business hours on the
Closing Date, Seller shall close all business operations and shall transfer to
Buyer possession of all Assets conveyed to Buyer hereunder.
5.2 Covenant Not to Compete. In order to effectuate this transaction,
and in consideration of the terms, conditions and covenants herein contained,
neither Seller nor Zila nor any of their Affiliates shall establish or engage
in, directly or indirectly, anywhere in the United States of America, any
business, trade or occupation relating to the business of digital
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<PAGE> 5
radiology systems and intra-oral cameras for dental uses, nor will Seller nor
Zila nor any of their Affiliates solicit any employees of Buyer for employment,
consultation or any other business relationship with Seller or Zila in any
capacity whatsoever during the period commencing on the Closing Date and ending
three (3) calendar years thereafter (the "Non-Competition Period").
Notwithstanding the foregoing, Zila or its Affiliates may, during the
Non-Competition Period and any time thereafter, make retail sales of oral camera
systems for dental use; provided, however, that Zila and its Affiliates shall
not be entitled to manufacture, distribute (as wholesale) or develop camera
systems for dental use.
5.3 Books and Records. Notwithstanding any provision of this Agreement
to the contrary, Seller shall be entitled to retain copies of all Books and
Records and Buyer shall provide Seller with reasonable access to the Books and
Records for purposes of preparing tax returns and other filings and for all
other reasonable purposes.
5.4 Panasonic Information. Zila and Seller shall transfer to Buyer all
copies of (a) non-public information that Zila or Seller has received either
from Panasonic or any of its affiliated companies and (b) any derivations of
such non-public information. The foregoing obligation applies to copies of such
information (a) whether an original or reproduction, (b) whether (i) in written
or other physical form, (ii) recorded on magnetic disk or similar magnetic,
magneto-optical or optical media or (iii) imbedded in an EEPROM or similar
semiconductor device and (c) whether in the possession of Zila or Seller or any
of their Affiliates.
5.5 Transitional Services. Seller and Zila shall provide to Buyer, at
no cost to Buyer, for a period of 180 days after the Closing Date, full access
and reasonable support and assistance, to the Macola accounting system and all
financial, accounting, and other records and information that Buyer reasonably
deems appropriate in connection with conducting its business after the Closing
Date. Additionally, Seller and Zila shall allow Buyer, at no cost to Buyer with
respect to the display booth, to participate, to the same extent as Seller has
participated in the past, in all trade shows that Zila has prepaid for and will
participate in through the Atlanta-Hinman 2000 show, provided that Buyer shall
be responsible for all of its ancillary costs in connection with such shows.
5.6 Payroll Costs. Notwithstanding any provision of this Agreement to
the contrary, Seller shall continue to employ Employees (as defined in Section
6.8) from the date hereof through the payroll period ending on November 15,
1999, and shall be responsible for all payroll costs therefor.
5.7 Release and Indemnity Agreement. Zila and Seller agree to provide
Buyer, in a timely manner, with the Release and Indemnification Agreement
required under Section 2.2 of the Panasonic Settlement Agreement.
SECTION 6
REPRESENTATIONS AND WARRANTIES
6.1 Representations and Warranties of Zila and Seller. Zila and Seller
represent and warrant to Buyer as follows, which representations and warranties
are, as of the date hereof, and will be, as of the Closing Date, true and
correct:
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<PAGE> 6
6.2 Organization of Zila and Seller. Zila is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. Seller is a corporation duly organized, validly existing and in good
standing under the laws of the State of Arizona.
6.3 Authorization. Zila and Seller have all requisite corporate power
and authority, and has taken all corporate action necessary, to consummate the
transactions contemplated hereby and to perform their obligations hereunder.
This Agreement has been duly executed and delivered by Zila and Seller and is a
legal, valid and binding obligation of Zila and Seller enforceable against it in
accordance with its terms, except as enforceability may be limited by applicable
bankruptcy, insolvency, or similar laws affecting creditors' rights or by
principles of equity.
6.4 Assets. Seller has and will transfer good and marketable fee simple
title to the Assets and upon the consummation of the transactions contemplated
hereby, Buyer will acquire good title to all of the Assets, free and clear of
any Encumbrances, except for any "Permitted Encumbrance" described on Schedule
6.4.
6.5 Facility. There is no owned real property used by Seller in the
Business. Seller has caused to be delivered to Buyer a true and accurate copy of
the lease for the Facility.
6.6 No Conflict or Violation. Neither the execution and delivery of
this Agreement by Zila and Seller nor the consummation of the transactions
contemplated hereby, nor compliance by Zila and Seller with any of the
provisions hereof, will (a) violate or conflict with any provision of the
Articles of Incorporation or Bylaws of Zila and Seller, (b) violate, conflict
with, or result in a breach of any provision of, or constitute a default (or an
event which, with notice or lapse of time or both, would constitute a default)
under, or result in the termination of, or accelerate the performance required
by, or result in a right of termination or acceleration under, or result in the
creation of any Encumbrance upon any of the Assets under, any of the terms,
conditions or provisions of any Contract, agreement, or other instrument or
obligation (i) to which Seller or Zila are parties or (ii) by which the Assets
are bound, (c) violate any statute, rule, regulation, ordinance, code, order,
judgment, ruling, writ, injunction, decree or award or (d) impose any
Encumbrance, restriction or charge on the Assets.
6.7 Litigation. There is no action, order, writ, injunction, judgment
or decree outstanding or any claim, suit, litigation, proceeding, labor dispute,
arbitral action, governmental audit or investigation (collectively, "Actions")
pending, or to the best of Seller's knowledge, threatened (a) against, related
to or affecting Seller, the Business or the Assets or (b) seeking to delay,
limit or enjoin the transactions contemplated by this Agreement. Seller is not
in default with respect to or subject to any judgment, order, writ, injunction
or decree of any court or governmental agency, and there are no unsatisfied
judgments against Seller, the Business or the Assets.
6.8 Employees. Seller shall permit Buyer to hire all employees
("Employees") of Seller, as of the Closing Date. The Employees may continue to
participate in the Seller's health and welfare benefit plans for a period of six
(6) months after the Closing Date provided that Buyer pay to Seller all expenses
and fees as a result of such continued coverage.
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<PAGE> 7
6.9 Representations and Warranties of Buyer. Buyer represents and
warrants to Zila and Seller as follows:
(a) Buyer is a corporation duly organized and in good standing
under the laws of the State of Arizona, and is duly authorized to carry on its
business in Arizona.
(b) The execution and delivery of this Agreement, all related
agreements and instruments and the performance by Buyer of the transactions
contemplated hereby and thereby have been duly authorized by the Board of
Directors and shareholder of Buyer and will not violate any agreement, law,
regulation or order to which Buyer is a party or by which Buyer is bound.
(c) This Agreement and all related agreements and instruments
constitute the legal, valid and binding obligations of Buyer, enforceable
against Buyer in accordance with their respective terms.
6.10 Schedules. To the extent that the schedules to this Agreement have
not been completed on or before the date hereof, the Buyer and Seller hereby
agree to use their best efforts to complete such schedules on or before the date
that is ten days after the date hereof.
SECTION 7
CLOSING
7.1 Closing Deliveries. To effect the sale and transfer referred to in
Section 2.1 hereof, Seller will, on the date hereof (the "Closing Date"),
deliver to Buyer:
(a) one or more executed bills of sale, each in the form of
Exhibit C attached hereto, conveying in the aggregate all of Seller's owned
personal property included in the Assets, free and clear of all Encumbrances
(except as set forth on Schedule 6.4);
(b) A certified copy of the resolutions of the Board of
Directors and shareholder of Seller, authorizing and approving the execution of
this Agreement and the other agreements and instruments contemplated hereby; and
(c) such other instruments as shall be requested by Buyer to
vest in Buyer title in and to the Assets in accordance with the provisions
hereof.
7.2 To effect the sale and transfer referred to in Section 2.1 hereof,
Buyer will, on the Closing Date, deliver to Seller:
(a) The Purchase Price payable in accordance with Section 3.1;
(b) Fully executed and enforceable documents and instruments
to be executed in connection with the transactions contemplated hereby
(including a Tax Indemnity Agreement in the form of Exhibit D); and
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<PAGE> 8
(c) Such other documents as either Seller shall reasonably
require of Buyer under this Agreement.
7.3 Form of Instruments. To the extent that a form of any document to
be delivered hereunder is not attached as an exhibit hereto, such documents
shall be in form and substance, and shall be executed and delivered in a manner,
reasonably satisfactory to the recipient.
SECTION 8
INDEMNIFICATION
8.1 By Seller and Zila. Seller and Zila shall, jointly and severally,
indemnify, defend, save and hold harmless Buyer, its Affiliates and
subsidiaries, and its respective representatives, from and against any and all
claims, damages, costs, losses (including without limitation diminution in
value), Taxes, liabilities, judgments, penalties, fines, obligations, lawsuits,
deficiencies, demands and expenses (whether or not arising out of third-party
claims), attorneys' fees, experts' fees and all amounts paid in investigation,
defense or settlement of any of the foregoing (herein, "Damages"), incurred in
connection with, arising out of, resulting from or incident to (i) any breach of
any representation or warranty, or the inaccuracy of any representation or
warranty, made by Zila or Seller in or pursuant to this Agreement; (ii) any
breach of any covenant or agreement made by Seller in or pursuant to this
Agreement; (iii) any Excluded Liability; (iv) any claims (other than under
Camera Warranties) by any purchaser of a Cygnus product provided that the Buyer
has made a good faith attempt to comply with its obligations under Article III
of the Panasonic Settlement Agreement with respect to such purchaser and (v) any
claims made by third parties contesting the transactions contemplated by this
Agreement (collectively, the "Indemnifiable Events"). Notwithstanding any
provision of this Agreement to the contrary, Zila's obligation under this
Section 8.1 shall not exceed the amount of the Purchase Price paid by Seller to
Buyer.
8.2 By Buyer. Buyer shall indemnify and save and hold harmless Seller,
its Affiliates and its representatives from and against any and all Damages
incurred in connection with, arising out of, resulting from or incident to (i)
any breach of any representation or warranty, or the inaccuracy of any
representation or warranty, made by Buyer in or pursuant to this Agreement; (ii)
any breach of any covenant or agreement made by Buyer in or pursuant to this
Agreement; and (iii) any failure of Buyer to comply with its obligations under
the Panasonic Settlement Agreement.
8.3 Cooperation. The indemnified party shall cooperate in all
reasonable respects with the indemnifying party and such attorneys in the
investigation, trial and defense of such lawsuit or action and any appeal
arising therefrom; provided, however, that the indemnified party may, at its own
cost, participate in the investigation, trial and defense of such lawsuit or
action and any appeal arising therefrom. The parties shall cooperate with each
other in any notifications to insurers.
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<PAGE> 9
SECTION 9
LINE OF CREDIT
9.1 Line of Credit. Cygnus shall provide Buyer with a revolving line of
credit, the purpose of which shall be for the necessary working capital
requirements of Buyer, in an amount not to exceed $300,000 (the "Line of
Credit").
(a) Interest. Interest shall accrue on any unpaid balance that
has been drawn from the Line of Credit at a rate equal to the rate payable by
Zila on its primary line of credit, calculated on the basis of the actual number
of days elapsed and on the basis of a 360-day year.
(b) Term. Buyer shall be permitted to draw on the Line of
Credit on demand for a period beginning on the Closing Date and ending 90 days
thereafter (the "Line of Credit Period"). The entire amount drawn on the Line of
Credit and all accrued and unpaid interest shall be due and payable in full
within 90 days after termination of the Line of Credit Period.
