SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934 (Amendment No. )
Filed by the Registrant /X/
Filed by a party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-12
ZILA, INC.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(4) Date Filed:
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ZILA, INC.
5227 NORTH 7TH STREET
PHOENIX, ARIZONA 85014-2800
(602) 266-6700
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD
January 14, 2003
The 2002 Annual Meeting of Stockholders of Zila, Inc. (the "Company") will
be held at Marriott's Camelback Inn, 5402 E. Lincoln Drive, Scottsdale, Arizona
85253 on January 14, 2003, at 9:00 a.m., local time.
MATTERS TO BE VOTED ON:
1. Election of seven directors to serve until the next annual meeting of
shareholders and until their successors are elected;
2. Ratification of the selection of Deloitte & Touche LLP as our
independent public accounting firm for the fiscal year ending July 31,
2003;
3. Approval of an amendment to the Non-Employee Directors Stock Option
Plan to (i) provide for an initial grant of options to new directors
and an increase in annual option grants to existing directors, and
(ii) increase the total number of shares reserved for issuance under
the Plan from 200,000 to 700,000; and
4. Consideration of any other matters that may properly come before the
Annual Meeting or any adjournment thereof.
The close of business on November 22, 2002 has been fixed as the Record
Date for the determination of stockholders entitled to receive notice of and to
vote at this meeting or any adjournment of the meeting. The list of stockholders
entitled to vote at this meeting is available at the offices of the Company,
5227 North 7th Street, Phoenix, Arizona 85014, for examination by any
stockholder for any purpose related to the meeting during ordinary business
hours during the ten days prior to the meeting.
WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THIS MEETING, PLEASE SIGN, DATE
AND RETURN THE ENCLOSED PROXY, WHICH IS SOLICITED BY AND ON BEHALF OF THE BOARD
OF DIRECTORS. THE GIVING OF SUCH PROXY WILL NOT AFFECT YOUR RIGHT TO REVOKE SUCH
PROXY OR TO VOTE IN PERSON SHOULD YOU LATER DECIDE TO ATTEND THE MEETING.
By Order of the Board of Directors,
/s/ Douglas D. Burkett, Ph.D.
Douglas D. Burkett, Ph.D.
President, Chief Executive Officer and
Chairman
Phoenix, Arizona
December 12, 2002
PROXY STATEMENT
TABLE OF CONTENTS
GENERAL INFORMATION............................................................1
WHO CAN VOTE...................................................................1
VOTING BY PROXIES..............................................................1
HOW YOU MAY REVOKE YOUR PROXY INSTRUCTIONS.....................................1
HOW VOTES ARE COUNTED..........................................................2
COST OF THIS PROXY SOLICITATION................................................2
ATTENDING THE ANNUAL MEETING...................................................2
WHAT VOTE IS REQUIRED TO APPROVE EACH PROPOSAL?................................2
WHO SHOULD I CALL IF I HAVE QUESTIONS?.........................................3
PROPOSALS......................................................................3
PROPOSAL NO. 1 - ELECT SEVEN DIRECTORS.......................................3
PROPOSAL NO. 2 - RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS..............3
PROPOSAL NO. 3 - APPROVAL OF AMENDMENT TO THE NON-EMPLOYEE
DIRECTORS STOCK OPTION PLAN................................................4
REPORT OF THE AUDIT COMMITTEE..................................................8
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS.....................................10
EXECUTIVE OFFICERS............................................................14
ABOUT THE BOARD AND ITS COMMITTEES............................................14
EXECUTIVE COMPENSATION........................................................17
STOCK OPTION GRANTS...........................................................18
OPTION VALUE AS OF JULY 31, 2002..............................................19
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION.......................21
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS............................24
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.......................25
STOCK PRICE PERFORMANCE GRAPH.................................................26
PROPOSALS BY STOCKHOLDERS.....................................................26
OTHER BUSINESS................................................................26
ANNUAL REPORT.................................................................27
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PROXY STATEMENT
This Proxy Statement is furnished to the Stockholders of Zila, Inc., a
Delaware corporation (the "Company"), in connection with the Company's
solicitation of proxies to be used in voting at the Annual Meeting of
Stockholders (the "Annual Meeting") to be held on January 14, 2003. The proxy
materials were mailed on or about December 12, 2002 to stockholders (the
"Stockholders") of record at the close of business on November 22, 2002 (the
"Record Date").
Your vote is very important. For this reason, the Board of Directors is
requesting that you allow your Common Stock to be represented at the Annual
Meeting by the persons who are named on the enclosed Proxy Card (the "Proxies").
"We," "our," "Zila," and the "Company" refer to Zila, Inc.
GENERAL INFORMATION
WHO CAN VOTE You are entitled to vote your Common Stock if our records
show that you held your shares as of November 22, 2002. At
that date, 45,465,260 shares of Common Stock were
outstanding and entitled to vote. Each share of Common Stock
is entitled to one vote on all matters on which Stockholders
may vote. The enclosed Proxy Card shows the number of shares
that you are entitled to vote. Your individual vote is
confidential and will not be disclosed to third parties.
VOTING BY PROXIES If your Common Stock is held by a broker, bank or other
nominee (i.e., in "street name"), you will receive
instructions from them which you must follow in order to
have your shares voted. If you hold your shares in your own
name as a holder of record, you may instruct the Proxies how
to vote your Common Stock by signing, dating and mailing the
Proxy Card in the envelope provided. Of course, you can
always come to the meeting and vote your shares in person.
If you give us a proxy without giving specific voting
instructions, your shares will be voted by the Proxies as
recommended by the Board of Directors.
We are not aware of any other matters to be presented at the
Annual Meeting except those described in this Proxy
Statement. However, if any other matters not described in
the Proxy Statement are properly presented at the meeting,
the Proxies will use their own judgment to determine how to
vote your shares. If the meeting is adjourned, your Common
Stock may be voted by the Proxies on the new meeting date as
well, unless you have revoked your proxy instructions prior
to that time.
HOW YOU MAY You may revoke your proxy instructions by any of the
REVOKE YOUR PROXY following procedures:
INSTRUCTIONS
1. Send us another signed proxy with a later date;
2. Send a letter to the Company's secretary revoking
your proxy before your Common Stock has been voted by
the Proxies at the meeting; or
3. Attend the Annual Meeting and vote your shares in
person.
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HOW VOTES ARE Inspectors of election will be appointed for the meeting.
COUNTED The inspectors of election will determine whether or not a
quorum is present and will tabulate votes cast by proxy or
in person at the Annual Meeting. If you have returned valid
proxy instructions or attend the meeting in person, your
Common Stock will be counted for the purpose of determining
whether there is a quorum, even if you wish to abstain from
voting on some or all matters introduced at the meeting. If
a broker indicates on the proxy that it does not have
discretionary authority as to certain shares to vote on a
particular matter, those shares will not be considered as
present and entitled to vote with respect to that matter.
COST OF THIS PROXY We will pay the cost of this proxy solicitation, including
SOLICITATION the charges and expenses of brokerage firms and others who
forward solicitation material to beneficial owners of the
Common Stock. We will solicit proxies by mail. Proxies may
also be solicited by personal interview, telephone, or
telegraph. Georgeson Shareholder will serve as the Company's
proxy solicitation agent. In such capacity, Georgeson
Shareholder will assist in the distribution of proxy
materials to beneficial owners of Common Stock and
solicitation of votes at an estimated cost of $5,500 plus
its reasonable out-of-pocket expenses.
ATTENDING THE If you are a beneficial owner of Common Stock held by a
ANNUAL MEETING broker or bank, you will need proof of ownership to be
admitted to the meeting. A recent statement or letter from a
broker or bank showing your current ownership and ownership
of the Company's shares on the record date are examples of
proof of ownership. Although you may attend the meeting, you
will not be able to vote your Common Stock held in street
name in person at the meeting and will have to vote through
your broker or bank.
WHAT VOTE IS REQUIRED TO APPROVE EACH PROPOSAL?
PROPOSAL 1: The seven nominees for director who receive the most votes
ELECTION OF will be elected. There is no cumulative voting in the
SEVEN DIRECTORS election of directors. If you "abstain" from voting or you
indicate "vote withheld" for any nominee on your proxy card,
your vote will not count for or against any nominee.
PROPOSAL 2: The affirmative vote of a majority of the shares of Common
RATIFICATION Stock entitled to vote and present at the Annual Meeting in
OF INDEPENDENT person or by proxy will be required to ratify the selection
PUBLIC ACCOUNTANTS of independent auditors. Therefore, if you "abstain" from
voting, it has the same effect as if you voted "against"
this proposal.
PROPOSAL 3: The affirmative vote of a majority of the shares of Common
AMENDMENT OF THE Stock entitled to vote and present at the Annual Meeting in
NON-EMPLOYEE person or by proxy will be required to approve the amendment
DIRECTORS STOCK of the Company's Non-Employee Directors Stock Option Plan.
OPTION PLAN Therefore, if you "abstain" from voting, it has the same
effect as if you voted "against" this proposal.
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WHO SHOULD I CALL IF I HAVE QUESTIONS?
If you have questions about the Annual Meeting or voting, please call Betty
J. Pecha, Director, Legal Affairs, at (602) 266-6700, ext. 214.
PROPOSALS
PROPOSAL NO. 1 - ELECT SEVEN DIRECTORS
NUMBER OF An entire Board of Directors, consisting of seven directors,
DIRECTORS TO BE is to be elected at the Annual Meeting. Each Director
ELECTED elected will hold office until the next annual meeting of
stockholders and until his successor is elected and
qualified. If any director resigns or otherwise is unable to
complete his term of office, the Board will elect another
director for the remainder of the resigning director's term.
VOTE REQUIRED The seven nominees receiving the highest number of votes
cast at the Annual Meeting will be elected. There is no
cumulative voting in the election of directors.