(c) Security Interests. As a condition precedent to Zila
advancing any funds to Buyer in connection with the Line of Credit, (a) Zila and
Buyer shall enter into a security agreement in the form of Exhibit E, and (b)
Zila and Cianciosi shall enter into a pledge agreement pursuant to which
Cianciosi will pledge all of his shares of Zila to secure such line of credit in
the form of Exhibit F.
SECTION 10
MISCELLANEOUS
10.1 Brokers. Each of the parties represents that no broker, finder or
salesman was responsible or involved with respect to this transaction.
10.2 Further Actions. Each of the parties agree to execute all further
documents and to take all further action necessary or required to consummate all
the transactions contemplated hereby and to effectuate the intent and purposes
of this Agreement.
10.3 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Arizona without regard to the
conflict of laws principles thereof.
10.4 Assignment. This Agreement and the rights and obligations
hereunder shall not be assigned by Buyer without Seller's prior written consent.
This Agreement and all rights and obligations hereunder shall be binding upon
and inure to the benefit of the parties hereto, and all of their respective
successors, assigns, executors, administrators, heirs and devisees.
10.5 Entire Agreement. This Agreement, together with the exhibits and
schedules attached hereto, constitutes the entire understanding of the parties,
supersedes any prior and contemporaneous letters, agreements or understandings,
written or oral, between the parties with respect to the subject matter hereof,
and is not intended to confer upon any person other than the parties hereto any
benefit, right or remedy.
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<PAGE> 10
10.6 Section Headings. The article, section and paragraph headings
contained in this Agreement are for reference purposes only and shall not in any
way affect the meaning or interpretation of this Agreement.
10.7 Amendment. Any amendment, supplement or other modification to this
Agreement shall be set forth in writing and shall be duly executed by each of
the parties hereto.
10.8 Consents to Assignment. Anything in this Agreement to the contrary
notwithstanding, this Agreement shall not constitute an agreement to assign any
Contract, Permit, sales order, purchase order or any claim or right or any
benefit arising thereunder or resulting therefrom if an attempted assignment
thereof, without the consent of a third party thereto, would constitute a breach
thereof or in any way adversely affect the rights of Buyer thereunder. If such
consent is not obtained, or if an attempted assignment thereof would be
ineffective or would affect the rights thereunder so that Buyer would not
receive all such rights, Seller will cooperate with Buyer, in all reasonable
respects, to provide to Buyer the benefits under any such Contract, Permit,
sales order, purchase order, claim or right including without limitation
enforcement for the benefit of Buyer of any and all rights of Seller against a
third party thereto arising out of the breach or cancellation by such third
party or otherwise.
10.9 Bulk Sales Law. To the extent permitted by applicable law, Buyer
and Seller hereby waive compliance by Buyer and Seller with any bulk sales law
and any other similar laws in any applicable jurisdiction in respect of the
transactions contemplated by this Agreement. To the extent that applicable law
does not permit such a waiver, Buyer and Seller hereby agree to cooperate in
taking such actions as may be necessary to comply with any bulk sales law or any
other similar laws that may be applicable in respect of the transactions
contemplated by this Agreement. Notwithstanding any provision of this Agreement
to the contrary, Seller shall indemnify Buyer for any obligation under any bulk
sales law and any other similar laws in any applicable jurisdiction in respect
of the transactions contemplated by this Agreement.
10.10 Buyers Fees and Expenses. Seller shall pay, upon presentment of
invoices by Buyer or its shareholder, all reasonable legal, accounting and
communication fees and expenses incurred by Buyer or its shareholder in
connection with the negotiation of this Agreement and the Closing.
10.11 Counterparts. This Agreement may be executed in counterparts.
[remainder of page intentionally left blank]
10
<PAGE> 11
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
ZILA, INC., a Delaware corporation
By: /s/ Joseph Hines
-----------------------------------------
Name: Joseph Hines
-----------------------------------------
Title: President
-----------------------------------------
CYGNUS IMAGING, INC., an Arizona corporation
By: /s/ Joseph Hines
-----------------------------------------
Name: Joseph Hines
-----------------------------------------
Title: Exec. Vice President
-----------------------------------------
PROCARE LABORATORIES, INC., an Arizona
corporation
By: /s/ Egidio Cianciosi
-----------------------------------------
Name: Egidio Cianciosi
Title: President
11
<PAGE> 12
EXHIBIT A
SECURED NOTE
A-1
<PAGE> 13
$4,000,000 October 28, 1999 Phoenix, Arizona
SECURED NOTE
FOR VALUE RECEIVED, PROCARE LABORATORIES, INC., an Arizona
corporation (the "Company"), hereby promises to pay to the order of CYGNUS
IMAGING, INC., an Arizona corporation, ("Holder"), or Holder's registered
assigns, the principal sum of up to Four Million Dollars ($4,000,000) (the
"Principal Amount"). The Company promises to pay to Holder the aggregate unpaid
Principal Amount of this Note on the Maturity Date (as defined herein); together
with any interest that may accrue on the Principal Amount remaining unpaid after
the Maturity Date as a result of an Event of Default (as defined herein) until
payment in full. The obligations of the Company under this Note are secured by
certain assets of the Company as defined in that certain Security Agreement of
even date between the Company and Holder (the "Security Agreement").
1. Payment on Maturity Date. The date upon which this Note
matures and the Principal Amount becomes due shall be November 10, 1999 (the
"Maturity Date"). The entire unpaid principal balance, all accrued and unpaid
interest, and all other amounts payable hereunder shall be due and payable in
full on the Maturity Date.
2. Payments. All payments of principal and interest due in
respect of this Note shall be made without deduction, defense, set off or
counterclaim, in lawful money of the United States of America, and in same day
funds and delivered to the Holder by wire transfer to a bank account of Holder,
as specified by Holder from time to time.
3.1 Event of Default. If the Company defaults in the payment
of the Principal Amount of the Note on the Maturity Date, which default is not
cured within ten (10) days (the "Event of Default"), the entire unpaid principal
balance and accrued interest payable hereunder shall automatically become
immediately due and payable without presentment, demand or notice of any kind,
all of which are hereby expressly waived by the Company.
3.2 Interest. If the Event of Default shall have occurred,
interest will accrue on the unpaid Principal Amount of this Note at the rate of
twelve and one-half percent (12.5%) per annum, calculated on the basis of the
actual number of days elapsed and on the basis of a 360 day year. Such interest
will continue to accrue at the specified rate until the entire unpaid Principal
Amount has been paid in full. Notwithstanding any provisions of this Note, in no
event shall the amount of interest paid or agreed to be paid by the Company
exceed an amount computed at the highest rate of interest permissible under
applicable law. If, from any circumstances whatsoever, fulfillment of any
provision of this Note at any time performance of such provision shall be due,
shall involve exceeding the interest rate limitation validly prescribed by law
which a court of competent jurisdiction may deem applicable hereto, then, ipso
facto, the obligations to be fulfilled shall be reduced to an amount computed at
the highest rate of interest permissible under applicable law, and if for any
reason whatsoever Holder shall ever receive as interest shall be applied
automatically to the payment of principal of this Note outstanding hereunder
(whether or not then due and payable), without prepayment charge, premium or
penalty, and not to the payment of interest, or shall be refunded to the Company
if such principal and all other obligations of the Company to Holder have been
paid in full.
<PAGE> 14
3.3 Suits for Enforcement. In case the Event of Default shall
have occurred, unless the Event of Default shall have been waived, the holder of
the Note may proceed to protect and enforce its rights by suit in equity or
action at law, whether for the specific performance of any term contained in the
Note or in any other Note Document or for an injunction against any breach of
any such term or in aid of the exercise of any power granted in the Note or
other Note Document, or may proceed to enforce the performance of any term
contained in the Note or other Note Document (including the payment of the Note)
or to enforce any other legal or equitable right of the holder of the Note, or
may take any one or more of such actions. In the event the Holder brings such an
action against the Company, the Holder shall be entitled to recover from the
Company all fees, costs and expenses of enforcing any right of the Holder under
or with respect to the Note or any Note Document, including without limitation
such reasonable fees and expenses of attorneys, advisors, accountants and expert
witnesses, which shall include, without limitation, all fees, costs and expenses
of appeals.
3.4 Remedies Cumulative. No right, power or remedy conferred
upon the holder of the Note shall be exclusive, and each such right, power or
remedy shall be cumulative and in addition to every other right, power or
remedy, whether conferred hereby or by the Note or now or hereafter available at
law or in equity or by statute or otherwise.
3.5 Remedies Not Waived. No course of dealing between the
Company and the holder of the Note, and no delay in exercising any right, power
or remedy conferred hereby or by the Note or now or hereafter existing at law or
in equity or by statute or otherwise, shall operate as a waiver of or otherwise
prejudice any such right, power or remedy.
3.6 Waiver of Statute of Limitations. To the extent permitted
by law, the Company hereby waives and agrees not to assert or take advantage of
any and all applicable statutes of limitations on its obligations under the Note
or any other Note Document.
4. Prepayment. The Company may prepay its obligation pursuant
to this Note, in whole or in part, at any time by tendering to the Holder the
outstanding principal amount of this Note, together with accrued but unpaid
interest hereon.
5. Recourse. This Note is a non-recourse note and is only
secured by the Collateral, as that term is defined in the Security Agreement.
6. Enforcement. If the Event of Default shall have occurred,
the Holder may proceed to protect and enforce the rights of the Holder by suit
in equity or action at law or the employment of any other available right or
remedy, as the Holder shall deem most effective to protect and enforce any such
rights. The Company promises to pay all costs and expenses, including reasonable
attorneys' fees and expenses, incurred in the collection and enforcement of this
Note. The Company and endorsers of this Note hereby consent to renewals and
extensions of time at or after the maturity hereof, without notice, and hereby
waive diligence, presentment, protest, demand and notice of every kind and, to
the full extent permitted by law, the right to plead any statute of limitations
as a defense to any demand hereunder.
7. Waivers and Amendments. This Note may be amended only with
the written consent of the Holder.
2
<PAGE> 15
8. Governing Law. This Note shall be governed by, and
construed and enforced in accordance with, the internal laws (but not the law of
choice of laws) of the State of Arizona, without regard to principles of
conflicts of laws.
[SIGNATURE PAGE FOLLOWS]
3
<PAGE> 16
IN WITNESS WHEREOF, the Company has caused this Note to be executed and
delivered by its duly authorized officer, as of the day and year first written
above.
PROCARE LABORATORIES, INC.,
an Arizona corporation
By: __________________________________
Name: Egidio Cianciosi
Title: President
4
<PAGE> 17
EXHIBIT B
FACILITY LEASE
B-1
<PAGE> 18
STANDARD INDUSTRIAL/COMMERCIAL MULTI-TENANT LEASE--MODIFIED NET
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
[LOGO]
1. BASIC PROVISIONS ("Basic Provisions").
1.1 PARTIES: This Lease ("Lease"), dated for reference purposes only,
April 14, 1998 is made by and between Greenway 77 II, L.L.C., an Arizona
limited liability company ("Lessor") and Cygnus Imaging, Inc. ("Lessee"),
(collectively the "Parties," or individually a "Party").
1.2(a) PREMISES: That certain portion of the Building, including all
improvements therein or to be provided by Lessor under the terms of this Lease,
commonly known by the street address of Parcel No. 215-48-070, located in the
City of Scottsdale, County of Maricopa, State of Arizona, with zip code 85260 as
outlined on Exhibit __ attached hereto ("Premises"). The "Building" is that
certain building containing the Premises and generally described as (describe
briefly the nature of the Building): 18,596 square feet, with 10,252 square feet
of office area, and 8,344 square feet of A/C warehouse area. In addition to
Lessee's rights to use and occupy the Premises as hereinafter specified, Lessee
shall have non-exclusive rights to the Common Areas (as defined in Paragraph 2.7
below) as hereinafter specified, but shall not have any rights to the roof,
exterior walls or utility raceways of the Building or to any other buildings in
the Industrial Center. The Premises, the building, the Common Areas, the land
upon which they are located, along with all other buildings and improvements
thereon, are herein collectively referred to as the "Industrial Center." (Also
see Paragraph 2.)