NOMINEES OF THE The Board has nominated the following individuals to serve
BOARD on our Board of Directors for the following year:
Douglas D. Burkett, Ph.D.
Michael S. Lesser
Christopher D. Johnson
Kevin J. Tourek
S. Timothy Rose, D.D.S.
John Edward Porter
Morris C. Aaron
All of these nominees, except for John Edward Porter, S. Timothy Rose D.D.S. and
Morris C. Aaron, are currently serving on the Board. Each of the nominees has
agreed to be named in this Proxy Statement and to serve if elected. See pages
12-15 for information regarding each of the nominees listed above.
We know of no reason why any of the listed nominees would not be able to
serve. However, if any nominee is unavailable for election, the Proxies will
vote your Common Stock to approve the election of any substitute nominee
proposed by the Board.
YOUR DIRECTORS RECOMMEND A VOTE FOR THE ELECTION
OF THE SEVEN NOMINEES UNDER PROPOSAL NO. 1.
PROPOSAL NO. 2 - RATIFICATION OF INDEPENDENT PUBLIC ACCOUNTANTS
The principal independent public accounting firm utilized by us during the
fiscal years ended July 31, 1994 through 2002 was Deloitte & Touche LLP,
independent certified public accountants (the "Auditors"). Our Board of
Directors has selected the Auditors to audit our financial statements for the
fiscal year ending July 31, 2003 and to perform other appropriate accounting
services. We anticipate that a representative of the Auditors will attend the
Annual Meeting for the purpose of responding to
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appropriate questions. At the Annual Meeting, a representative of the Auditors
will be afforded an opportunity to make a statement if the Auditors so desire.
The Proxies will vote in favor of ratifying the selection of Deloitte &
Touche LLP unless instructions to the contrary are indicated on the accompanying
proxy form.
AUDIT FEES
The aggregate fees billed by Deloitte & Touche LLP for professional
services rendered for the audit of our annual financial statements for the
fiscal year ended July 31, 2002 and for the review of the financial statements
included in our Quarterly Reports on Form 10-Q for that fiscal year were
$169,000.
ALL OTHER FEES
The aggregate fees billed by Deloitte & Touche LLP for services other than
described above under "Audit Fees" for the fiscal year ended July 31, 2002 were
$114,000, including audit-related services of $53,000 and non-audit related
services of $61,000. Audit-related services generally include fees for pension
and statutory audits, business acquisitions, accounting consultations and SEC
registration statements. Non-audit related services generally include fees for
preparation of tax returns.
FINANCIAL INFORMATION SYSTEMS DESIGN AND IMPLEMENTATION FEES
We did not engage Deloitte & Touche LLP to provide any information
technology services during the fiscal year ended July 31, 2002.
Although the Company has not yet engaged Deloitte & Touche LLP as its
independent auditors for the fiscal year ended July 31, 2003, the Audit
Committee will approve in advance any audit services or non-audit services to be
performed by Deloitte & Touche LLP or other independent auditors.
YOUR DIRECTORS RECOMMEND A VOTE FOR PROPOSAL NO. 2.
PROPOSAL NO. 3 - APPROVAL OF AMENDMENT TO THE NON-EMPLOYEE
DIRECTORS STOCK OPTION PLAN
GENERAL
In September 2002, the Company engaged Clark/Bardes Consulting ("CBC") to
conduct an analysis of the compensation of the non-employee directors in
relation to the Company's peer group of publicly held companies and to provide
recommendations regarding the level and composition of the Company's
compensation package for its non-employee, or independent, directors.
CBC issued a report to the Board that analyzed the level of director
compensation in relation to a peer group of companies similar to the Company in
terms of industry and revenue size. The peer group included national survey data
on pharmaceutical and medical product companies and companies, regardless of
industry, in the Company's revenue range.
The report also analyzed the cash and non-cash components of director
compensation and made recommendations to the Board of Directors. Based upon
these recommendations, the Board of Directors adopted a new compensation plan
for its non-employee directors. Because the levels of annual stock option grants
are higher than the Company has made in the past, it is necessary to increase
the number of options available in the Directors Plan. These amendments to the
Directors Plan are designed to enable the Company to attract, retain and
motivate qualified independent directors for its Board.
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At the Annual Meeting, the Company will seek shareholder approval of an
amendment to the Company's Non-Employee Directors Stock Option Plan (the
"Directors Plan") to (i) provide for an initial grant to each new director of
20,000 option shares upon his or her election or appointment to the Board of
Directors; (ii) increase the number of option shares to be granted annually to
non-employee directors from 2,500 to 20,000; (iii) increase the total number of
shares authorized for issuance under the Directors Plan from 200,000 to 700,000
and (iv) provide for vesting over four quarterly periods.
The Directors Plan provides non-employee directors with an opportunity to
acquire a meaningful, proprietary interest in the Company. Given the renewed
emphasis on director responsibility and the substantial time commitment required
of independent directors serving on its Board, the Company believes that
increased cash compensation and options are, and will be, required to assist it
in assembling a qualified, dedicated group of independent directors. The
Company's Board of Directors approved the amendment to the Directors Plan on
September 26, 2002 and directed that the amendment be submitted as a proposal
for shareholder approval at the Annual Meeting. The Directors Plan was
originally adopted in 1989.
The following description of the Directors Plan is a summary of the
material provisions of the Plan and is qualified in its entirety by reference to
the Directors Plan, as amended subject to stockholder approval, a copy of which
has been attached as Appendix A to this Proxy Statement.
PLAN PROVISIONS
The Directors Plan provides for the non-discretionary grant of nonstatutory
stock options ("Options") to the Company's non-employee directors. Under the
Directors Plan, as proposed to be amended, the Company will grant options to
purchase 20,000 shares of common stock to each new director upon election or
appointment to the Board of Directors and options to purchase 20,000 shares of
Common Stock annually to each non-employee director on the third trading day
after the Company publicly announces its year-end financial results for the
immediately preceding fiscal year. However, such Options shall not be granted to
any non-employee director of the Company who during the fiscal year immediately
preceding such grant date (or the period that he or she served as a director of
the Company, if less than the full fiscal year) attended fewer than 75 percent
of the aggregate of (i) the total number of the regularly scheduled and special
meetings of the Board of Directors and (ii) the total number of meetings held by
all committees of the Board on which he or she served.
The exercise price of an Option will be the fair market value (the mean of
the final closing bid and asked prices of the Common Stock on the NASDAQ) on the
date of grant. The exercise price of Options may be satisfied with (i) cash,
(ii) shares of the Company's Common Stock having an aggregate fair market value
at the time the Option is exercised equal to the exercise price, or (iii) a
combination of the foregoing. Pursuant to the terms of the Directors Plan, as
proposed to be amended, all of the shares subject to an Option will vest in
equal quarterly installments throughout the fiscal year in which the director
serves on the Board. All Options granted under the Directors Plan will expire
five years from the date of grant. Options are not transferable other than by
will or the laws of descent and distribution.
The exercise price of each Option, number of shares of Common Stock subject
to the Directors Plan, and the number of shares issuable upon the exercise of
each Option will be increased or decreased, as appropriate, to reflect any stock
merger, consolidation, stock split, stock dividend or other similar capital
adjustment.
The Board of Directors may amend or terminate the Directors Plan at any
time. However, amendments to the Directors Plan relating to the amount, price,
or timing of the option grants may not be made more than once in any six-month
period. In addition to any applicable NASDAQ requirements, the Directors Plan
provides that no amendment of the Directors Plan may be made without prior
stockholder approval if such approval is necessary for the Plan to continue to
comply with the applicable exemptions
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under Section 16(b) of the Exchange Act. Any amendment or termination of the
Directors Plan will not affect Options already granted and such Options shall
remain in full force and effect as if the Directors Plan had not been amended or
terminated.
The closing market price of one share of Common Stock on the NASDAQ on
December 6, 2002 was $1.10.
FEDERAL INCOME TAX CONSEQUENCES FOR OPTIONS UNDER THE DIRECTORS PLAN
The following briefly summarizes the U.S. federal income tax consequences
under current law of participation in the Directors Plan based upon the
applicable provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), and the applicable Treasury regulations, both of which are in effect on
the date of this description. This summary is subject to change in the event of
a change in either the Code, the Treasury regulations or their respective
interpretations. The following discussion is only a summary; it is not intended
to be all-inclusive or to constitute tax advice. Each optionee is urged to
consult his or her personal tax advisors as to the tax effects of his or her
participation in the Directors Plan, including the effects under state income
tax or other tax laws which may be applicable.
Options granted under the Directors Plan will be nonqualified stock options
("NSOs") and will not qualify as "incentive stock options" under Section 422 of
the Code. An optionee will not recognize taxable income as the result of the
grant of a NSO. Upon exercise of a NSO, an optionee normally recognizes ordinary
income in the amount of the difference between the option exercise price and the
fair market value of the Common Stock on the date of exercise. The optionee will
also have ordinary income attributable to any shares of Common Stock issuable
upon exercise that are surrendered, if permitted under the applicable stock
option agreement, in order to satisfy the federal income tax withholding
requirements.
If an optionee chooses to pay the option exercise price in previously
acquired shares of Common Stock, the exercise is treated as two transactions.
First, under Code Section 1036 there will be a tax-free exchange of the
previously acquired Common Stock for a like number of new shares of Common
Stock. The new shares of Common Stock will retain the tax basis and holding
period of the previously acquired Common Stock. Second, to the extent the shares
of Common Stock received exceeds the number of shares of Common Stock
surrendered, there will be an issuance of additional new shares of Common Stock
equal to such excess. The optionee will realize ordinary income under Code
Section 83 in an amount equal to the fair market value of the additional shares
reduced by any cash paid by the optionee upon exercise (i.e., the spread on the
options). The additional shares will have a tax basis equal to the fair market
value of the additional shares and have a holding period that begins on the date
such Additional Shares are issued.