1.2(b) PARKING: ________________ unreserved vehicle parking spaces
("Unreserved Parking Spaces"); and __________ reserved vehicle parking spaces
("Reserved Parking Spaces"). (Also see Paragraph 2.6.)
1.3 TERM: five (5) years and 0 months ("Original Term") commencing no
later than November 1, 1998 or January 1, 1999 ("Commencement Date") and ending
December 21, 2003 ("Expiration Date"). (Also see Paragraph 3).
1.4 EARLY POSSESSION: October 1, 1998 ("Early Possession Date"). (Also
see Paragraphs 3.2 and 3.3).
1.5 BASE RENT: $15,806.00 per month ("Base Rent"), payable on the first
(1st) day of each month commencing on or prior to January 1, 1999 (Also see
Paragraph 4.)
[x] If this box is checked, this Lease provides for the Base Rent to be
adjusted per Addendum 49 attached hereto.
1.6(a) BASE RENT PAID UPON EXECUTION: $0 as Base Rent for the period N/A.
1.6(b) LESSEE'S SHARE OF COMMON AREA OPERATING EXPENSES: ____ percent
( %)("Lessee's Share") as determined by [ ] prorata square footage of
the Premises as compared to the total square footage of the Building or [ ]
other criteria as described in Addendum ____.
1.7 SECURITY DEPOSIT: $15,806.60 ("Security Deposit"). (Also see
Paragraph 5.)
1.8 PERMITTED USE: office/warehouse/manufacturing in conformance with
the City of Scottsdale I-1 zoning ordinance. ("Permitted Use") (Also see
Paragraph 6.)
1.9 INSURING PARTY. Lessor is the "Insuring Party." (Also see Paragraph
8.)
1.10(a) Real Estate Brokers. The following real estate broker(s)
(collectively, the "Brokers") and brokerage relationships exist in this
transaction and are consented to by the Parties (check applicable boxes):
[ ] ___________________________________ represents Lessor exclusively
("Lessor's Broker");
[ ] ___________________________________ represents Lessee exclusively
("Lessee's Broker"); or
[X] Colliers International represents both Lessor and Lessee ("Dual Agency").
Also see Paragraph 16.)
1.10(b) PAYMENT TO BROKERS. Upon the execution of this Lease by both
Parties, Lessor shall pay to said Broker(s) jointly, or in such separate shares
as they may mutually designate in writing, a fee as set forth in a separate
written agreement between Lessor and said Broker(s) (or in the event there is no
separate written agreement between Lessor and said Broker(s), the sum of $N/A)
for brokerage services rendered by said Broker(s) in connection with this
transaction.
1.11 GUARANTOR. The obligations of the Lessee under this Lease are to
be guaranteed by Zila Incorporated, 5227 N. 7th Street, Phoenix, Arizona
85014-2800, (602) 266-6700 ("Guarantor"). (Also see Paragraph 37.)
1.12 ADDENDA AND EXHIBITS. Attached hereto is an Addendum or Addenda
consisting of Paragraphs 49 through 63 and Exhibits A through C all of which
constitute a part of this Lease.
2. PREMISES, PARKING AND COMMON AREAS.
2.1 LETTING. Lessor hereby leases to Lessee, and Lessee hereby leases
from Lessor, the Premises, for the term, at the rental, and upon all of the
terms, covenants and conditions set forth in this Lease. Unless otherwise
provided herein, any statement of square footage set forth in this Lease, or
that may have been used in calculating rental and/or Common Area Operating
Expenses, is an approximation which Lessor and Lessee agree is reasonable and
the rental and Lessee's Share (as defined in Paragraph 1.6(b)) based thereon is
not subject to revision whether or not the actual square footage is more or
less.
2.2 CONDITION. Lessor shall deliver the Premises to Lessee clean and free
of debris on the Commencement Date and warrants to Lessee that the existing
plumbing, electrical systems, fire sprinkler system, lighting, air conditioning
and heating systems and loading doors, if any, in the Premises, other than those
constructed by Lessee, shall be in good operating condition on the Commencement
Date. If a non-compliance with said warranty exists as of the Commencement Date,
Lessor shall, except as otherwise provided in this Lease, promptly after receipt
of written notice from Lessee setting forth with specificity the nature and
extent of such non-compliance, rectify same at Lessor's expense. If Lessee does
not give Lessor written notice of a non-compliance with this warranty within
thirty (30) days after the Commencement Date, correction of that non-compliance
shall be the obligation of Lessee at Lessee's sole cost and expense.
2.3 COMPLIANCE WITH COVENANTS, RESTRICTIONS AND BUILDING CODE. Lessor
warrants that any improvements (other than those constructed by Lessee or at
Lessee's direction) on or in the Premises which have been constructed or
installed by Lessor or with Lessor's consent or at Lessor's direction shall
comply with all applicable covenants or restrictions of record and applicable
building codes, regulations and ordinances in effect on the Commencement Date.
Lessor further warrants to Lessee that Lessor has no knowledge of any claim
having been made by any governmental agency that a violation or violations of
applicable building codes, regulations, or ordinances exist with regard to the
Premises as of the Commencement Date. Said warranties shall not apply to any
Alterations or Utility Installations (defined in Paragraph 7.3(a)) made or to be
made by Lessee. If the Premises do not comply with said warranties, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee given within six (6) months following the
Commencement Date and setting forth with specificity the nature and extent of
such non-compliance, take such action, at Lessor's expense, as may be reasonable
or appropriate to rectify the non-compliance. Lessor makes no warranty that the
Permitted Use in Paragraph 1.8 is permitted for the Premises under Applicable
Laws (as defined in Paragraph 2.4).
2.4 ACCEPTANCE OF PREMISES. Lessee hereby acknowledges: (a) that it has
been advised by the Broker(s) to satisfy itself with respect to the condition
of the Premises (including but not limited to the electrical and fire sprinkler
systems, security, environmental aspects, seismic and earthquake requirements,
and compliance with the Americans with Disabilities Act and applicable zoning,
municipal, county, state and federal laws, ordinances and regulations and any
covenants or restrictions of record (collectively, "APPLICABLE LAWS") and the
present and future suitability of the Premises for Lessee's intended use; (b)
that Lessee has made such investigation as it deems necessary with reference to
such matters, is satisfied with reference thereto, and assumes all
responsibility therefore as the same relate to Lessee's occupancy of the
Premises and/or the terms of this Lease; and (c) that neither Lessor, nor any
of Lessor's agents, has made any oral or written representations or warranties
with respect to said matters other than as set forth in this Lease.
2.5 LESSEE AS PRIOR OWNER/OCCUPANT. The warranties made by Lessor in this
Paragraph 2 shall be of no force or effect if immediately prior to the date set
forth in Paragraph 1.1 Lessee was the owner or occupant of the Premises. In
such event, Lessee shall, at Lessee's sole cost and expense, correct any
non-compliance of the Premises with said warranties.
Initials:_______________
_______________
[LOGO] American Industrial Real Estate Association 1993 MULTI-TENANT - MODIFIED
NET
<PAGE> 19
LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND
PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO. THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES.
IF THIS LEASE HAS BEEN FILLED IN, IT HAS BEEN PREPARED FOR YOUR ATTORNEY'S
REVIEW AND APPROVAL. FURTHER, EXPERTS SHOULD BE CONSULTED TO EVALUATE THE
CONDITION OF THE PROPERTY FOR THE POSSIBLE PRESENCE OF ASBESTOS,
UNDERGROUND STORAGE TANKS OR HAZARDOUS SUBSTANCES. NO REPRESENTATION OR
RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
OR BY THE REAL ESTATE BROKERS OR THEIR CONTRACTORS, AGENTS OR EMPLOYEES AS
TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE
OR THE TRANSACTION TO WHICH IT RELATES: THE PARTIES SHALL RELY SOLELY UPON
THE ADVICE OF THEIR OWN COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF
THIS LEASE. IF THE SUBJECT PROPERTY IS IN A STATE OTHER THAN CALIFORNIA, AN
ATTORNEY FROM THE STATE WHERE THE PROPERTY IS LOCATED SHOULD BE CONSULTED.
The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.
Executed at:__________________________ Executed at:___________________________
on:___________________________________ on:____________________________________
By LESSOR: By LESSEE:
CYGNUS IMAGING, INC. GREENWAY 77 II, L.L.C.
______________________________________ _______________________________________
______________________________________ _______________________________________
By:___________________________________ By:____________________________________
Name Printed: Eqidio Cianciosi Name Printed: James Elson
_________________________ __________________________
Title: President Title: Member
________________________________ _________________________________
By:___________________________________ By:___________________________________
Name Printed: Name Printed:
_________________________ __________________________
Title: Title:
________________________________ _________________________________
Address: Address:
______________________________ _______________________________
______________________________________ _______________________________________
Telephone: (602) 905-1500 Telephone: (602) 443-8211
____________________________ _____________________________
Facsimile: (602) 905-1129 Facsimile: (602) 998-9511
____________________________ _____________________________
BROKER: BROKER:
Executed at:__________________________ Executed at:___________________________
on:___________________________________ on:____________________________________
By:___________________________________ By:___________________________________
Name Printed: David E. Lord Name Printed: David E. Lord
_________________________ __________________________
Title: Designated Broker Title: Designated Broker
________________________________ _________________________________
Address: 3636 N. Central, #600 Address: 3636 N. Central, #600
______________________________ _______________________________
Phoenix, AZ 85012 Phoenix, AZ 85012
______________________________________ _______________________________________
Telephone: (602) 222-5000 Telephone: (602) 222-5000
____________________________ _____________________________
Facsimile: (602) 230-2216 Facsimile: (602) 230-2213
____________________________ _____________________________
NOTE: These forms are often modified to meet changing requirements of law and
needs of the industry. Always write or call to make sure you are utilizing
the most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700
South Flower Street, Suite 500, Los Angeles, CA 90017. (213) 687-8777.
<PAGE> 20
ADDENDUM
This Addendum is attached hereto and made a part hereof that certain Lease
dated April 14, 1998, and entered into by and between Greenway 77 II L.L.C., an
Arizona limited liability company ("Lessor") and Cygnus Imaging, Inc.
("Lessee"). Should the body of the Lease and this Addendum conflict, this
Addendum shall prevail.
49. RENT SCHEDULE: Rent shall be adjusted as follows:
<TABLE>
<CAPTION>
YEAR MONTHLY AMOUNT ANNUAL AMOUNT
---- -------------- --------------
<S> <C> <C>
1 $15,806.60 plus tax $189,679.20
2 $16,280.80* plus tax $195,369.60*
3 $16,769.22* plus tax $201,230.64*
4 $17,272.30* plus tax $207,267.60*
5 $17,790.47* plus tax $213,485.64*
</TABLE>
* Annual rental increases based on annual CPI rate, however, not to exceed
3% annually. Maximum rate noted above.
50. INDEMNIFICATION. Lessor covenants and agrees to indemnify and hold Lessee
harmless for, from and against liability and claims of any kind for loss or
damage to property of Lessor or any other person, or indirectly, out of:
(1) any work, activity, or other things allowed or suffered by Lessor to be
done in, on or about the Premises; (2) any breach or default by Lessor of
any of Lessor's expense and by counsel satisfactory to Lessee defend Lessee
in any action or proceeding arising from any such claim and shall indemnify
Lessee against all costs, attorney's fee, expert witness fees, and any
other expenses incurred in any such action or proceeding from the time that
any claim or demand is made or may be made, except due to Lessee's
negligence or willful acts.