Upon the sale of Common Stock acquired by the exercise of a NSO, any gain
or loss, based on the difference between the sale price and the fair market
value on the date of exercise, will be taxed as capital gain or loss. No
deduction for federal income tax purposes is available to the Company with
respect to the grant of a NSO or the sale of the Common Stock acquired pursuant
to such grant. The Company generally should be entitled to a deduction for
federal income tax purposes equal to the amount of ordinary income recognized by
an optionee as a result of the exercise of a NSO, except to the extent such
deduction is limited by applicable provisions of the Code.
Special rules apply with respect to shares of Common Stock transferred
directly to or acquired upon exercise of an option by the optionee if he or she
is subject to the "short-swing profits" provisions of the Exchange Act.
The foregoing discussion is only a summary of certain of the federal income
tax consequences relating to the Directors Plan as in effect on the date of this
description. No consideration has been given to the effects of state, local, and
other laws (tax or other) upon the Directors Plan or upon the optionee or the
Company, which laws will vary depending upon the particular jurisdiction or
jurisdictions involved.
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NEW PLAN BENEFITS
The following table shows the number of shares of common stock underlying
options that would have been granted to the non-employee directors, as a group,
under the Non-Employee Directors Option Plan if the Plan had been in effect for
fiscal 2002. Under the Plan, as amended, non-employee directors would receive
annual grants at the levels indicated for each new fiscal year that they serve
as directors. Nominees for election as directors will receive options to
purchase 20,000 shares of common stock upon their election to the Board. Such
options will be exercisable at the mean of the final bid and ask prices of the
common stock on their date of grant.
NEW PLAN BENEFITS
NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN
Number of Shares of
-------------------
Common Stock Underlying the Option
----------------------------------
All Current Non-Employee Directors as a Group 120,000
REQUIRED VOTE
Approval of the amendment to the Directors Plan requires the affirmative
vote of a majority of voting power of Common Stock present at the Annual Meeting
in person or by proxy.
YOUR DIRECTORS RECOMMEND A VOTE FOR THE AMENDMENT OF THE NON-EMPLOYEE
DIRECTORS STOCK OPTION PLAN UNDER PROPOSAL NO. 3.
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EQUITY COMPENSATION PLAN INFORMATION
The following table summarizes options, warrants and securities available
for issuance under the Company's equity compensation plans as of July 31, 2002
NUMBER OF SECURITIES
REMAINING AVAILABLE
NUMBER OF SECURITIES FOR ISSUANCE UNDER
TO BE ISSUED UPON WEIGHTED-AVERAGE EQUITY COMPENSATION
EXERCISE OF EXERCISE PRICE OF PLANS (EXCLUDING
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, SECURITIES REFLECTED
WARRANTS AND RIGHTS WARRANTS AND RIGHTS IN COLUMN (a))
PLAN CATEGORY (a) (b) (c)
------------------------------ --------------------------- --------------------------- ----------------------------
Equity compensation plans 2,196,000 $4.42 3,428,990 (2)
approved by security holders
(1)
Equity compensation plans not 25,000 $4.36 --
approved by security holders
(3)
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Total 2,221,000
(1) Includes the 1997 Stock Option Award Plan, the 1988 Stock Option Award
Plan, the Non-Employee Directors Stock Option Plan, and the Zila, Inc.
Employee Stock Purchase Plan.
(2) Includes 1,974,990 shares issuable under the Zila, Inc. Employee Stock
Purchase Plan.
(3) Includes warrants issued to financial advisors in March and December of
2000.
In March 2000, we issued a warrant to purchase 10,000 shares of our common
stock to a financial advisor. The warrant was issued pursuant to the terms of an
engagement agreement, and the exercise price is $4.906 per share. In December
2000, we issued a warrant to purchase 15,000 shares of our common stock to a
financial advisor. The warrant was issued pursuant to the terms of a consulting
agreement and 7,500 of the shares underlying the warrant have an exercise price
of $4.00 per share and 7,500 of the shares have an exercise price of $5.00 per
share.
REPORT OF THE AUDIT COMMITTEE
The Committee is responsible for the oversight of the Company's financial
reporting process on behalf of the Board of Directors, including the Company's
internal controls, the quality of its financial reporting, and the independence
and performance of the Company's independent auditors. The Board of Directors
has adopted a written charter for the Audit Committee.
Management has the primary responsibility for the financial statements and
the reporting process including the systems of internal controls. The
independent auditors audit the annual financial statements prepared by
management, express an opinion as to whether those financial statements fairly
present the consolidated financial position, results of operations and cash
flows of the Company and its subsidiaries in conformity with accounting
principles generally accepted in the United States of America, and discuss with
us any issues they believe should be raised with us.
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The Committee meets with management periodically to consider the adequacy
of the Company's internal controls and the objectivity of it financial
reporting. The Committee discusses these matters with the Company's independent
auditors. The Committee regularly meets privately with the independent auditors.
The Board of Directors has determined that none of the Directors serving on
the Committee has a relationship to the Company that may interfere with their
independence from the Company and its management. As a result, each Director who
serves on the Committee is "independent" as required by NASDAQ listing
standards.
This year, the Committee reviewed and discussed the Company's financial
statements with management and Deloitte & Touche, LLP ("Deloitte & Touche"), the
Company's independent auditors. Management has represented to the Committee that
the financial statements were prepared in accordance with accounting principles
generally accepted in the United States of America.
The Committee has considered the non-audit services provided by Deloitte &
Touche during fiscal 2002 and determined that the provision of these services
does not impact the firm's independence from the Company.
The Committee has received from and discussed with Deloitte & Touche the
written disclosure and the letter required by Independence Standards Board
Standard No. 1 (Independence Discussions with Audit Committees). These items
relate to that firm's independence from the Company. The Committee has discussed
with Deloitte & Touche their independence. We also discussed with Deloitte &
Touche any matters required to be discussed by Statement on Auditing Standards
No. 61 (Communication with Audit Committees).
Based on these reviews and discussions, the Committee recommends to the
Board of Directors that the Company's audited financial statements be included
in the Company's Annual Report on Form 10-K for the fiscal year ended July 31,
2002.
AUDIT COMMITTEE
Christopher D. Johnson, Chairman
H. Richard Grisham
Carl Schroeder
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BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
Information regarding the names, ages, positions with us, and business
experience of each of the directors and nominees is set forth in the table
below. Each director has served continuously with us since his first election as
indicated below.
DIRECTOR
NAME AGE POSITION(S) SINCE
---- --- ----------- -----
Douglas D. Burkett, Ph.D. 39 Chairman of the Board, 2002
President and Chief Executive
Officer
Michael S. Lesser (3) 60 Director 1995
Christopher D. Johnson (2) 50 Director 1999
Kevin J. Tourek (3) 44 Director 1999
S. Timothy Rose, D.D.S. 60 Director Nominee
John Edward Porter 67 Director Nominee
Morris C. Aaron 38 Director Nominee
Joseph Hines(1) 74 Director (1) 1983
Carl A. Schroeder (2) (3) 73 Director 1984
Curtis M. Rocca III 40 Director 1997
H. Richard Grisham (2) 57 Director 2001
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(1) Previously President and Chief Executive Officer until June 6, 2002 and
Chairman of the Board until September 26, 2002
(2) Member of the Audit Committee
(3) Member of the Compensation Committee
The Board has nominated the following individuals to serve on our Board of
Directors for the following year:
Douglas D. Burkett, Ph.D.
Michael S. Lesser
Christopher D. Johnson
Kevin J. Tourek
S. Timothy Rose, D.D.S.
John Edward Porter
Morris C. Aaron
-10-
DOUGLAS D. BURKETT, Dr. Burkett has served as our President and Chief Executive Officer
PH.D. since June 2002 and Chairman as of September 2002. From May to June
2002 he was Vice President and General Manager-Pharmaceutical and
Business Development. From September 2000 to May 2002 he was Vice
President and General Manager-Zila Technical Operations. From August
1995 to September 2000 he held a variety of positions with us. These
positions included serving as Vice President of our Innovative Swab
Technologies subsidiary from February 2001 to June 2002; as Vice
President and General Manager-BioTech from August 1997 to September
2000; as Director of Research, Development and Manufacturing from
August 1996 to August 1997; and as Manager-Research and Development
from August 1995 to August 1996. At various points during this tenure
with us he has had responsibility for the development of the
manufacturing facility and the refining and production of Zila
Tolonium Chloride, the active ingredient in Zila's OraTest(R)oral
cancer detection product. The U.S. Patent Office granted Dr. Burkett
three patents (which were assigned to us) relating to the process of
manufacturing a pharmaceutical grade of Tolonium Chloride. Prior to
joining Zila, Dr. Burkett was a research associate from May 1994 to
August 1995 with the Cancer Research Institute at Arizona State
University where he collaborated with the National Cancer Institute in
developing efficient techniques to prepare supplies of new cancer
treatment drugs for clinical trials. Dr. Burkett received a B.S. in
Chemistry from Missouri Western State College in 1987 and a Ph.D. in
Organic Chemistry from Arizona State University in 1994.
MICHAEL S. LESSER Mr. Lesser is the president of Dental Concepts LLC. From 1994 to
January 1999, Mr. Lesser was president of T.V. Direct, Inc. Mr. Lesser
also was the founder of Lesser & Roffe Company, a business development
consulting company. Prior to founding Lesser & Roffe Company, Mr.
Lesser served as President of Ogilvy & Mather Co., Inc. from 1989 to
1990, as Chairman and Chief Executive Officer of Lowe Marschalk Co.,
Inc. (a subsidiary of Interpublic) from 1980 to 1989, and as Executive
Vice President and General Manager of Norcliff Thayer, Inc. (a
subsidiary of Revlon) from 1973 to 1979.
CHRISTOPHER D. JOHNSON Since 1995, Mr. Johnson has been a corporate finance partner with
Squire, Sanders & Dempsey, LLP, a law firm with over 750 attorneys and
offices in ten major U.S. cities, eight European capitals, Beijing,
Taipei and Hong Kong. Mr. Johnson has served on the firm's five-member
Management Committee since 1997 to 2001. From 1994 to 1995, he was a
partner with the firm of Meyer, Hendricks, Victor, Osborn & Maledon in
Phoenix, Arizona, and before that he was a partner with the firm of
Streich Lang also in Phoenix, Arizona. Mr. Johnson received a B.A.
from Princeton University and a J.D. from the University of Virginia.
During fiscal 2002 Mr. Johnson's firm performed limited legal services
for us.
Kevin J. Tourek Mr. Tourek is Senior Vice President of Legal and Human Resources for
National Airlines, Inc., based in Las Vegas, Nevada. National Airlines
filed for bankruptcy protection under Chapter 11 in December 2000. It
is currently operating under such protection. From 1987 to August
1998, Mr. Tourek was a partner with the law firm of Streich Lang in
Phoenix, Arizona where his
-11-
practice focused mainly on corporate, securities and finance matters.
Mr. Tourek received his B.A. from Michigan State University and a J.D.
from the Ohio State University College of Law.
S. TIMOTHY ROSE, D.D.S. Dr. Rose is the immediate past president of the American Dental
(NOMINEE) Association ("ADA"). He served as president of the ADA from 1998 to
1999. During his tenure with the ADA, Dr. Rose launched the ADA's Oral
Cancer Awareness campaign. Since 1999, he has served as the USA
National Secretary for the World Dental Federation - FDI. Dr. Rose has
had several articles published and has been actively involved in
various dental professional organizations on the local, state,
national and international levels. Since 1972 Dr. Rose has been a
partner in Valley Periodontics, S. C. based in Appleton, Wisconsin.
Dr. Rose received his B. A. from Ohio State University, a D.D.S. from
Ohio State University College of Dentistry, a M.S. from Ohio State
University Graduate School and a Professional Post-graduate
Certificate from Ohio State University Department of Periodontology
College of Dentistry.
JOHN EDWARD PORTER John Edward Porter is a partner in Hogan & Hartson's Washington, D.C.
(NOMINEE) office where his practice concentrates on health law and education
matters, including administrative and regulatory, international,
legislative strategy, and education and health policy. Prior to
joining Hogan & Hartson, Mr. Porter served 21 years as Congressman
from Illinois' 10th District. In Congress he served on the
Appropriations Committee, and as Chairman of the Subcommittee on
Labor, Health and Human Services and Education; as Vice-Chairman of
the Subcommittee on Foreign Operations; and as Vice-Chairman of the
Subcommittee on Military Construction. Mr. Porter was founder and
co-chairman of the Congressional Human Rights Caucus. He sponsored the
legislation creating Radio Free Asia. He served as chairman of the
Global Legislators Organized for a Balanced Environment (GLOBE USA).
Mr. Porter is a member of several boards, including the Rand
Corporation, The Brookings Institution, PBS, Research! America, the
Foundation for the National Institutes of Health, the Kemper Insurance
Companies, and the Population Resource Center in Princeton, N.J. Mr.
Porter is currently also chairing a committee of the Institute of
Medicine, National Academy of Sciences, on the future roles of
academic health centers. The committee report is scheduled to be
completed by March 2003.
MORRIS C. AARON Mr. Aaron is President and founder of MCA Financial Group, a business
(NOMINEE) advisory and corporate restructuring firm specializing in turnaround
management, interim management and corporate finance consulting. Prior
to founding MCA Financial Group in October 2000, Mr. Aaron was the
Chief Financial Officer and Treasurer for The Network Connection, Inc.
("TNCI"), a provider of broadband communications systems from May 1999
to December 2000. He was also a board member of TNCI from May 1999
until January 2000. Subsequent to Mr. Aaron's departure, TNCI filed
for bankruptcy protection under Chapter 11 in March, 2001. Mr. Aaron
was the Chief Financial Officer and Treasurer for Global Technologies,
Inc. from September 1998 until December 1999. Global Technologies
managed and commercialized emerging growth companies primarily in the
technology and telecommunications sectors and acquired TNCI in May
1999. From January 1996 to September 1998, Mr. Aaron served as Chief
Financial Officer and
-12-
Treasurer of Employee Solutions, Inc. Prior to that, Mr. Aaron was in
the corporate restructuring and corporate finance practice with Arthur
Andersen. Mr. Aaron has a Bachelors of Science in Accounting from the
Pennsylvania State University and an MBA in Management and Finance
from Columbia University. Mr. Aaron is a Certified Public Accountant
in New York State and is also a Certified Turnaround Professional by
the Turnaround Management Association. Mr. Aaron has participated in
not-for-profit boards, has been a lecturer at the Wharton School and
the Pennsylvania State University on business turnarounds, and held an
adjunct faculty position in Arizona State University's Graduate School
of Business teaching a course on Business Turnarounds.
***********************************************************************
JOSEPH HINES Mr. Hines served as our President and Chief Executive Officer from
(FORMER OFFICER) 1983 until June 2002 and as our Chairman from 1983 until September
2002. From 1976 until 1983, Mr. Hines owned and operated Desert Valley
Companies, Inc., a management consulting firm headquartered in
Phoenix, Arizona. From 1966 until 1976, Mr. Hines served as Chief
Executive Officer of several subsidiaries of Dart Industries, formerly
Rexall Drug and Chemical Company. In December 2001, we and Mr. Hines
reached a settlement with the SEC relating to certain public
statements made by us in January 1999 with respect to the prospects
for approval by the FDA of the OraTest(R) Product. In order to resolve
the matter, and without admitting or denying the Commission's
findings, we and Mr. Hines consented to the entry of an Order
Instituting Public Proceedings pursuant to Section 21C of the Act and
the issuance of a Cease-and-Desist Order prohibiting future violations
of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
thereunder.
CARL A. SCHROEDER Mr. Schroeder is retired. From September 1991 to August 1996, Mr.
Schroeder was the President of Dixon Capital Corp. Between 1982 and
September 1991, Mr. Schroeder was a private business consultant. Mr.
Schroeder was also a principal in certain mining, drilling and farming
operations from 1987 to 1992. From 1977 to 1982, he served as Chief
Financial Officer with a high technology division of the MEAD
Corporation. Mr. Schroeder received an engineering degree from MIT and
an MBA degree from Harvard Business School.
CURTIS M. ROCCA III Mr. Rocca is the Chief Executive Officer for Douglas, Curtis & Allyn
LLC, a business advisory firm. From March 1998 to May 2001 Mr. Rocca
was the Chief Executive Officer and Director of Dental Partners, Inc.,
a privately held dental practice consulting and management company.
Mr. Rocca was President of the Zila Professional Products Group,
having held this position following Zila's acquisition of Bio-Dental
Technologies Corporation in January 1997. Prior to the firm's
acquisition by Zila, Mr. Rocca served as President, CEO and Chairman
of Bio-Dental Technologies Corporation. Mr. Rocca holds a B.A. in
Economics from the University of California at Davis, where he
graduated with honors. Mr. Rocca currently serves as a director of
Schick Technologies, Inc., located in Long Island City, New York.
-13-
H. RICHARD GRISHAM Mr. Grisham is retired. From January 1999 until his retirement in
December 1999, Mr. Grisham was Executive Vice President and Managing
Director - Health Care for Johnson Research and Capital. From January
1997 to January 1999, he was the Chief Operating Officer and Vice
President - Commercial Business for United Healthcare of the Midwest -
HMO, one of the primary operating businesses of United Health Group.
From June 1995 to June 1996, he was the President and Chief Operating
Officer of Unity Health System, a health care system comprised of
several acute care hospitals in St. Louis, Missouri. From September
1981 to May 1995, Mr. Grisham was the President and Chief Executive
Officer of St. Anthony's Medical Center, an acute care facility in St.
Louis. Mr. Grisham received a B.S. in Pharmacy from the University of
Oklahoma College of Pharmacy and a M.H.A. (Masters in Health
Administration) from the Washington University School of Medicine.
EXECUTIVE OFFICERS
Information regarding the names, ages, positions with the Company, and
business experience of the Company's Executive Officers is set forth
below.
BRADLEY C. ANDERSON Mr. Anderson, age 41, joined us as Vice President and Treasurer in
November 1996 and was named Chief Financial Officer in January 1998
and Secretary in October 2002. Prior to joining the Company, from 1985
to 1996, Mr. Anderson was employed by Deloitte & Touche LLP, most
recently as an Audit Senior Manager, in which capacity Mr. Anderson
provided auditing, planning, and other assistance and consulting to
numerous privately and publicly held companies, including Zila. Mr.
Anderson received his B.S. in Accountancy from Brigham Young
University. Mr. Anderson is a Certified Public Accountant.
JANICE L. BACKUS Ms. Backus, age 53, retired as Secretary and Vice President effective
(FORMER OFFICER) October 11, 2002. She served as our Secretary since April 1989 and in
1993 was named a Vice President of the Company. From 1983 until April
1989, Ms. Backus served as Assistant Secretary of the Company. Ms.
Backus has also served as the Assistant to the President since 1983.
Prior to joining the Company, Ms. Backus held administrative and
secretarial positions with the American Heart Association, Arizona
Division, BX International and Century Capital Corporation.
ABOUT THE BOARD AND ITS COMMITTEES
THE BOARD The Company is governed by a Board of Directors and various
committees which meet throughout the year. During the fiscal year
ended July 31, 2002, our Board of Directors met nine times. All
other actions taken by the Board of Directors during the fiscal
year ended July 31, 2002 were accomplished by means of unanimous
written consent. During the period in which he served as
director, each of the directors attended 75% or more of the
meetings of the Board of Directors and of the meetings held by
committees of the Board on which he served.