51. HAZARDOUS MATERIALS. Lessor agrees to indemnify, defend and hold harmless
Lessee, its agents, officers, directors, stockholders and employees
(collectively the "Indemnities") from and against any and all debts, claims
costs, personal injuries, losses, damages, liabilities, penalties or
expenses, including reasonable attorney's fees suffered or incurred by the
indemnities resulting directly or indirectly from the presence in, upon or
under the surface of the Premises or in any surface waters or groundwaters
on the Premises or any migration of Hazardous or Toxic Material off the
Premises, if such materials were generated, stored or existed prior to the
date of this Lease, during the term or after the term of this Lease, unless
the presence of such Hazardous or Toxic Material is caused or generated by
Lessee, its agents, officers, directors, stockholders, employees,
independent contractors or invitees. Lessee warrants that it will comply
with all federal, state and local environmental laws, rules, regulations
and statutes applicable to Lessee's use of the Premises. Lessee agrees to
indemnify and hold harmless Lessor, its agents, officers, directors,
stockholders and employees from and against any and all debts, claims,
costs, personal injury losses, damages, liabilities, penalties or expenses,
including reasonable attorney's fees which arise out of or are related to
the presence of Hazardous waste or Toxic Material caused or generated by
Lessee, its agents, officers, directors, stockholders, employees,
independent contractors or
<PAGE> 21
GUARANTY OF LEASE
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
WHEREAS, Greenway 77 II, L.L.C., an Arizona limited liability company,
referred to as "Lessor", and Cygnus Imaging, Inc., hereinafter referred to as
"Lessee", are about to execute a document entitled "Lease" dated April 14, 1998
concerning the premises commonly known as Parcel #215-48-070, North 84th
Street, Scottsdale, Arizona, wherein Lessor will lease the premises to Lessee,
and
WHEREAS, Zila Inc., an Arizona corporation, hereinafter referred to as
"Guarantors" have a financial interest in Lessee, and
WHEREAS, Lessor would not execute the Lease if Guarantors did not execute
and deliver to Lessor this Guarantee of Lease.
NOW THEREFORE, for and in consideration of the execution of the foregoing
Lease by Lessor and as a material inducement to Lessor to execute said Lease,
Guarantors hereby jointly, severally, unconditionally and irrevocably guarantee
the prompt payment to Lessee of all rentals and all other sums payable by
Lessee under said Lease and the faithful and prompt performance by Lessee of
each and every one of the terms, conditions, and covenants of said Lease to be
kept and performed by Lessee.
It is specifically agreed and understood that the terms of the foregoing
Lease may be altered, affected, modified or changed by agreement between Lessor
and Lessee, or by a course of conduct, and said Lease may be assigned by Lessor
or any assignee of Lessor without consent or notice to Guarantors and that this
Guaranty shall thereupon and thereafter guarantee the performance of said
Lessor as so changed, modified, altered or assigned.
This Guaranty shall not be released, modified or affected by failure or
delay on the part of Lessor to enforce any of the rights and remedies of the
Lessor under said Lease, whether pursuant to the terms thereof or at law or in
equity.
No notice of default need be given to Guarantors, if being specifically
agreed and understood that the guarantee of the undersigned is a continuing
guarantee under which Lessor may proceed forthwith and immediately against
Lessee or against Guarantors following any breach or default by Lessee or for
the enforcement of any rights which Lessor may have as against Lessee pursuant
to or under the terms of the within Lease or at law or in equity.
Lessor shall have the right to proceed against Guarantors hereunder
following any breach or default by Lessee without first proceeding against
Lessee and without previous notice to or demand upon either Lessee or
Guarantors.
Guarantors hereby waive (a) notice of acceptance of this Guaranty, (b)
demand of payment, presentation and protest, (c) right to assert or plead any
statute of limitations as to or relating to this Guaranty and the Lease, (d)
any right to require the Lessor proceed against the Lessee or any other
Guarantor or any other person or entity liable to Lessor, (e) any right to
require Lessor to apply to any default any security deposit or other security
it may hold under the Lease, (f) any right to require Lessor to proceed under
any other remedy Lessor may have before proceeding against Guarantors, (g) any
right of subrogation.
Guarantors do hereby subrogate all existing or future indebtedness of
Lessee to Guarantors to the obligations owed to Lessor under the Lease and this
Guaranty.
Any married woman who signs this Guaranty expressly agrees that recourse
may be had against her separate property for all of her obligations hereunder.
The obligations of Lessee under the Lease to execute and deliver estoppel
statements and financial statements, as therein provided shall be deemed to
also require the Guarantors hereunder to do and provide the same relative to
Guarantors.
The term "Lessor" whenever hereinabove used refers to and means the Lessor
in the foregoing Lease specifically named and not any assignee of said Lessor,
whether by outright assignment or by assignment for security, and also any
successor to the interest of said Lessor or of any assignee in such Lease of
any part thereof, whether by assignment or otherwise. So long as the Lessor's
interest in any of the leased premises or the rents, issues and profits
therefrom, or in, to or under said Lease, are subject to any mortgage or deed
of trust assignment for security, no acquisition by Guarantors of the Lessor's
interest in the leased premises or under said Lease shall affect the continuing
obligation of Guarantors under this Guaranty which shall nevertheless continue
in full force and effect for the benefit of the mortgagee, beneficiary, trustee
or assignee under such mortgage, deed of trust, or assignment, of any purchase
at sale by judicial foreclosure or under private power of sale, and of the
successors and assigns of any such mortgagee, beneficiary, trustee, assignee or
purchaser.
The term "Lessee" whenever hereinabove used refers to and means the Lessee
in the foregoing Lease specially named and any assignee or sublessee of said
Lease and also any successor to the interests of said Lessee, assignee or
sublessee of such Lessee or any part thereof, whether by assignment, sublease
or otherwise.
In the event any action be brought by said Lessor against Guarantors
hereunder to enforce the obligation of Guarantors hereunder, the unsuccessful
party in such action shall pay to the prevailing party therein a reasonable
attorney's fee which shall be filed by the court.
<PAGE> 22
EXHIBIT C
BILL OF SALE
C-1
<PAGE> 23
BILL OF SALE
For good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, Cygnus Imaging, Inc., an Arizona corporation ("Seller"),
does hereby grant, bargain, transfer, sell, assign, convey and deliver to
Procare Laboratories, Inc., an Arizona corporation ("Buyer"), all right, title
and interest in and to the Assets as such term is defined in the Asset Purchase
Agreement dated as of October 28, 1999 by and between Buyer and Seller (the
"Agreement"). Buyer hereby acknowledges that Seller is making no representation
or warranty with respect to the assets being conveyed hereby except as
specifically set forth in the Agreement. Seller for itself, its successors and
assigns hereby covenants and agrees that, at any time and from time to time
forthwith upon the written request of Buyer, Seller will do, execute,
acknowledge and deliver or cause to be done, executed, acknowledged and
delivered, each and all of such further acts, deeds, assignments, transfers,
conveyances, powers of attorney and assurances as may reasonably be required by
Buyer in order to assign, transfer, set over, convey, assure and confirm unto
and vest in Buyer, its successors and assigns, title to the assets sold,
conveyed, transferred and delivered by this Bill of Sale.
This Bill of Sale is being executed and delivered by Seller as of the date
set forth below pursuant to the terms of the Agreement.
Executed at _______________________________, this 28th day of October,
1999.
Cygnus Imaging, Inc.
By___________________________________
Name:________________________________
Its:_________________________________
<PAGE> 24
STATE OF )
) ss.
COUNTY OF ______________ )
On ____________________ before me, ____________________, personally appeared
__________________________, personally known to me (or proved to me on the basis
of satisfactory evidence) to be the person whose name is subscribed to the
within instrument and acknowledged to me that he executed the same in his
authorized capacity, and that by his signature on the instrument the entity upon
behalf of which the person acted, executed the instrument.
WITNESS my hand and official seal.
________________________[SEAL]
Notary Public in and for said
County and State
<PAGE> 25
EXHIBIT D
TAX INDEMNITY AGREEMENT
D-1
<PAGE> 26
TAX INDEMNITY AGREEMENT
THIS TAX INDEMNITY AGREEMENT is entered into as of the 28th day of
October, 1999, by and among ZILA, INC., a Delaware corporation ("Zila"), CYNUS
IMAGING, INC., an Arizona corporation ("Seller"), PROCARE LABORATORIES, INC., an
Arizona corporation ("Buyer"), and EGIDIO CIANCIOSI ("Cianciosi").
RECITALS:
A. Zila, Seller and Buyer entered into an Asset Purchase Agreement dated
as of October 28, 1999 ("Asset Purchase Agreement"), pursuant to which Seller
sold and Buyer purchased certain assets of Buyer.
B. Pursuant to the Asset Purchase Agreement, the parties thereto agreed to
enter into this Tax Indemnity Agreement with Cianciosi.
AGREEMENT:
NOW THEREFORE, in consideration of the terms, conditions and mutual
covenants herein contained, it is agreed by and among the parties to this
Agreement as follows:
1.1 Zila and Seller (collectively, "Indemnitors") shall, jointly and
severally, indemnify Buyer and Cianciosi (collectively, "Indemnitees") from, and
promptly pay upon request by Indemnitors, an amount with respect to each
calendar year ("Year") of the Indemnitees equal to the excess (if any) of (a)
the Indemnitees' Taxes (as defined in the Asset Purchase Agreement) for such
Year, over (b) the Indemnitees' Taxes for such Year determined as if Buyer's
deduction for expenses ("PSA Expenses) incurred in connection with fulfilling
its obligations under Article 3 of the Panasonic Settlement Agreement for such
Year is equal to (i) the aggregate amount of PSA Expenses incurred by Buyer for
all Years (determined through the day prior to the filing date of Buyer's
federal income tax return for such Year), multiplied by (ii) (A) the amount of
payments ("PSA Payments") received by Buyer under Article III of the Panasonic
Settlement Agreement for such Year, over (B) the aggregate amount of PSA
Payments for all Years (determined through the day prior to the filing date of
Buyer's federal income tax return for such Year).
1.2 It is expressly provided that the indemnity hereunder shall encompass,
without limitation, liabilities for Taxes incurred by the Indemnitees by reason
of the receipt of payments by the Indemnitors pursuant hereto and, accordingly,
the Indemnitors shall "gross up" any payments hereunder to take into account the
Indemnitees' liabilities for Taxes with respect to the receipt of payments
hereunder.
1.3 As a condition to Indemnitors' obligations under this Agreement,
Indemnitees shall, on Indemnitees' Tax returns for any applicable period, report
deductions for PSA Expenses in accordance with the formula set forth in
Paragraph 1.1 or in such lesser amount as is approved by the Seller, unless and
until either (a) the Indemnitees have been expressly prohibited from doing so by
the Internal Revenue Service, or (b) after reasonable efforts, the Indemnitees
are not able to engage a tax return preparer to prepare their tax returns
reporting deductions for PSA
<PAGE> 27
Expenses in accordance with the formula set forth in Paragraph 1.1, have
provided the Indemnitors with written notice thereof, and have provided
Indemnitors with the opportunity, for a period of no less than 30 days after
receipt of such written notice, to designate a Tax return preparer that will
prepare the Indemnitees' tax returns in such manner.
1.4 If, with respect to any Year, following the payment by Zila or Seller
of an indemnity payment hereunder, any PSA Expense provides a tax benefit to the
Indemnitees in addition to the benefit (if any) during the Year in which the PSA
Expense was incurred, the Indemnitees shall pay to the Indemnitors an amount
equal to the amount by which the Indemniteees' Taxes are reduced by such PSA
Expense in such subsequent or other Year. To the extent requested by the
Indemnitors, the Indemnitees shall agree to carryback rather than carryforward
any loss carryover to the extent permitted under law. The aggregate payments by
the Indemnitees hereunder shall in no event exceed the aggregate payments by the
Indemnitors.