-14-
BOARD The Board has two principal committees, the Compensation
COMMITTEES Committee and the Audit Committee. The function of each of these
committees is described below, along with the current membership
and number of meetings held during the fiscal year ended July 31,
2002. The Company does not maintain a standing nominating
committee or other committee performing similar functions.
Compensation The Compensation Committee of the Board of Directors, which met
Committee three times during the fiscal year ended July 31, 2002,
administers the Company's Stock Option Award Plan, reviews all
aspects of compensation of the Company's officers and makes
recommendations on such matters to the full Board of Directors.
During the fiscal year ended July 31, 2002, there were three
members of the Compensation Committee, Michael S. Lesser, Kevin
J. Tourek and Carl A. Schroeder.
AUDIT The Audit Committee, which met five times during the fiscal year
COMMITTEE ended July 31, 2002, makes recommendations to the Board
concerning the selection of outside auditors, reviews the
Company's financial statements and considers such other matters
in relation to the internal and external audit of the financial
affairs of the Company as may be necessary or appropriate in
order to facilitate accurate and timely financial reporting.
During the fiscal year ended July 31, 2002, there were three
members of the Audit Committee, Carl A. Schroeder, Christopher D.
Johnson and H. Richard Grisham.
DIRECTOR In September 2002, the Company engaged CBC to conduct an analysis
COMPENSATION of the compensation of the non-employee directors in relation to
the Company's peer group of publicly held companies and to
provide recommendations regarding the level and composition of
the Company's compensation package for its non-employee, or
independent, directors.
CBC issued a report to the Board that analyzed the level of
director compensation in relation to a peer group of companies
similar to the Company in terms of industry and revenue size. The
peer group included national survey data on pharmaceutical and
medical product companies and companies, regardless of industry,
in the Company's revenue range.
The report also analyzed the cash and non-cash components of
director compensation and made recommendations to the Board of
Directors. Based upon these recommendations, the Board of
Directors adopted a new compensation plan for its non-employee
directors.
Effective for the current fiscal year, non-employee members of
the Company's Board of Directors receive compensation in the
amount of $10,000 per year and $2,000 per meeting of the Board
that they attend in person and $1,000 for each meeting that they
attend by telephone. Directors receive $1,000 per meeting for any
committee meeting that they attend. Additionally, the director
serving as committee chair of the Audit Committee receives an
annual fee of $5,000 and the director serving as chair of the
Compensation Committee receives an annual fee of $2,500.
Previously, during the fiscal year ended July 31, 2002
non-employee members of the Company's Board of Directors received
compensation in the amount of $1,500 per meeting of the Board of
Directors attended by such Director in person, and $500 per
meeting of the Board of Directors attended by such Director by
telephone. Directors received $750 per meeting of any of the
Committees of the Board that they attended in person and $500 per
meeting that
-15-
they attended by telephone. In 1989, the Board of Directors
adopted and the stockholders approved the Directors Plan. The
Board of Directors has approved an amendment to the Director's
Plan, subject to stockholder approval. Under the terms of the
Directors Plan, as proposed to be amended, immediately
exercisable options to purchase 20,000 shares of Common Stock are
granted to each non-employee member of the Board of Directors
upon election to the Board of Directors and annually on the third
trading day following the day the Company publicly announces its
year-end financial results for the immediately preceding fiscal
year; provided, however, that options may not be granted to any
non-employee director who, during the fiscal year immediately
preceding the grant date, attended less than 75% of the Board
meetings and committee meetings (if he is a member of such
committee) held while he was a member of the Board of Directors.
As proposed to be amended, the options will vest quarterly over a
one-year period. The per share price at which the options may be
exercised is the average of the closing bid and asked prices of
the Common Stock on the date of grant. The term of each option
granted under the Directors Plan is five years from the date of
grant. The Board may from time to time amend the Directors Plan
in whole or in part in such respects as the Board may deem
advisable, subject to approval by the shareholders, or may
terminate the Directors Plan.
On August 9, 2002 and September 21, 2001, each non-employee
director serving on the Board was granted an option to purchase
5,000 and 2,500 shares, respectively, of Common Stock at a per
share exercise price of $1.12 and $1.865, respectively. As of
September 26, 2002, options to purchase 92,089 shares of Common
Stock granted under the Directors Plan have been exercised.
-16-
EXECUTIVE COMPENSATION
The table below sets forth annual and long-term compensation for services
in all capacities to us for the fiscal years ended July 31, 2002, 2001, and 2000
of the persons who were, at July 31, 2002: (i) the Chief Executive Officer and
(ii) our other executive officers (the "Named Officers") whose total annual
salary and bonus exceeded $100,000.
Annual Compensation Long-Term All Other
------------------- Compensation Compensation(1)
------------ ------------
Securities
Name and Principal Fiscal Other Annual Underlying
Position Year Salary ($) Bonus ($) Compensation(3) Options(2)
- -------- ---- ---------- --------- ------------ -------
Douglas D. Burkett, 2002 $180,506 $54,455 - 215,000 -
Ph.D.(4)
President, Chairman,
Chief Executive Officer
and Director
Bradley C. Anderson 2002 $195,060 $19,622 - 25,000 $7,932
Vice President and Chief 2001 184,080 18,876 - 25,000 7,001
Financial Officer 2000 163,857 10,725 - 30,000 5,582
Joseph Hines(5) 2002 $276,552 $20,625 - 25,000 $9,768
Director, Former 2001 262,000 26,681 - 40,000 8,224
President, Chief 2000 231,858 10,000 - 90,000 6,760
Executive Officer and
Chairman of the Board
Janice L. Backus(6) 2002 $156,088 $15,274 - 25,000 $6,360
Former Vice President and 2001 147,096 14,694 - 25,000 5,031
Secretary 2000 134,231 8,700 - 30,000 5,339
- ---------------------
(1) Represents Company 401(k) plan-matching contributions.
(2) The exercise price of all stock options granted were at least equal to the
fair market values of the Company's Common Stock on the date of grant.
(3) If no amount is indicated, the amount of perquisites and other personal
benefits, securities or property given to each named executive officer
valued on the basis of aggregate incremental cost to the Company, was less
than the lower of $50,000 or 10% of the total of annual salary and bonus
for that executive officer during each of those years.
(4) Dr. Burkett was appointed President and Chief Executive Officer of the
Company on June 6, 2002 and Chairman on September 26, 2002. Dr. Burkett was
not an Executive Officer during fiscal years ended 2001 or 2000 and
accordingly compensation information is provided only for the full fiscal
year ended July 31, 2002.
(5) Mr. Hines resigned as President and Chief Executive Officer on June 6, 2002
and as Chairman on September 26, 2002. We entered into a severance
agreement with Mr. Hines effective October 11, 2002, further described in
"Employment Contracts and Severance Agreements."
(6) Ms. Backus resigned as Vice President and Secretary effective October 11,
2002. We entered into a severance agreement with Ms. Backus effective
October 11, 2002, further described in "Employment Contracts and Severance
Agreements."
-17-
STOCK OPTION GRANTS
The following Named Officers were granted stock options under the Company's
Stock Option Award Plan during the fiscal year ended July 31, 2002.
OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants
-----------------
% of Total
Number of Options Potential Realizable Value
Securities Granted to at Assumed Annual Rates
Underlying Employees Exercise of Stock Price
Option in Price Expiration Appreciation for
Name Granted(1)(#) Fiscal Year (per share)(2) Date Option Term(3)
- ---- ------------- ----------- -------------- ---- --------------
5% 10%
-- ---
Douglas D. Burkett, Ph.D. 15,000 $2.37 12/14/2011 $22,357 $ 56,658
200,000 41.9% $0.76 7/24/2012 $95,592 $242,249
Joseph Hines 35,000 6.8% $2.37 12/14/2011 $52,167 $132,201
Bradley C. Anderson 25,000 4.9% $2.37 12/14/2011 $37,262 $94,429
Janice L. Backus 25,000 4.9% $2.37 12/14/2011 $37,262 $94,429
- ------------------------
(1) All options granted, except for the 200,000 options granted to Dr. Burkett,
vest annually over a three-year period in equal one-third increments and
vesting commences on the first anniversary date following the date of
grant. Dr. Burkett's 200,000 options vest one-third upon grant and the
balance in two equal installments on the first and second anniversaries of
the date of grant. All of the above options were granted on December 14,
2001, except for Dr. Burkett's 200,000 stock options, which were granted
effective July 24, 2002.
(2) All options were granted at the fair market value (the mean of the final
closing bid and asked prices of the Common Stock on the NASDAQ) on the date
of grant. The exercise price and tax withholding obligations related to
exercise may be paid by delivery of already owned shares or by offset of
the underlying shares, subject to certain conditions.
(3) The potential realizable value is calculated based on the ten-year term of
the option at the time of its grant. It is calculated by assuming that the
stock price on the date of grant appreciates at the indicated annual rate,
compounded annually over the term of the option. These numbers are
calculated based upon rules promulgated by the SEC and do not represent the
Company's estimated or projection of the future value of the Common Stock.
Potential gains are reported net of the option exercise price, but before
taxes associated with the exercise. Actual gains, if any, on stock option
exercises are dependent on the future performance of the Common Stock and
overall stock market conditions, as well as the option holder's continued
employment. The amounts reflected in the table may not necessarily be
achieved.
-18-
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
OPTION VALUE AS OF JULY 31, 2002
The following table sets forth information with respect to the exercise of
stock options pursuant to the Company's Stock Option Award Plan during the
fiscal year ended July 31, 2002 by the Named Officers.
Number of Securities Underlying Value of Unexercised
Unexercised In-the-Money
Options at Options at
Fiscal Year-End (#) Fiscal Year End ($)
------------------- -------------------
Shares
Acquired on Value
Name Exercise(#) Realized ($)(1) Exercisable(2) Unexercisable Exercisable(3) Unexercisable(3)
- ---- ----------- --------------- -------------- ------------- -------------- ----------------
Douglas D. - - 140,553 179,999 $4,000 $8,000
Burkett, Ph.D.
Bradley C. - - 233,334 51,666 -0- -0-
Anderson
Joseph Hines - - 235,603 91,666 -0- -0-
Janice L. - - 169,186 51,666 -0- -0-
Backus
- --------------------
(1) Represents the market value of the underlying securities on the date of
exercise, minus the exercise price of the options.
(2) Options are considered to be exercisable if they could be exercised on or
before July 31, 2002.
(3) Represents the difference between the bid and ask closing prices ($0.82) of
the Company's Common Stock on July 31, 2002 and the exercise price of the
options.
COMPENSATION OF DIRECTORS
In September 2002, the Company engaged CBC to conduct an analysis of the
compensation of the non-employee directors in relation to the Company's peer
group of publicly held companies and to provide recommendations regarding the
level and composition of the Company's compensation package for its
non-employee, or independent, directors.
CBC issued a report to the Board that analyzed the level of director
compensation in relation to a peer group of companies similar to the Company in
terms of industry and revenue size. The peer group included national survey data
on pharmaceutical and medical product companies and companies, regardless of
industry, in the Company's revenue range.
-19-
The report also analyzed the cash and non-cash components of director
compensation and made recommendations to the Board of Directors. Based upon
these recommendations, the Board of Directors adopted a new compensation plan
for its non-employee directors.
Effective for the current fiscal year, non-employee members of the
Company's Board of Directors receive compensation in the amount of $10,000 per
year and $2,000 per meeting of the Board that they attend in person and $1,000
for each meeting that they attend by telephone. Directors receive $1,000 per
meeting for any committee meeting that they attend. Additionally, the director
serving as committee chair of the Audit Committee receives an annual fee of
$5,000 and the director serving as chair of the Compensation Committee receives
an annual fee of $2,500. Previously, during the fiscal year ended July 31, 2002
non-employee members of the Company's Board of Directors received compensation
in the amount of $1,500 per meeting of the Board of Directors attended by such
Director in person, and $500 per meeting of the Board of Directors attended by
such Director by telephone. Directors received $750 per meeting of any of the
Committees of the Board that they attended in person and $500 per meeting that
they attended by telephone. In 1989, the Board of Directors adopted and the
stockholders approved the Directors Plan. The Board of Directors has approved an
amendment to the Director's Plan, subject to stockholder approval. Under the
terms of the Directors Plan, as proposed to be amended, immediately exercisable
options to purchase 20,000 shares of Common Stock are granted to each
non-employee member of the Board of Directors upon election to the Board of
Directors and annually on the third trading day following the day the Company
publicly announces its year-end financial results for the immediately preceding
fiscal year; provided, however, that options may not be granted to any
non-employee director who, during the fiscal year immediately preceding the
grant date, attended less than 75% of the Board meetings and committee meetings
(if he is a member of such committee) held while he was a member of the Board of
Directors. As proposed to be amended, the options will vest quarterly over a
one-year period. The per share price at which the options may be exercised is
the average of the closing bid and asked prices of the Common Stock on the date
of grant. The term of each option granted under the Directors Plan is five years
from the date of grant. The Board may from time to time amend the Directors Plan
in whole or in part in such respects as the Board may deem advisable, subject to
approval by the shareholders, or may terminate the Directors Plan.
On August 9, 2002 and September 21, 2001, each non-employee director
serving on the Board was granted an option to purchase 5,000 and 2,500 shares,
respectively, of Common Stock at a per share exercise price of $1.12 and $1.865,
respectively. As of September 26, 2002, options to purchase 92,089 shares of
Common Stock granted under the Directors Plan have been exercised.
EXECUTIVE EMPLOYMENT CONTRACTS AND SEVERANCE AGREEMENTS
AND CHANGE-IN-CONTROL ARRANGEMENTS
During the first quarter of fiscal 2003, we entered into an employment
agreement with Douglas D. Burkett, Ph.D. pursuant to which Dr. Burkett is
employed as President and Chief Executive Officer of the Company. The agreement
is effective as of July 24, 2002 and terminates January 24, 2004, but may be
automatically renewed for successive six-month terms unless terminated by either
party upon thirty days notice. The agreement provides for an initial base salary
of $250,000, which is subject to periodic review by the Board or the
Compensation Committee to determine whether to increase such amount. We paid Dr.
Burkett a bonus of $35,000 in connection with the execution of the agreement. He
is also eligible for a performance bonus of up to 35% of his annual base salary
as determined by the Board or the Compensation Committee at the end of each
fiscal year. Dr. Burkett is eligible to participate in any applicable Company
bonus plan or program or stock option plan or program. We granted him options to
purchase 200,000 shares of stock on the effective date at an exercise price of
$.76 per share and will grant him options to purchase 100,000 shares of stock on
the first anniversary of the effective date at an exercise price equal to the
mean of the closing bid and ask prices of the common stock on such date. Such
options will vest one-third on the date of grant and one-third on each of the
first and second
-20-
anniversaries of the date of grant. In addition to his cash compensation, Dr.
Burkett will also receive an automobile allowance of $950 per month,
reimbursement of certain tax and estate planning expenses and other benefits,
including those generally provided to our other employees.
We entered into a Severance Agreement with Joseph Hines dated as of October
11, 2002 in connection with his earlier resignation as Chairman of the Board and
Chief Executive Officer and pursuant to which his employment with the Company
Terminated effective October 11, 2002. Under the Agreement, we will pay Mr.
Hines a severance payment of $177,375, payable on a semi-monthly basis through
July 31, 2003. We will also pay for Mr. Hines' COBRA payments and provide
funding for off-site office space for six months.
We entered into a Severance Agreement with Janice Backus dated as of
October 11, 2002 in connection with her resignation as an employee and officer
of the Company. Under the Agreement, we will pay Ms. Backus a severance payment
equal to her continued salary until December 31, 2003 ($170,172), payable on a
semi-monthly basis in accordance with our standard payroll practices. We will
also pay for Ms. Backus' COBRA benefits through December 31, 2003.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee of the Board of Directors consists of Carl A.
Schroeder, Michael S. Lesser and Kevin J. Tourek. No member of the compensation
committee is our employee. There are no compensation committee interlocks (i.e.,
no executive officer of ours serves as a member of the board of directors or the
compensation committee of another entity which has an executive officer serving
on our board of directors or the compensation committee).
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
WHAT IS OUR Decisions on compensation of the Company's executive officers
COMPENSATION are made by the Compensation Committee of the Board of Directors
PHILOSOPHY? (the "Committee"). Each member of the Committee is anon-employee
director. The Committee is responsible for setting and
administering the policies that govern both annual compensation
and stock ownership programs. The Committee follows the belief
that compensation should be based upon the following subjective
principles:
o Compensation programs should reflect and promote the
Company's values, and reward individuals for
contributions to the Company's success.
o Compensation should be related to the value created for
stockholders.
o Compensation programs should integrate the long- and
short-term strategies of the Company.
o Compensation programs should be designed to attract and
retain executives critical to the success of the
Company.
o Stock ownership by management and stock-based
compensation plans are beneficial in aligning the
interests of management and the stockholders in the
enhancement of stockholder value.
-21-
The Company applies a consistent philosophy to compensation for
its employees, including its senior management. This philosophy
is based on the belief that the achievements of the Company
result from the collective and coordinated efforts of all the
employees working toward common objectives. The Company aims to
achieve these objectives through teamwork and focus on its
customers and shareholders.
The Compensation Committee is responsible for setting the policy
and administering the Company's executive compensation policies
and programs. It also makes recommendations respecting
compensation for all executive officers and senior management,
including such matters as salaries, incentive plans, stock
ownership plans, benefits and overall compensation. In carrying
out its duties, the Committee has direct access to independent
compensation consultants and utilizes outside survey data as it
deems necessary. The Committee reports regularly to the Board of
Directors on its activities. Each member of the Committee is
independent as defined by the applicable Nasdaq listing
standards and, accordingly, each member is a non-employee
director.
Due to the level of compensation received by the officers of the
Company, the Committee has not yet deemed it necessary to adopt
a policy regarding the one million-dollar cap on deductibility
of certain executive compensation under Section 162(m) of the
Internal Revenue Code.
COMPENSATION The Company's compensation program consists of cash-based
VEHICLES compensation in the form of base salaries and incentive bonuses
and equity-based compensation in the form of stock option
grants. Each component is described below.
BASE SALARY Senior executive officers submit salary recommendations annually
to the Committee. The Committee compares base pay levels to a
competitive peer group based upon industry and size and revenues
within that peer group of companies with similar revenues
outside the industry group. If a position does not readily match
or is not found in the data, the Committee uses its judgment in
determining a fair competitive salary. Accordingly, there is
some variation above and below the competitive medium if, in the
judgment of management and the Committee, the value of the
individual's experience and skills justifies variation.
The Committee permits these variations in order to place more
emphasis on performance-related rewards to those individuals and
business units that produce strong results. In this way,
competitively superior pay goes to those who earn it. As a
result, the Company places the greatest retention value in its
strongest performers.
INCENTIVE The purpose of the Incentive Bonus Plan ("Bonus Plan") is to
BONUS PLAN reward eligible participants who have performed at consistently
high levels and whose performance contributed positively to
operations, increasing profitability over the prior year, and
achieving the Company's approved current year profit plan.