1.5 To the extent that an Indemnitee's payment to Indemnitors under
Paragraph 1.4 is deductible by such Indemnitor, such payment shall be increased
by the reduction of Taxes realized by such Indemnitee by reason of such payment
and, accordingly, such Indemnitee shall "gross up" any payments hereunder.
1.6 Indemnitees shall, upon the request of an Indemnitor, provide such
Indemnitor (or a mutually acceptable third party) with copies of Indemnitees Tax
returns and such other financial information as is reasonably necessary to
determine the parties' respective obligations under this Agreement.
1.7 In the event that an Indemnitee is subject to a tax audit that results
in adjustments to items that are the subject of this Agreement, Buyer receives
PSA Payments or incurs PSA Expenses in a year subsequent to the year 2000, or in
any other event, the benefits that are intended to be realized and obligations
that are intended to be incurred under this Agreement by any party hereto are
not realized or incurred in accordance with the parties' intentions, the parties
hereto agree that equitable adjustments shall be made to the amounts due
hereunder.
1.8 Each of the parties agree to execute all further documents and to take
all further action necessary or required to consummate all of the transactions
contemplated hereby and to effectuate the intent and purposes of this Agreement.
The Indemnitors and the Indemnitees agree to modify the provisions of this Tax
Indemnity to cure any ambiguity, to correct or supplement any provision hereof
that may be inconsistent with any other provision hereof, or to make any other
modification with respect to matters or questions arising under this Tax
Indemnity not inconsistent with the intent hereof.
1.9 This Agreement shall be governed by and construed in accordance with
the laws of the State of Arizona without regard to the conflict of laws
principles thereof.
1.10 Any amendment, supplement or other modification to this Agreement
shall be set forth in writing and shall be dully executed by each of the parties
hereto.
1.11 This Agreement may be executed in counterparts.
2
<PAGE> 28
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
ZILA, INC., a Delaware corporation
By___________________________________
Name:________________________________
Its:_________________________________
CYGNUS IMAGING, INC., an Arizona
corporation
By___________________________________
Name:________________________________
Its:_________________________________
PROCARE LABORATORIES, INC., an Arizona
corporation
By___________________________________
Name: Egidio Cianciosi
Title: President
EGIDIO CIANCIOSI
______________________________________
3
<PAGE> 29
EXHIBIT E
SECURITY AGREEMENT
E-1
<PAGE> 30
SECURITY AGREEMENT
THIS SECURITY AGREEMENT (this "Agreement") is made and entered into
as of October 28, 1999, by and between CYGNUS IMAGING, INC., an Arizona
corporation ("Secured Party"), and PROCARE LABORATORIES, INC., an Arizona
corporation ("Debtor").
RECITALS
WHEREAS, Debtor and Secured Party have entered into an Asset Purchase
Agreement dated of even date herewith (the "Asset Purchase Agreement") pursuant
to which Secured Party has agreed to sell certain assets to Debtor, subject to
the terms and conditions set forth in such Asset Purchase Agreement. As used
herein, the term "Assets" shall have the meaning set forth in the Asset Purchase
Agreement;
WHEREAS, Pledgor has executed and delivered a Secured Note dated October
28, 1999 (the "Secured Note") to Pledgee, in the original principal amount of
Four Million Dollars ($4,000,000), as consideration for the purchase of the
Assets;
WHEREAS, Secured Party has provided Debtor with a $300,000 line of credit
for working capital requirements for a period of 180 days beginning on the
Closing Date as that term is defined in the Asset Purchase Agreement (the "Line
of Credit"); and
WHEREAS, Debtor has agreed to give the Secured Party a security interest
in the Assets as collateral against payment of the Secured Note and the Line of
Credit.
NOW, THEREFORE, in consideration of the terms, conditions and mutual
covenants of the parties and in order to induce Secured Party to accept the
Secured Note, it is hereby agreed as follows:
1. SECURITY INTEREST
To secure payment and performance of the obligations of Debtor under the
Secured Note and the Line of Credit, Debtor hereby grants to Secured Party a
valid lien on and security interest (the "Security Interest") in the Assets (the
"Collateral").
2. SECURED OBLIGATIONS
The Collateral shall secure, in such order of priority as Secured Party
may elect, the following (collectively, the "Secured Obligations"):
(i) Payment and performance of all obligations of Debtor under the terms
of the Secured Note, together with all extensions, modifications, substitutions
or renewals thereof, or other advances made thereunder;
(ii) Payment and performance of all obligations of Debtor under the Line
of Credit
<PAGE> 31
pursuant to the terms and conditions of the Asset Purchase Agreement, together
with all extensions, modifications, substitutions or renewals of the Line of
Credit, or other advances made thereunder; and
(iii) Payment and performance of every obligation, covenant and agreement
of Debtor contained in this Agreement, together with all extensions,
modifications, substitutions or renewals hereof.
3. REPRESENTATIONS AND WARRANTIES OF DEBTOR
Debtor hereby represents and warrants to Secured Party that:
3.1 Use. The Collateral is or will be used or produced primarily for
business purpose of Debtor.
3.2 Location. The Collateral will be kept at the facilities of Debtor
located at 8230 East Thoroughbred Trail, Scottsdale, Arizona 85258 (the
"Facility").
3.3 Business Names. Debtor does not do business under any name other than
Procare Laboratories, Inc.
3.4 Other Agreements. The execution, delivery and performance by Debtor of
this Agreement and all other documents and instruments relating to the Secured
Obligations will not result in any material breach of the terms and conditions
or constitute a material default under any agreement or instrument under which
Debtor is a party or is obligated. Debtor is not in material default in the
performance or observance of any covenants, conditions or provisions of any such
agreement or instrument.
3.5 Title. Subject to the representations and warranties of the Secured
Party in the Asset Purchase Agreement, Debtor is the owner of, and has good
title to the Collateral free of all security interests or other encumbrances
except the Security Interest.
3.6 Authority. Debtor has the full power, authority and legal right to
grant to Secured Party the Security Interest, and no further consent,
authorization, approval or other action is required for the grant of the
Security Interest or for Secured Party's exercise of its rights and remedies
under this Agreement.
3.7 Chief Executive Office. The chief executive office of Debtor is
located at the Facility.
4. COVENANTS OF DEBTOR
4.1 Transfers. Debtor shall not sell, transfer, assign or otherwise
dispose of any Collateral or any interest therein (except in the ordinary course
of business or otherwise consistent with the Settlement Agreement, dated October
28, 1999, by and between Matsushita Electric Corporation of America and Debtor)
without obtaining the prior written consent of Secured Party
2
<PAGE> 32
and shall keep the Collateral free of all security interests or other
encumbrances except the Security Interest. Although proceeds of Collateral are
covered by this Agreement, this shall not be construed to mean that Secured
Party consents to any sale or other transfers of the Collateral.
4.2 Maintenance. Debtor shall keep and maintain the Collateral in good
condition and repair and shall not use the Collateral in violation of any
provision of this Agreement or any applicable statute, ordinance, or regulation
or any policy of insurance insuring the Collateral.
4.3 Payments of Charges. Debtor shall pay when due all taxes, assessments
and other charges which may be levied or assessed against the Collateral.
4.4 Fixtures and Accessions. Debtor shall prevent any portion of the
Collateral that is not a fixture from being or becoming a fixture and shall
prevent any portion of the Collateral from being or becoming an accession to
other goods that are not part of the Collateral.
4.5 Notice to Secured Party. Debtor shall give Secured Party 45 days'
prior written notice of any change: (i) in the location Debtor's Facility; (ii)
in the location of the Collateral; or (iii) of the names under which it does
business.
4.6 Inspections. Secured Party or its agents may inspect the Collateral at
reasonable times and may enter into any premises where the Collateral is or may
be located. Debtor shall if requested by Secured Party and when applicable, mark
the Collateral to indicate the Security Interest. Secured Party shall have free
and complete access to the books and records regarding the Collateral and shall
have the right to make extracts therefrom or copies thereof. Upon the request of
Secured Party from time to time, Debtor shall submit up-to-date schedules of the
accounts receivable comprising the Collateral in such detail as Secured Party
may reasonably require and shall deliver to Secured Party confirming specific
assignments of all accounts, instruments, documents and chattel paper included
in such accounts receivable. After the occurrence of any Event of Default (as
defined below), upon the request of Secured Party, Debtor shall submit
up-to-date schedules of inventory comprising the Collateral in such detail as
Secured Party may reasonably require.
4.7 Defense of Collateral. Debtor, at its cost and expense, shall protect
and defend this Agreement, all of the rights of Secured Party hereunder, and the
Collateral against all claims and demands of other parties, including, without
limitation, defenses, setoffs, claims and counterclaims asserted by any Obligor
against Debtor and/or Secured Party. Debtor shall pay all claims and charges
that in the reasonable opinion of Secured Party might prejudice, imperil or
otherwise affect the Collateral or the Security Interest.
4.8 Payment of Charges. If Debtor fails to pay any taxes, assessments,
expenses or charges, or fails to keep all of the Collateral free from other
security interests, encumbrances or claims, or fails to keep the Collateral in
good condition and repair, or fails to procure and maintain insurance thereon,
or to perform otherwise as required herein, Secured Party may advance the monies
necessary to pay the same, to accomplish such repairs, to procure and maintain
such insurance or to so perform.
3
<PAGE> 33
5. NOTIFICATION AND PAYMENTS; COLLECTION OF COLLATERAL; USE OF COLLATERAL BY
DEBTOR
5.1 Notice to Obligors. Secured Party, after the occurrence of any Event
of Default, may notify any or all Obligors of the existence of the Security
Interest and may direct the Obligors to make all payments on the Collateral to
Secured Party. Until Secured Party has notified the Obligors to remit payments
directly to it, Debtor, at Debtor's own cost and expense, shall collect or cause
to be collected the accounts and monies due under the accounts, documents,
instruments and general intangibles or pursuant to the terms of the chattel
paper. Unless Secured Party notifies Debtor in writing that it waives one or
more of the requirements set forth in this sentence, any payments or other
proceeds of Collateral received by Debtor, after notification to Obligors, shall
be held by Debtor in trust for Secured Party and shall promptly be turned over
to Secured Party.
5.2 Collection. Secured Party, after the occurrence of an Event of
Default, may demand, collect and sue on the Collateral (either in Debtor's or
Secured Party's name), enforce, compromise, settle or discharge the Collateral
and endorse Debtor's name on any instruments, documents, or chattel paper
included in or pertaining to the Collateral.
5.3 Use of Collateral. Until the occurrence of an Event of Default, Debtor
may: (i) use, consume and sell any inventory included in the Collateral in any
lawful manner in the ordinary course of Debtor's business provided that all
sales shall be at commercially reasonable prices; (ii) subject to Section 5.1
and Section 5.2 hereof, retain possession of any other Collateral and use it in
any lawful manner consistent with this Agreement.
6. EVENTS OF DEFAULT; REMEDIES
6.1 Events of Default. The occurrence of any of the following events or
conditions shall constitute an "Event of Default":
(i) Any failure to pay any principal or interest or any other part
of the Secured Obligations when the same shall become due and payable; or
(ii) Any breach by Debtor of any warranty, representation, covenant
or agreement made herein.
6.2 Remedies. Upon the occurrence of any Event of Default, and at any time
while such Event of Default is continuing, Secured Party shall have the
following rights and remedies and may do one or more of the following:
(i) Declare all or any part of the Secured Obligations to be
immediately due and payable, and the same shall be collectible thereupon
by action at law.
(ii) Without further notice or demand and without legal process,
take possession of the Collateral wherever found.
4
<PAGE> 34
(iii) Pursue any legal or equitable remedy available to collect the
Secured Obligations, to enforce its title in and right to possession of
the Collateral and to enforce any and all other rights or remedies
available to it.
(iv) Upon obtaining possession of the Collateral or any part
thereof, after written notice to Debtor as provided in Section 6.4 hereof,
sell such Collateral at public or private sale either with or without
having such Collateral at the place of sale. The proceeds of such sale,
after deducting therefrom all expenses of Secured Party in taking,
storing, repairing and selling the Collateral (including, without
limitation, reasonable attorneys' fees) shall be applied to the payment of
the Secured Obligations, and any surplus thereafter remaining shall be
paid to Debtor or any other person that may be legally entitled thereto.
6.3 Purchase of Collateral. Secured Party, so far as may be lawful, may
purchase all or any part of the Collateral offered at any public or private sale
made in the enforcement of Secured Party's rights and remedies hereunder.
6.4 Notice. Any demand or notice of sale, disposition or other intended
action hereunder or in connection herewith, whether required by the UCC or
otherwise, shall be deemed to be commercially reasonable and effective if such
demand or notice is given to Debtor at least 10 days prior to such sale,
disposition or other intended action, in the manner provided herein for the
giving of notices.
6.5 Costs and Expenses. Debtor shall pay all reasonable costs and expenses
of Secured Party, including, without limitation, costs of uniform commercial
code searches, court costs and reasonable attorneys' fees, incurred by Secured
Party in enforcing payment and performance of the Secured Obligations or in
exercising the rights and remedies of Secured Party hereunder. All such
reasonable costs and expenses shall be secured by this Agreement and by other
lien and security documents securing the Secured Obligations. In the event of
any court proceedings, court costs and attorneys' fees shall be set by the court
and not by jury and shall be included in any judgment obtained by Secured Party.
6.6 Additional Remedies. In addition to any remedies provided herein for
an Event of Default, Secured Party shall have all the rights and remedies
afforded a secured party under the UCC and all other legal and equitable
remedies allowed under applicable law.
7. MISCELLANEOUS PROVISIONS
7.1 Power of Attorney. Debtor hereby appoints Secured Party as its true
and lawful attorney-in-fact, with full power of substitution from and after the
occurrence of an Event of Default to do the following: (i) to demand, collect,
receive, receipt for, sue and recover all sums of money or other property which
may now or hereafter become due, owing or payable from the Collateral; (ii) to
execute, sign and endorse any and all claims, instruments, receipts, checks,
drafts or warrants issued in payment for the Collateral; (ii) to settle or
compromise any and all claims arising under the Collateral, and, in the place
and stead of Debtor to execute and deliver its release and settlement for the
claim; (iv) to file any claim or claims or to take any action or institute or
take part in any
5
<PAGE> 35
proceedings, either in its own name or in the name of Debtor, or otherwise,
which in the discretion of Secured Party may seem to be necessary or advisable;
and (v) to execute any documents necessary to perfect or continue the Security
Interest. This power is a power coupled with an interest and is given as
security for the Secured Obligations, and the authority hereby conferred is and
shall be irrevocable and shall remain in full force and effect until renounced
by Secured Party.
7.2 Definitions. All undefined capitalized terms used herein shall have
the meaning given them in the Asset Purchase Agreement. Otherwise the terms
herein shall have the meanings in and be construed under the UCC.
7.3 Governing Law. This Agreement shall be construed in accordance with
and governed by the laws of the State of Arizona, without regard to the choice
of law rules of the State of Arizona.
7.4 Jurisdiction and Venue. Debtor hereby expressly agrees that in the
event any actions or other legal proceedings are initiated by or against Debtor
or Secured Party involving any alleged breach or failure by any party to pay,
perform or observe any sums, obligations or covenants to be paid, performed or
observed by it under this Agreement, or involving any other claims or
allegations arising out of the transactions evidenced or contemplated by this
Agreement, regardless of whether such actions or proceedings shall be for
damages, specific performance or declaratory relief or otherwise, such actions,
in the sole and absolute discretion of Secured Party, may be required to be
brought in Maricopa County, Arizona; and Debtor hereby submits to the
jurisdiction of the State of Arizona for such purposes and agrees that the venue
of such actions or proceedings shall properly lie in Maricopa County, Arizona;
and Debtor hereby waives any and all defenses to such jurisdiction and venue.
7.5 Counterparts. This Agreement may be executed in several counterparts,
each of which shall be deemed an original, but such counterparts shall together
constitute but one and the same agreement.
7.6 Entire Agreement. This Agreement contains the entire agreement and
understanding of the parties with respect to the subject matter hereof,
supersedes all other prior understandings, oral or written, with respect to the
subject matter hereof, and is intended by Secured Party and Debtor as the final,
complete and exclusive statement of the terms agreed to by them.
7.7 Amendments. No amendment, modification, change, waiver, release or
discharge hereof and hereunder shall be effective unless evidenced by an
instrument in writing and signed by the party against whom enforcement is
sought.
7.8 Section Headings. The section headings set forth in this Agreement are
for convenience only and shall not have substantive meaning hereunder or be
deemed part of this Agreement.
7.9 Time of Essence. Time is of the essence of this Agreement and each and
every provision hereof.
6
<PAGE> 36
7.10 Severability. If any provision hereof is invalid or unenforceable,
the other provisions hereof shall remain in full force and effect and shall be
liberally construed in favor of Secured Party in order to effectuate the other
provisions hereof.
7.11 Binding Nature. This provisions of this Agreement shall be binding
upon, and shall inure to the benefit of, the parties hereto and their heirs,
personal representatives, successors and assigns. The term "Secured Party" shall
include not only the original Secured Party hereunder but also any future owner
and holder, including, without limitation, pledges, of note or notes evidencing
the Secured Obligations. The provisions hereof shall apply to the parties
according to the context thereof and without regard to the number or gender of
words or expressions used.
7.12 Notices. All notices required or permitted to be given hereunder
shall be in writing and may be given in person, by certified or registered
United States mail or by delivery service. Any notice directed to a party to
this Agreement shall become effective upon the earliest of the following: (a)
actual receipt by that party; or (b) delivery to the designated address of that
party, addressed to that party. All notices hereunder shall be sent as follows:
If to Secured Party: President
Cygnus Imaging, Inc.
8240 East Gelding Drive
Scottsdale, Arizona 85260
With a copy to: Christopher D. Johnson
Squire, Sanders & Dempsey L.L.P.
Two Renaissance Square
40 North Central Avenue, Suite 2700
Phoenix, Arizona 85004
If to Debtor: President
Procare Laboratories, Inc.
8230 East Thoroughbred Trail
Scottsdale, Arizona 85258
With a copy to: Samuel Cowley, Esq.
Snell & Wilmer
One Arizona Center
400 East Van Buren
Phoenix, Arizona 85004-0001
7.13 Copy. A carbon, photographic or other reproduced copy of this
Agreement and/or any financing statement relating hereto shall be sufficient for
filing and/or recording as a financing statement.
7
<PAGE> 37
IN WITNESS WHEREOF, this Agreement was executed by Debtor and Secured
Party as of the date first set forth above.
DEBTOR
PROCARE LABORATORIES, INC.,
an Arizona corporation
By:______________________________
Name: Egidio Cianciosi
Title: President
SECURED PARTY
CYGNUS IMAGING, INC.,
an Arizona corporation
By:________________________________
Name:______________________________
Title:_____________________________
8
<PAGE> 38
EXHIBIT F
PLEDGE AGREEMENT
F-1
<PAGE> 39
STOCK PLEDGE AGREEMENT
This STOCK PLEDGE AGREEMENT (the "Pledge Agreement") is made and
entered into as of this 28th day of October, 1999, by and between CYGNUS
IMAGING, INC., an Arizona corporation ("Pledgee"), and Egidio Cianciosi
("Pledgor").
RECITALS
WHEREAS, Procare Laboratories, Inc., an Arizona corporation ("Procare")
and Pledgee have entered into an Asset Purchase Agreement dated of even date
herewith (the "Asset Purchase Agreement") pursuant to which Pledgee has agreed
to sell certain assets to Procare, subject to the terms and conditions set forth
in such Asset Purchase Agreement;
WHEREAS, Pledgor is the sole shareholder of Procare;
WHEREAS, Pledgee has provided Procare with a $300,000 line of credit for
working capital needs for a period of 180 days (the "Line of Credit") beginning
on the Closing Date; and
WHEREAS, Pledgor has agreed to pledge his shares in Zila, Inc. as
collateral against payment of the Line of Credit.
NOW, THEREFORE, in consideration of the terms, conditions and mutual
covenants of the parties, it is hereby agreed as follows:
1. DEFINITIONS. The following term shall have the following meaning in
this Pledge Agreement:
Collateral: The Securities and all dividends, distributions and
amounts or additional securities to which Pledgor (with or without
additional consideration) is or becomes entitled by virtue of its
ownership of any of the Securities or as the result of any corporate
reorganization, merger, consolidation, stock split, stock dividend,
conversion, preemptive right or otherwise.
Securities: The capital stock described in Exhibit A attached hereto
(and duly executed assignments separate from such stock certificates
satisfactory to Pledgee attached thereto).
All capitalized terms not otherwise defined in this Pledge Agreement and defined
in the Asset Purchase Agreement shall have the meaning ascribed to them in the
Asset Purchase Agreement.
2. COLLATERAL. The Collateral shall secure, in such order of priority as
Pledgee may elect, the following (collectively, the "Secured Obligations"):
(a) Payment and performance of all obligations of Pledgor under the
Line of Credit pursuant to the terms and conditions of the Asset Purchase
Agreement, together with all
<PAGE> 40
extensions, modifications, substitutions or renewals of the Line of
Credit, or other advances made thereunder; and
(b) Payment and performance of every obligation, covenant and
agreement of Pledgor contained in this Pledge Agreement, together with all
extensions, modifications, substitutions or renewals hereof.
3. REPRESENTATIONS AND WARRANTIES. Pledgor hereby covenants, represents
and warrants to Pledgee that, as to the Securities deposited by Pledgor with
Pledgee on the date hereof, (i) Pledgor is the legal and beneficial owner of
such Collateral; (ii) so long as any of the Secured Obligations remain
unperformed or unpaid, Pledgor will not create or permit to exist any claim,
lien, charge, security interest or encumbrance upon or with respect to such
Collateral, except for the security interest therein granted to Pledgee by this
Pledge Agreement and except as otherwise permitted pursuant to the terms of this
Pledge Agreement; (iii) Pledgor will not sell, transfer, convey, assign, or
otherwise divest its interests in the Collateral, or any part thereof, to any
other person; and (iv) no authorization, approval or other action by, or notice
to or filing with, any governmental body is required for the pledge by Pledgor
of the Collateral pursuant to the terms of this Pledge Agreement.
4. STOCK SPLITS, STOCK DIVIDENDS, ETC.
4.1 Pledgor agrees that in the event that Pledgor, by virtue of Pledgor's
ownership of the Collateral, now is, or hereafter becomes, entitled (with or
without additional consideration) to other or additional securities as the
result of any corporate reorganization, merger, consolidation, stock split,
stock dividend, conversion or preemptive right or otherwise, Pledgor shall:
(a) Cause the issuer of such additional securities to deliver to
Pledgee the certificates evidencing Pledgor's ownership thereof and hereby
authorizes and empowers Pledgee to demand the same from such issuer, and
agrees if such certificates are delivered to Pledgor, to take possession
thereof in trust for Pledgee;
(b) Deliver to Pledgee an assignment separate from certificate with
respect to such Additional Securities, executed in blank by Pledgor;
(c) Deliver to Pledgee a certificate, executed by Pledgor and dated
the date of such pledge, as to the truth and correctness on such date of
the representations and warranties set forth in Section 3 hereof; and
(d) Deliver to Pledgee such other certificates, forms and other
instruments as Pledgee may request in connection with such pledge.