The Bonus Plan for the fiscal year ending July 31, 2001 (which
was paid in fiscal year 2002) was based on a combination of
achieving profit plan and sales budget goals, operating cost
targets, and personal objectives. Executives were eligible for
up to 33% of Base Salary. Up to 65% of the target bonus was
based on achieving sales, profit and operating cost budgets. The
remaining 35% of the target bonus was based on personal
performance. Each component of the criteria qualified
independently. Additionally, an "S-curve" was applied to the
operating cost budget, sales, and profit
-22-
achievement components. This meant that the payout on these
components could have been plus 25% or minus 20% versus target
depending on how actual achievement compares to plan. There was
no payout on the sales or profit component if actual results
fell below 80% of plan.
The Committee did not approve any bonuses, nor were any bonuses
paid, in fiscal year 2003 relative to the Company's performance
in fiscal year 2002.
The Company implemented a new incentive bonus plan for fiscal
year 2003 which is based on achieving EBITDA (earnings before
interest, taxes depreciation and amortization) revenue growth
and personal performance goals.
OPTIONS The Committee administers the Company's Stock Option Award Plan
(the "Award Plan"). The exercise price of options granted under
the Award Plan is never less than the fair market value of the
Company's common stock on the day of grant.
The Committee seeks the recommendation of senior management with
respect to options granted to the Chief Executive Officer and
senior management. During fiscal year 2002, the Committee
approved granting options representing 290,000 shares of Common
Stock under the Award Plan to corporate officers.
The Committee did not approve any option grants in fiscal year
2003 relative to the Company's performance in fiscal year 2002.
The Company implemented a new criteria for the granting of
options for fiscal year 2003 which is based on eligibility and
participation in the new incentive bonus plan.
CHIEF Dr. Burkett has served as our President and Chief Executive
EXECUTIVE Officer since June 2002. As Chief Executive Officer, Dr. Burkett
OFFICER receives a base salary as well as stock options under the Award
Plan and is eligible to participate in the Plan. The Company has
entered into an employment contract with Dr. Burkett effective
as of July 24, 2002 which terminates January 23, 2004, but may
be automatically renewed for successive six-month terms unless
terminated by either party upon thirty days notice. The
agreement provides for an initial base salary of $250,000, which
is subject to periodic review by the Board or the Compensation
Committee to determine whether to increase such amount. We paid
Dr. Burkett a bonus of $35,000 in connection with the execution
of the agreement. He is also eligible for a performance bonus of
up to 35% of his annual base salary as determined by the Board
or the Compensation Committee at the end of each fiscal year. We
granted him options to purchase 200,000 shares of stock on the
effective date at an exercise price of $.76 per share and will
grant him options to purchase 100,000 shares on the first
anniversary of the effective date at an exercise price equal to
the mean of the closing bid and ask prices of the common stock
on such date. Such options vest one-third on the date of grant
and one-third on each of the first and second anniversaries of
the date of grant. In addition to his cash compensation, Dr.
Burkett will also receive an automobile allowance of $950 per
month, reimbursement of certain tax and estate planning expenses
and other benefits, including those generally provided to our
other employees.
Compensation Committee
Michael S. Lesser, Chairman
Kevin J. Tourek
Carl Schroeder
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RELATED TRANSACTIONS
In fiscal 2002, we paid $194,829 to Douglas, Curtis and Allyn, LLC
("Douglas"), a limited liability company owned by a member of our Board of
Directors, Mr. Curtis Rocca. The payment was related to consulting work
performed in connection with the sale of the Zila Dental Supply businesses and
pursuant to an engagement letter, dated March 15, 2001, between Douglas and us.
In addition, Douglas was paid an advisory retainer of $60,000 during fiscal
2002. The arrangements were terminated in July 2002.
In fiscal 2002, we paid legal fees and expenses totaling $38,000 to Squire,
Sanders & Dempsey LLP, of which a member of our Board of Directors, Christopher
D. Johnson, is a partner.
As of July 31, 2002, Douglas D. Burkett, Ph.D., our current President,
Chief Executive Officer and Chairman, had $19,038 consisting of a loan and an
advance. The loan and the advance predated the enactment of the Sarbanes-Oxley
Act on July 30, 2002. Approximately $11,300 (all of which was in the form of an
advance) was repaid in August 2003. The remaining loan amount, which bears
interest at an annual rate of 6%, will be paid in full by January 31, 2003
through regular payroll deductions. There have been no changes to the terms of
the loan.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
The following table sets forth, as of September 30, 2002, the number and
percentage of outstanding shares of Common Stock beneficially owned by (a) each
person known by us to beneficially own more than 5% of such stock, (b) each
director of the Company, (c) each of the Named Officers, (d) each nominee for
Director, and (e) all our directors, executive officers and nominees as a group.
The address of each stockholder listed below is c/o Zila, Inc., 5227 North 7th
Street, Phoenix, Arizona 85014-2800.
NAME AND ADDRESS OF SHARES BENEFICIALLY PERCENT OF
BENEFICIAL OWNER OWNED COMMON STOCK
---------------- ----- ------------
Joseph Hines 1,262,355(1) 2.8%
Douglas D. Burkett, Ph.D. 150,553 (2) *
Janice L. Backus 280,067(3) *
Bradley C. Anderson 238,694(4) *
Carl Schroeder 37,500(5) *
Michael S. Lesser 26,000(5) *
Curtis M. Rocca III 64,0746) *
Christopher D. Johnson 15,000(7) *
Kevin J. Tourek 15,500(7) *
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NAME AND ADDRESS OF SHARES BENEFICIALLY PERCENT OF
BENEFICIAL OWNER OWNED COMMON STOCK
---------------- ----- ------------
H. Richard Grisham 130,000(8) *
John Edward Porter(9) 0
S. Timothy Rose, D.D.S.(9) 0
Morris C. Aaron(9) 0
All officers, directors and 2,219,743 4.9%
nominees as a group (13
persons)(10)
- -------------------
* Represents less than 1%.
(1) Includes 235,603 shares of Common Stock which are subject to unexercised
options that were exercisable on September 30, 2002 or within 60 days
thereafter.
(2) Includes 140,553 shares of Common Stock which are subject to unexercised
options that were exercisable on September 30, 2002 or within 60 days
thereafter.
(3) Includes 169,186 shares of Common Stock which are subject to unexercised
options that were exercisable on September 30, 2002 or within 60 days
thereafter.
(4) Includes 233,334 shares of Common Stock which are subject to unexercised
options that were exercisable on September 30, 2002 or within 60 days
thereafter.
(5) Includes 20,000 shares of Common Stock which are subject to unexercised
options that were exercisable on September 30, 2002 or within 60 days
thereafter.
(6) Includes 17,500 shares of Common Stock which are subject to unexercised
options that were exercisable on September 30, 2002 or within 60 days
thereafter.
(7) Includes 15,000 shares of Common Stock which are subject to unexercised
options that were exercisable on September 30, 2002 or within 60 days
thereafter.
(8) Includes 5,000 shares of Common Stock which are subject to unexercised
options that were exercisable on September 30, 2002 or within 60 days
thereafter.
(9) Director Nominee
(10) Includes the shares of Common Stock subject to the options described above.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange Act")
requires the Company's officers and directors and persons who beneficially own
more than 10% of a registered class of the Company's equity securities to file
reports of ownership and changes in ownership with the Securities and Exchange
Commission and the National Association of Securities Dealers Automated
Quotation System. Officers, directors and greater than 10% stockholders are
required by Exchange Act regulations to furnish us with copies of all Section
16(a) forms they file.
-25-
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons that no Forms were
required for such persons, we believe that during the fiscal year ended July 31,
2002 its officers, directors, and greater than 10% beneficial owners have
complied with all filing requirements applicable to them.
STOCK PRICE PERFORMANCE GRAPH
The graph below compares the cumulative total return of the Company's
Common Stock with the NASDAQ stock market index (U.S. companies) and the NASDAQ
pharmaceutical index from July 31, 1997 to July 31, 2002.
COMPARSION OF 5 YEAR CUMULATIVE TOTAL RETURN*
AMONG ZILA, INC., THE NASDAQ STOCK MARKET (U.S.) INDEX,
AND THE NASDAQ PHARMACEUTICAL INDEX
Cumulative Total Return
------------------------------------------------------------
7/97 7/98 7/99 7/00 7/01 7/02
ZILA, INC. 100.00 85.47 46.58 52.99 34.60 10.94
NASDAQ STOCK MARKET (U.S.) 100.00 117.68 168.18 239.52 128.56 84.94
NASDAQ PHARMACEUTICAL 100.00 100.27 156.57 297.80 248.18 159.83
PROPOSALS BY STOCKHOLDERS
Any Stockholder proposal that is intended to be presented at the Company's
2003 Annual Meeting of Stockholders must be received at the Company's principal
executive offices no later than August 19, 2003, if such proposal is to be
considered for inclusion in the Company's proxy statement and form of proxy
relating to such meeting.
OTHER BUSINESS
The Annual Meeting is being held for the purposes set forth in the Notice
that accompanies this Proxy Statement. The Board is not presently aware of any
business to be transacted at the Annual Meeting other than as set forth in the
Notice.
-26-
ANNUAL REPORT
The Company's Annual Report on Form 10-K and its Amendment No. 1 on Form
10-K/A with certified financial statements for the fiscal year ended July 31,
2002 accompanies this Notice and Proxy Statement and was mailed to all
shareholders of record on or about December 12, 2002.
By Order of the Board of Directors,
/s/ Douglas D. Burkett, Ph.D.
Douglas D. Burkett, Ph.D.
President, Chief Executive Officer and
Chairman
Phoenix, Arizona
-27-
APPENDIX A
----------
ZILA, INC.