4.2 Pledgor agrees that such Additional Securities shall constitute a
portion of the Collateral and be subject to this Pledge Agreement in the same
manner and to the same extent as the Securities pledged hereby to Pledgee on the
date hereof.
5. VOTING POWER. Subject to Section 6.2(c) of this Pledge Agreement,
Pledgor shall be entitled to exercise all voting powers in all corporate matters
pertaining to the Securities.
2
<PAGE> 41
6. DEFAULT AND REMEDIES.
6.1 The occurrence of any of the following events or conditions shall
constitute an "Event of Default":
(a) Any failure to pay any principal or interest or any other part
of the Secured Obligations when the same shall become due and payable; or
(b) Any breach by Pledgor of any warranty, representation, covenant
or agreement made herein.
6.2 If an Event of Default shall have occurred and be continuing, Pledgee,
at its option, may:
(a) Declare all or any part of the Secured Obligations to be
immediately due and payable, and the same shall be collectible thereupon
by action at law;
(b) Cause the Collateral to be registered in its name or in the name
of its nominee;
(c) Exercise all voting powers pertaining to the Collateral and
otherwise act with respect thereto as though Pledgee were the owner
thereof;
(d) Receive all dividends and all other distributions of any kind
whatsoever on all or any part of such Collateral;
(e) Exercise any and all rights of collection, conversion or
exchange, and any and all other rights, privileges, options or powers of
Pledgor pertaining or relating to such Collateral;
(f) Sell, assign and deliver the whole, or from time to time, any
part of such Collateral at any broker's board or at any private sale or at
public auction, with or without demand for performance or advertisement of
the time or place of sale or adjournment thereof or otherwise, and free
from any right of redemption (all of which are hereby expressly waived by
Pledgor) for cash, for credit or for other property, for immediate or
future delivery, and for such price and on such terms as Pledgee in its
sole discretion may determine; and
(g) Exercise any other remedy (i) specifically granted under this
Pledge Agreement, (ii) available to a secured party under the laws of the
State of Arizona, or (iii) now or hereafter existing in equity, or at law,
by virtue of statute or otherwise.
With respect to the actions described in each of subsections 6.2(c)
and 6.2(e) above, Pledgor hereby irrevocably constitutes and appoints Pledgee
its proxy and attorney-in-fact
3
<PAGE> 42
with full power of substitution and acknowledges that the constitution and
appointment of such proxy and attorney-in-fact are coupled with an interest and
are irrevocable.
6.3 Pledgee shall give not less than 10 business days prior written notice
to the Pledgor of any sale pursuant to this Section 6. Pledgor hereby agrees
that such notice is commercially reasonable.
6.4 At any sale made pursuant to Section 6.2 above, Pledgee may bid for
and purchase, free from any right or equity of redemption on the part of the
applicable Pledgor (the same hereby being waived and released by Pledgor), any
part or all of the Collateral that is offered for sale, and Pledgee, upon
compliance with the terms of sale, may hold, retain and dispose of such
Collateral without further accountability therefor.
6.5 Pledgee shall apply the proceeds of any sale of the whole or any part
of the Collateral and any other monies at the time held by Pledgee under the
provisions of this Pledge Agreement in such manner and order as Pledgee shall
determine in its sole discretion.
6.6 Pledgee shall not have any duty to exercise any of the rights,
privileges, options or powers or to sell or otherwise realize upon any of the
Collateral, as hereinbefore authorized, and Pledgee shall not be responsible for
any failure to do so or delay in so doing.
6.7 Any sale of all or any portion of the Collateral pursuant to Section
6.2 above shall operate to divest all right, title and interest of the Pledgor
to the Collateral which is the subject of any such sale.
6.8 Pledgor acknowledges that Pledgee may be unable to effect a public
sale of all or a part of the Collateral by reason of certain prohibitions
contained in the Securities Act of 1933, as amended, or that it may be able to
do so only after delay which might adversely affect the value that might be
realized upon the sale of the Collateral. Accordingly, Pledgor agrees that
Pledgee, without the necessity of attempting to cause any registration of the
Collateral to be effected under the Securities Act, may sell the Collateral or
any part thereof in one or more private sales to a restricted group of
purchasers who may be required to agree, among other things, that they are
acquiring the Collateral for their own account, for investment purposes only,
and not with a view toward the distribution or resale thereof. Pledgor agrees
that any such private sale may be at prices or on terms less favorable to the
owner of the Collateral than would be the case if such Collateral were sold at
public sale, and that any such private sale shall not be deemed to have been
made in a commercially unreasonable manner by virtue of such sale having been a
private sale.
7. PLEDGEE'S OBLIGATIONS, CUSTODIAL AGREEMENT, PERFORMANCE RIGHTS. Except
for the safe custody of any Collateral in its possession and the accounting for
monies actually received by it hereunder, Pledgee shall have no duty with
respect to any Collateral. Pledgee shall be deemed to have exercised reasonable
care in the custody and preservation of the Collateral in its possession if it
takes such action for that purpose as Pledgor reasonably requests in writing,
but failure of Pledgee to comply with any such request at any time shall not of
itself be deemed a failure to exercise reasonable care. It is expressly agreed
that Pledgee shall have no responsibility for (i) ascertaining or taking action
with respect to calls, conversions, exchanges,
4
<PAGE> 43
maturities, tenders or other matters relative to any Collateral, whether or not
Pledgee has or is deemed to have knowledge of such matters, or (ii) taking any
necessary steps to preserve rights against any parties with respect to any
Collateral, but Pledgee may do so and all expenses incurred in connection
therewith shall be payable by and for the sole account of Pledgor.
8. TERMINATION OF PLEDGE AGREEMENT. Upon the indefeasible and final
payment and performance in full of all of Procare's obligations under the Line
of Credit, Pledgee shall deliver to Pledgor, without recourse to or warranty by
Pledgee, the Collateral in its possession and this Pledge Agreement thereupon
shall be terminated.
9. MISCELLANEOUS.
9.1 Unconditional Obligation. Pledgor further unconditionally agrees that
if an Event of Default has occurred, Pledgee may exercise its rights and
remedies hereunder. The obligations of Pledgor under this Pledge Agreement shall
be absolute and unconditional, and shall remain in full force and effect without
regard to, and shall not be released or discharged or in any way affected by:
(a) Any amendment or modification of or supplement to the Asset
Purchase Agreement or the Line of Credit;
(b) Any exercise or non-exercise of any right or remedy under the
Asset Purchase Agreement or the Line of Credit;
(c) The institution of any bankruptcy, insolvency, debt agreement,
readjustment, composition, receivership or liquidation proceedings by or
against Pledgor; or
(d) Any other circumstance which otherwise might constitute a
defense to, or a discharge of Pledgor with respect to his obligations.
9.2 Cumulative Remedies; Indulgence. Each and every right, remedy and
power granted to Pledgee hereunder shall be cumulative and in addition to any
other right, remedy or power specifically granted herein or now or hereafter
existing in equity, at law, by virtue of statute or otherwise and may be
exercised by Pledgee, from time to time, concurrently or independently and as
often and in such order as Pledgee may deem expedient. Any failure or delay on
the part of Pledgee in exercising any such right, remedy or power, or
abandonment or discontinuance of steps to enforce the same, shall not operate as
a waiver thereof or affect Pledgee's right thereafter to exercise the same, and
any single or partial exercise of any such right, remedy or power shall not
preclude any other right, remedy or power, and no such failure, delay,
abandonment or single or partial exercise of Pledgee's rights hereunder shall be
deemed to establish a custom or course of dealing or performance among the
parties hereto.
9.3 Further Action. Pledgor agrees that at any time, and from time to
time, Pledgor, upon the request of Pledgee and at the expense of Pledgor,
promptly will execute and deliver such further documents and do such further
acts and things as Pledgee may request in order to effect fully the purposes of
this Pledge Agreement and to subject to the security interest created hereby any
property or rights intended by the provisions hereof to be covered hereby.
5
<PAGE> 44
9.4 Defense of Title. Pledgor agrees that it will warrant, preserve,
maintain and defend, at its sole expense, the right, title and interest of
Pledgee in and to the Collateral and all right, title and interest represented
thereby against all claims, charges and demands of all persons whomsoever.
9.5 Notice. Any notice required hereunder shall be in writing and
addressed to Pledgor and Pledgee at their addresses set forth on the signature
page hereto. Notices hereunder shall be deemed received on the earlier of
receipt, whether by mail, personal delivery, facsimile, or otherwise, or upon
deposit in the United States mail, postage prepaid.
9.6 No Waiver by Pledgee. No delay or failure of Holder in exercising any
right hereunder shall affect such right, nor shall any single or partial
exercise of any right preclude further exercise thereof.
9.7 Governing Law. This Pledge Agreement shall be construed in accordance
with and governed by the laws of the State of Arizona, without regard to
principles of conflicts of laws.
9.8 Severability. Every provision of this Pledge Agreement is intended to
be severable, and if any term or provision hereof is invalid, illegal, or
unenforceable for any reason, the validity, legality, and enforceability of the
remaining provisions hereof will not be affected or impaired thereby, and any
invalidity, illegality, or unenforceability in any jurisdiction will not affect
the validity, legality, or enforceability of any such term or provision in any
other jurisdiction.
9.9 Binding Nature. The provisions of this Pledge Agreement are binding
upon and inure to the benefit of the heirs, personal representatives, successors
and assigns of the parties hereto.
9.10 Amendments. No amendment, modification, change, waiver, release, or
discharge hereof and hereunder will be effective unless evidenced by an
instrument in writing and signed by the party against whom enforcement is
sought. Any modification or waiver of any provision of this Pledge Agreement, or
any consent to any departure by Pledgor therefrom, shall not be effective in any
event unless the same is in writing and signed by Pledgee, and then such
modification, waiver or consent shall be effective only in the specific instance
and for the specific purpose given. Any notice to or demand on Pledgor in any
event not specifically required of Pledgee hereunder shall not entitle Pledgor
to any other or further notice or demand in the same, similar or other
circumstances unless specifically required hereunder.
9.11 Paragraph Headings. The paragraph headings set forth in this Pledge
Agreement are for convenience only and do not have substantive meaning hereunder
and are not deemed to be part of this Pledge Agreement.
9.12 Counterparts. This Pledge Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
taken together shall be one and the same instrument.
6
<PAGE> 45
9.13 Construction. Construction of this Pledge Agreement is to be based as
a whole, in accordance with its fair meaning, and without regard to or taking
into account any presumption or other rule of law requiring construction against
the party preparing this Pledge Agreement.
[SIGNATURE PAGE FOLLOWS]
7
<PAGE> 46
IN WITNESS WHEREOF, the Pledgor and Pledgee have caused this Pledge
Agreement to be executed as of the date first written above.
PLEDGOR
______________________________
Egidio Cianciosi
PLEDGEE
Cygnus Imaging, Inc.
an Arizona corporation
______________________________
By:___________________________
Its:__________________________
8
<PAGE> 47
EXHIBIT A
Description of Securities
____________ shares of the Common Stock of Zila, Inc., par value $.001 per
share, as represented by share certificate No(s). ________________.
9
<PAGE> 48
SCHEDULE 1.1(F)
PATENTS
S-1
<PAGE> 49
SCHEDULE 3.2
ALLOCATION OF PURCHASE PRICE
S-2
<PAGE> 50
SCHEDULE 6.4
PERMITTED ENCUMBRANCES
None
S-3
<PAGE> 1
Exhibit 10-M
$4,000,000 October 28, 1999 Phoenix, Arizona
SECURED NOTE
FOR VALUE RECEIVED, PROCARE LABORATORIES, INC., an Arizona
corporation (the "Company"), hereby promises to pay to the order of CYGNUS
IMAGING, INC., an Arizona corporation, ("Holder"), or Holder's registered
assigns, the principal sum of up to Four Million Dollars ($4,000,000) (the
"Principal Amount"). The Company promises to pay to Holder the aggregate unpaid
Principal Amount of this Note on the Maturity Date (as defined herein); together
with any interest that may accrue on the Principal Amount remaining unpaid after
the Maturity Date as a result of an Event of Default (as defined herein) until
payment in full. The obligations of the Company under this Note are secured by
certain assets of the Company as defined in that certain Security Agreement of
even date between the Company and Holder (the "Security Agreement").
1. Payment on Maturity Date. The date upon which this Note
matures and the Principal Amount becomes due shall be November 10, 1999 (the
"Maturity Date"). The entire unpaid principal balance, all accrued and unpaid
interest, and all other amounts payable hereunder shall be due and payable in
full on the Maturity Date.
2. Payments. All payments of principal and interest due in
respect of this Note shall be made without deduction, defense, set off or
counterclaim, in lawful money of the United States of America, and in same day
funds and delivered to the Holder by wire transfer to a bank account of Holder,
as specified by Holder from time to time.
3.1 Event of Default. If the Company defaults in the payment
of the Principal Amount of the Note on the Maturity Date, which default is not
cured within ten (10) days (the "Event of Default"), the entire unpaid principal
balance and accrued interest payable hereunder shall automatically become
immediately due and payable without presentment, demand or notice of any kind,
all of which are hereby expressly waived by the Company.
3.2 Interest. If the Event of Default shall have occurred,
interest will accrue on the unpaid Principal Amount of this Note at the rate of
twelve and one-half percent (12.5%) per annum, calculated on the basis of the
actual number of days elapsed and on the basis of a 360 day year. Such interest
will continue to accrue at the specified rate until the entire unpaid Principal
Amount has been paid in full. Notwithstanding any provisions of this Note, in no
event shall the amount of interest paid or agreed to be paid by the Company
exceed an amount computed at the highest rate of interest permissible under
applicable law. If, from any circumstances whatsoever, fulfillment of any
provision of this Note at any time performance of such provision shall be due,
shall involve exceeding the interest rate limitation validly prescribed by law
which a court of competent jurisdiction may deem applicable hereto, then, ipso
facto, the obligations to be fulfilled shall be reduced to an amount computed at
the highest rate of interest permissible under applicable law, and if for any
reason whatsoever Holder shall ever receive as interest shall be applied
automatically to the payment of principal of this Note outstanding hereunder
(whether or not then due and payable), without prepayment charge, premium or
penalty, and not to the payment of interest, or shall be refunded to the Company
if such principal and all other obligations of the Company to Holder have been
paid in full.
<PAGE> 2
3.3 Suits for Enforcement. In case the Event of Default shall
have occurred, unless the Event of Default shall have been waived, the holder of
the Note may proceed to protect and enforce its rights by suit in equity or
action at law, whether for the specific performance of any term contained in the
Note or in any other Note Document or for an injunction against any breach of
any such term or in aid of the exercise of any power granted in the Note or
other Note Document, or may proceed to enforce the performance of any term
contained in the Note or other Note Document (including the payment of the Note)
or to enforce any other legal or equitable right of the holder of the Note, or
may take any one or more of such actions. In the event the Holder brings such an
action against the Company, the Holder shall be entitled to recover from the
Company all fees, costs and expenses of enforcing any right of the Holder under
or with respect to the Note or any Note Document, including without limitation
such reasonable fees and expenses of attorneys, advisors, accountants and expert
witnesses, which shall include, without limitation, all fees, costs and expenses
of appeals.
3.4 Remedies Cumulative. No right, power or remedy conferred
upon the holder of the Note shall be exclusive, and each such right, power or
remedy shall be cumulative and in addition to every other right, power or
remedy, whether conferred hereby or by the Note or now or hereafter available at
law or in equity or by statute or otherwise.
3.5 Remedies Not Waived. No course of dealing between the
Company and the holder of the Note, and no delay in exercising any right, power
or remedy conferred hereby or by the Note or now or hereafter existing at law or
in equity or by statute or otherwise, shall operate as a waiver of or otherwise
prejudice any such right, power or remedy.
3.6 Waiver of Statute of Limitations. To the extent permitted
by law, the Company hereby waives and agrees not to assert or take advantage of
any and all applicable statutes of limitations on its obligations under the Note
or any other Note Document.
4. Prepayment. The Company may prepay its obligation pursuant
to this Note, in whole or in part, at any time by tendering to the Holder the
outstanding principal amount of this Note, together with accrued but unpaid
interest hereon.
5. Recourse. This Note is a non-recourse note and is only
secured by the Collateral, as that term is defined in the Security Agreement.
6. Enforcement. If the Event of Default shall have occurred,
the Holder may proceed to protect and enforce the rights of the Holder by suit
in equity or action at law or the employment of any other available right or
remedy, as the Holder shall deem most effective to protect and enforce any such
rights. The Company promises to pay all costs and expenses, including reasonable
attorneys' fees and expenses, incurred in the collection and enforcement of this
Note. The Company and endorsers of this Note hereby consent to renewals and
extensions of time at or after the maturity hereof, without notice, and hereby
waive diligence, presentment, protest, demand and notice of every kind and, to
the full extent permitted by law, the right to plead any statute of limitations
as a defense to any demand hereunder.
7. Waivers and Amendments. This Note may be amended only with
the written consent of the Holder.
2
<PAGE> 3
8. Governing Law. This Note shall be governed by, and
construed and enforced in accordance with, the internal laws (but not the law of
choice of laws) of the State of Arizona, without regard to principles of
conflicts of laws.
[SIGNATURE PAGE FOLLOWS]
3
<PAGE> 4
IN WITNESS WHEREOF, the Company has caused this Note to be executed and
delivered by its duly authorized officer, as of the day and year first written
above.
PROCARE LABORATORIES, INC.,
an Arizona corporation
By: /s/ Egidio Cianciosi
----------------------------------
Name: Egidio Cianciosi
Title: President
4
<PAGE> 1
EXHIBIT 23
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 29, 1999 appearing in this Annual Report on
Form 10-K of Zila, Inc. for the year ended July 31, 1999.
DELOITTE & TOUCHE LLP
Phoenix, Arizona
October 29, 1999
<PAGE> 1
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, constitutes and
appoints BRADLEY C. ANDERSON as his true and lawful attorney-in-fact and agent
with full power of substitution and resubstitution, for him and his name, place
and stead, in any and all capacities, to sign the Annual Report on Form 10-K for
fiscal year ended July 31, 1999, 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 29, 1999
/s/ Joseph Hines
--------------------------
JOSEPH HINES
STATE OF ARIZONA )
)
County of Maricopa )
On the 29th day of October, 1999, before me, the undersigned Notary
Public, personally appeared JOSEPH HINES, known 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 L. Backus
--------------------------
Notary Public
My commission expires:
[seal of Janice L. Backus]
EXHIBIT
24-A
<PAGE> 1
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, constitutes and
appoints JOSEPH HINES as his true and lawful attorney-in-fact and agent
with full power of substitution and resubstitution, for him and his name, place
and stead, in any and all capacities, to sign the Annual Report on Form 10-K for
fiscal year ended July 31, 1999, 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 29, 1999
/s/ Bradley C. Anderson
--------------------------
BRADLEY C. ANDERSON
STATE OF ARIZONA )
)
County of Maricopa )
On the 29th day of October, 1999, before me, the undersigned Notary
Public, personally appeared BRADLEY C. ANDERSON, known 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 L. Backus
--------------------------
Notary Public
My commission expires:
[seal of Janice L. Backus]
EXHIBIT
24-B
<PAGE> 1
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, constitutes and
appoints JOSEPH HINES and BRADLEY C. ANDERSON as his true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution,
for him and his name, place and stead, in any and all capacities, to sign the
Annual Report on Form 10-K for fiscal year ended July 31, 1999, 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 29, 1999
/s/ Carl Schroeder
--------------------------
CARL SCHROEDER
STATE OF ARIZONA )
)
County of Maricopa )
On the 29th day of October, 1999, before me, the undersigned Notary
Public, personally appeared CARL SCHROEDER, known 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 L. Backus
--------------------------
Notary Public
My commission expires:
[seal of Janice L. Backus]
EXHIBIT
24-C
<PAGE> 1
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, constitutes and
appoints JOSEPH HINES and BRADLEY C. ANDERSON as his true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution,
for him and his name, place and stead, in any and all capacities, to sign the
Annual Report on Form 10-K for fiscal year ended July 31, 1999, 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 29, 1999
/s/ Patrick M. Lonergan
--------------------------
PATRICK M. LONERGAN
STATE OF ARIZONA )
)
County of Maricopa )
On the 29th day of October, 1999, before me, the undersigned Notary Public,
personally appeared PATRICK M. LONERGAN, known 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 L. Backus
--------------------------
Notary Public
My commission expires:
[seal of Janice L. Backus]
EXHIBIT
24-D
<PAGE> 1
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, constitutes and
appoints JOSEPH HINES and BRADLEY C. ANDERSON as his true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution,
for him and his name, place and stead, in any and all capacities, to sign the
Annual Report on Form 10-K for fiscal year ended July 31, 1999, 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 29, 1999
/s/ Michael S. Lesser
--------------------------
MICHAEL S. LESSER
STATE OF ARIZONA )
)
County of Maricopa )
On the 29th day of October, 1999, before me, the undersigned Notary
Public, personally appeared MICHAEL S. LESSER, known 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 L. Backus
--------------------------
Notary Public
My commission expires:
[seal of Janice L. Backus]
EXHIBIT
24-E
<PAGE> 1
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, constitutes and
appoints JOSEPH HINES and BRADLEY C. ANDERSON as his true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution,
for him and his name, place and stead, in any and all capacities, to sign the
Annual Report on Form 10-K for fiscal year ended July 31, 1999, 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 29, 1999
/s/ Curtis M. Rocca, III
--------------------------
CURTIS M. ROCCA, III
STATE OF ARIZONA )
)
County of Maricopa )
On the 29th day of October, 1999, before me, the undersigned Notary Public,
personally appeared CURTIS M. ROCCA, known 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 L. Backus
--------------------------
Notary Public
My commission expires:
[seal of Janice L. Backus]
EXHIBIT
24-F
<PAGE> 1
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, constitutes and
appoints JOSEPH HINES and BRADLEY C. ANDERSON as his true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution,
for him and his name, place and stead, in any and all capacities, to sign the
Annual Report on Form 10-K for fiscal year ended July 31, 1999, 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 29, 1999
/s/ Christopher D. Johnson
--------------------------
CHRISTOPHER D. JOHNSON
STATE OF ARIZONA )
)
County of Maricopa )
On the 29th day of October, 1999, before me, the undersigned Notary
Public, personally appeared CHRISTOPHER JOHNSON, known 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 L. Backus
--------------------------
Notary Public
My commission expires:
[seal of Janice L. Backus]
EXHIBIT
24-G
<PAGE> 1
SPECIAL POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned, constitutes and
appoints JOSEPH HINES and BRADLEY C. ANDERSON as his true and lawful
attorney-in-fact and agent with full power of substitution and resubstitution,
for him and his name, place and stead, in any and all capacities, to sign the
Annual Report on Form 10-K for fiscal year ended July 31, 1999, 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 29, 1999
/s/ Kevin J. Tourek
--------------------------
KEVIN J. TOUREK
STATE OF ARIZONA )
)
County of Maricopa )
On the 29th day of October, 1999, before me, the undersigned Notary Public,
personally appeared KEVIN J. TOUREK, known 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 L. Backus
--------------------------
Notary Public
My commission expires:
[seal of Janice L. Backus]
EXHIBIT
24-H
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