NON-EMPLOYEE DIRECTORS STOCK OPTION PLAN
(AS AMENDED THROUGH SEPTEMBER 26, 2002)
1. PURPOSES OF THE PLAN. The purposes of this Plan are to enable the
Company to attract and retain the best available individuals to serve
as non-employee members of the Board, to reward such directors for
their contributions to the Company, and to maximize the identity of
interest between such directors and the Company's stockholders
generally.
2. DEFINITIONS. As used herein, the following definitions shall apply:
(a) "BOARD" shall mean the Board of Directors of the Company.
(b) "COMPANY" shall mean ZILA, INC., a Delaware corporation.
(c) "EXERCISE PRICE" shall mean, with respect to each Share
granted, the Fair Market Value on the date of grant.
(d) "FAIR MARKET VALUE" shall mean, with respect to the date a
given Option is granted or exercised, the value determined by the Board in
good faith using a generally accepted valuation method; provided, however,
that where there is a public market for the Stock, the Fair Market Value
per Share shall be the mean of the final bid and asked prices of the Stock
on the date of grant or exercise, as reported in The Wall Street Journal
(or, if not so reported, as otherwise reported by NASDAQ/National Market
System or NASDAQ) or, in the event the Stock is listed on a stock exchange,
the Fair Market Value per Share shall be the closing price of the Stock on
such exchange on the date of grant or exercise of the Option, as reported
in The Wall Street Journal.
(e) "OPTION" shall mean a right to purchase Stock, granted
pursuant to the Plan.
(f) "OPTIONED STOCK" shall mean the Stock subject to an Option.
(g) "OPTIONEE" shall mean a non-employee director of the Company
who has been granted an Option.
(h) "PLAN" shall mean this Zila, Inc. Non-Employee Directors
Stock Option Plan.
(i) "SHARE" shall mean a share of the Stock.
(j) "STOCK" shall mean the common stock of the Company described
in the Company's Certificate of Incorporation, as amended or restated from
time to time.
(k) "TRADING DAY" shall mean a day on which the Fair Market Value
of the Stock can be determined.
3. STOCK SUBJECT TO THE PLAN.
(a) Subject to increases and adjustments pursuant to Section 9
hereof, the number of Shares reserved and available for distribution under
the Plan shall be 700,000.
-1-
(b) If an Option should terminate, or be canceled, rescinded or
surrendered, the Optioned Stock subject to such Option shall not be
available for future grants under the Plan.
4. OPTION GRANTS. An Option to purchase 20,000 Shares shall be granted to
each non-employee director of the Board upon his or her election or appointment
to the Board of Directors. In addition, an Option to purchase 20,000 Shares
shall be granted annually to each non-employee director of the Board on the date
determined pursuant to Section 10 hereof; provided, however, that such Option
shall not be granted to any non-employee director of the Company who during the
fiscal year immediately preceding such grant date (or the period that he served
as a director of the Company, if less than the full fiscal year) attended fewer
than 75 percent of the aggregate of (i) the total number of the regularly
scheduled and special meetings of the Board and (ii) the total number of
meetings held by all committees of the Board on which he served; provided,
further, that no such Options shall be granted to any of the non-employee
directors of the Company in the event that, on such grant date, the number of
Shares remaining available for distribution under the Plan is less than the
product of the number of then current non-employee directors of the Company
multiplied by 20,000.
5. BOARD APPROVAL AND EFFECTIVE DATES. This Plan shall become effective
as of October 20, 1989, the date as of which the Board adopted the Plan. The
Plan shall be submitted as a proposal for stockholder approval at the Company's
1989 Annual Meeting of Stockholders, or any adjournment thereof. In the event
that such approval is not obtained, the Board may, but need not, terminate the
Plan. The Plan and all outstanding Options shall remain in effect until such
Options shall have been exercised, shall have expired or shall otherwise be
terminated.
6. TERM; EXERCISE; RIGHTS AS A STOCKHOLDER.
(a) The term of each Option shall be five years from the date of
grant thereof. Subject to Section 5, an Option shall be exercisable upon
vesting and may be exercised in whole or in part as to such vested portion
at any time or times during its term; provided, however, that an Option may
not be exercised for a fraction of a Share. Each Option shall vest as to
25% of the Shares as to which such Option may be exercised on the last day
of each fiscal quarter during which optionee is a director; provided,
however, that if the optionee is not a director for the full fiscal quarter
the 25% otherwise vesting will be pro rated accordingly. The Option shall
not vest unless such Optionee is still a director of the Company on such
vesting date.
(b) An Option shall be deemed to be exercised upon receipt by the
Company from the Optionee of written notice of such exercise. Such notice
shall be accompanied by full payment for the Shares subject to such
exercise.
(c) No person shall have any right or privilege as a stockholder
of the Company, whether to vote or to receive dividends or otherwise, by
reason of the grant of an Option, but shall obtain such right only when
Shares are actually issued to such person upon the exercise thereof.
7. PAYMENT. The Exercise Price shall be paid:
(a) In United States dollars in cash or by check payable to the
order of the Company; or
(b) At the election of the Optionee by delivery of Shares with an
aggregate Fair Market Value equal to the Exercise Price; or
(c) By any combination of (a) and (b) above.
-2-
The Board shall determine acceptable methods for tendering Stock as payment upon
exercise of an Option and may impose such limitations and prohibitions on the
use of Stock to exercise an Option as it deems appropriate.
8. TRANSFERABILITY OF OPTIONS. The Option may not be sold, pledged,
assigned, hypothecated, transferred, or disposed of in any manner other than by
will or by the laws of descent and distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee or by his guardian or legal
representative.
In the event of the Optionee's death, his Option shall be exercisable,
prior to the expiration of the Option, by the person or entity to whom his
accrued and vested rights pass by will or by the laws of descent and
distribution.
9. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER. If the
outstanding Stock of the Company shall at any time be changed or exchanged by
declaration of a stock dividend, split-up, combination of shares,
recapitalization, merger, consolidation, or other corporate reorganization in
which the Company is the surviving corporation, the number and kind of Shares
subject to the Plan or subject to any Options theretofore granted, and the
Options' prices, shall be appropriately and equitably adjusted.
In the event of a liquidation or dissolution of the Company, sale of all or
substantially all of its assets, or a merger, consolidation or other corporate
reorganization in which the Company is not the surviving corporation, or any
merger or other reorganization in which the Company is the surviving corporation
but the holders of its Stock receive securities of another corporation, any
outstanding Options hereunder shall be appropriately and equitably adjusted.
10. TIME OF GRANTING OPTIONS. The Option grant date for the annual grant
shall be the third Trading Day after the Company publicly announces its year-end
financial results for the immediately preceding fiscal year; provided, however,
that grants for the first year only under the Plan shall be effective as of the
date the Company's stockholders approve the Plan. The grant date for the grant
upon election or appointment shall be a reasonable period of time following such
election or appointment.
11. AMENDMENT AND TERMINATION OF THE PLAN. The Board may from time to time
amend the Plan in whole or part in such respects as the Board may deem advisable
or may terminate the Plan, PROVIDED, HOWEVER, that amendments to the Plan
relating to the amount, price, or timing of the option grants shall not be made
more than once in any six month period. Any amendment or termination of the Plan
shall not affect Options already granted and such Options shall remain in full
force and effect as if the Plan had not been amended or terminated. Any
amendment to the Plan shall be submitted as a proposal for approval of the
Company's stockholders if such approval of the amendment is necessary for the
Plan to comply or to continue to comply with the applicable exemption, if any
under Section 16(b) of the Securities Exchange Act of 1934, as amended, and the
rules and regulations promulgated thereunder.
12. CONDITIONS UPON ISSUANCE OF SHARES. The Plan, the grant, the exercise
of Options and the obligations of the Company shall be subject to all applicable
federal and state laws, rules and regulations, and to such approvals by any
regulatory or governmental agency as may be required. The Company shall not be
required to issue or deliver any certificate or certificates for Shares of Stock
prior to (i) the admission of such Shares to listing on any stock exchange on
which the Stock may then be listed, and (ii) the completion of any registration
or other qualification of such Shares under any state or federal law (including,
without limitation, the Securities Act of 1933, as amended, and the Securities
Exchange Act of 1934, as amended), or rulings or regulations of any government
body which the Company shall, in its sole discretion, determine to be necessary
or advisable.
-3-
As a condition to the exercise of an Option, the Company may require the
Optionee to represent and warrant at the time of any such exercise that the
Shares are being purchased only for investment and without any present intention
to sell or distribute such Shares if, in the opinion of counsel for the Company,
such a representation is necessary or advisable.
13. OPTION AGREEMENT. Options shall be evidenced by written option
agreements in accordance with the terms of the Plan. A form of such agreement is
attached hereto as Exhibit "B".
14. MISCELLANEOUS PROVISIONS.
(a) PLAN EXPENSE. Any expenses of administering this Plan shall
be borne by the Company.
(b) TAXES. The Company shall be entitled if necessary or
desirable to pay or withhold the amount of any tax attributable to the
delivery of Stock under the Plan after giving the person entitled to
receive such Stock notice as far in advance as practical, and the Company
may defer making delivery of such Stock if any such tax may be pending
unless and until indemnified to its satisfaction.
(c) CONSTRUCTION OF PLAN. The validity, construction,
interpretation, administration and effect of the Plan and of its rules and
regulations, and rights relating to the Plan, shall be determined by the
Board in accordance with the laws of the State of Delaware, and such
determinations shall be final and conclusive.
(d) GENDER. For purposes of this Plan, words used in the
masculine gender shall include the feminine and neuter, and the singular
shall include the plural and vice versa, as appropriate.
As approved by the Board of Directors as of September 26, 2002.
/s/ Douglas D. Burkett
- ------------------------------------
Douglas D. Burkett, Ph.D.
Chairman
ATTEST:
/s/ Bradley C. Anderson
- ------------------------------------
Bradley C. Anderson
Chief Financial Officer
-4-