ZILA Zila (MM)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

SCHEDULE 14A

 

Proxy Statement Pursuant to Section 14(a) of the Securities

Exchange Act of 1934 (Amendment No.     )

 

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ZILA, INC.

(Name of Registrant as Specified In Its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

 

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ZILA, INC.

 

5227 North 7 ^th Street

Phoenix, Arizona 85014-2800

 

TABLE OF CONTENTS

 

ZILA, INC.

 

5227 North 7 ^th Street

Phoenix, Arizona 85014-2800

 

ANNUAL SHAREHOLDERS MEETING

 

 

 

 

PLEASE VOTE -— YOUR VOTE IS IMPORTANT

 

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE ELECTION OF THE DIRECTOR NOMINEES.

 

 

 

 

 

PROPOSAL TWO:

 

AMENDMENT TO 1997 STOCK AWARD PLAN

 

We are seeking approval of an amendment to the 1997 Stock Award Plan, as amended and restated as of September 30, 2004 (the “1997 Plan”). The amendment will increase the number of shares available for grant from five million (5,000,000) to eight million (8,000,000). The affirmative vote of the holders of a majority of the shares present in person or represented by proxy and entitled to vote at the meeting will be required to approve the proposal. Abstentions will be counted toward the tabulation of votes cast on proposals presented to the shareholders and will have the same effect as negative votes. Broker non-votes will be counted towards a quorum, but will not be counted for any purpose in determining whether this matter has been approved.

 

As of September 30, 2007, without taking into account the proposed increase in the number of shares available under the 1997 Plan, options (net of canceled or expired options) covering an aggregate of 4,170,000 shares of the our common stock had been granted under the 1997 Plan, 648,000 shares (net of forfeited shares) of restricted stock had been granted under the 1997 Plan and a total of 144,000 shares of our common stock remained available for future grants under the 1997 Plan, subject to increase in certain circumstances.

 

If shareholders approve this amendment to the 1997 Plan, Section 4(a) of the 1997 Plan will be amended as follows:

 

(a) Limitation on Overall Number of Shares Subject to Awards. Subject to adjustment as provided in Section 11(c) hereof, the total number of shares of Stock reserved and available for delivery in connection with Awards under the Plan shall be (i) 8,000,000 plus (ii) any share of Stock available under the Directors Plan as of the Effective Date of this Plan. Any shares of Stock delivered under the Plan may consist, in whole or in part, of authorized and unissued shares or treasury shares.

 

Reasons for Proposed Amendment

 

The Board believes that we must continue to offer a competitive equity incentive program if we are to remain competitive in attracting, and successful in retaining, the most qualified candidates. We believe that the 1997 Plan is integral to our compensation strategies and programs. The Board expects that the 1997 Plan will be an important factor in attracting, motivating and retaining the high-caliber employees, essential to our future growth and success. In addition, we believe that the 1997 Plan benefits shareholders by continuing to align the interests of our employees with those of our shareholders through equity incentives. Grants are used as an alternative to cash bonuses to reward performance and allow the Board to incentivize and reward management while directing cash resources to operational goals and objectives. Failure to approve the amendment to the 1997 Plan will mean that we will be unable to continue to grant stock options and other equity awards to the extent that the Board believes that they will be necessary in order to further the long-term interests of ZILA and its shareholders.

 

Previous Board Amendments to the 1997 Plan

 

The Board, pursuant to its discretion provided in the 1997 Plan, has made two amendments to the 1997 Plan over the course of the last year. On November 9, 2006, the Board eliminated previous Section 8 of the 1997 Plan which provided for automatic grants of stock options to ZILA’s non-employee directors.

 

In addition, on November 6, 2007, the Board amended the 1997 Plan to expressly prohibit the repricing and/or replacement of outstanding stock options and/or stock appreciation rights granted pursuant to the 1997 Plan. The Board believes that such action was in the best interests of ZILA and its shareholders. In connection with this amendment a new Section 9(b) was added to the 1997 Plan as follows (with the remaining subsections of Section 9 renumbered accordingly):

 

(b) Award Repricing Prohibited. Except in connection with a Corporate Transaction (for purposes of this Section 9(b), including, without limitation, any stock dividend, stock split, extraordinary cash dividend, recapitalization, reorganization, merger, consolidation, split-up, spin-off, combination or exchange of shares), the terms of outstanding Awards may not be amended to (i) reduce the exercise price of such Awards or

(ii) cancel such Awards in exchange for cash or other Awards with an exercise price that is less than the exercise price of the original Awards without shareholder approval.

 

Attached at Appendix A hereto is the full text of the 1997 Plan, as amended (i) by the Board (as described directly above) and (ii) by the proposed amendment to be approved by shareholders at this Annual Meeting. The essential features of the 1997 Plan are summarized below. This summary is qualified in its entirety by reference to the complete text of the 1997 Plan attached as Appendix A.

 

Background and Purpose of the Plan

 

The terms of the 1997 Plan provide for grants of stock options, stock appreciation rights, restricted stock, stock units, bonus stock, dividend equivalents, other stock-related awards and performance awards that may be settled in cash, stock or other property.

 

We adopted the 1997 Plan to provide a means by which employees, directors and consultants of ZILA and those of our subsidiaries and other designated affiliates, which we refer to together as our affiliates, may be given an opportunity to purchase our common stock or receive awards of common stock, to assist in retaining the services of such persons, to secure and retain the services of persons capable of filling such positions and to provide incentives for such persons to contribute to our success and the success of our affiliates. All of our employees, directors and various consultants, including persons performing services for our affiliates, are eligible to participate in the 1997 Plan.

 

Shares Available for Awards

 

Under the 1997 Plan, taking into account the proposed 3 million share increase in the share reserve, the total number of shares of our common stock that may be subject to awards under the 1997 Plan is equal to 3,144,000 shares, plus (i) the number of shares with respect to which awards previously granted under the 1997 Plan terminate without the issuance of the shares or where the shares are forfeited or repurchased; and (ii) the number of shares that are surrendered or withheld in payment of any awards or any tax withholding requirements.

 

Limitations on Awards

 

The 1997 Plan imposes individual limitations on certain awards, in part to comply with Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”). However, the 1997 Plan does provide broad discretion to the Plan Administrator to grant awards thereunder. For instance, each fiscal year during any part of which the 1997 Plan is in effect, an eligible person may be granted an award under which up to 1 million shares of common stock could be received. In addition, the maximum amount that may be earned as a performance award (payable in cash) or other award (payable or settled in cash) for a performance period by any one participant can be up to $5 million. All limitations on the amount of stock to be issued under the 1997 Plan are subject to adjustment in certain circumstances.

 

Adjustments

 

In the event that a dividend or other distribution (whether in cash, shares of our common stock or other property), recapitalization, forward or reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase, share exchange, liquidation, dissolution or other similar corporate transaction or event affects our common stock so that an adjustment is determined to be appropriate by the administrator of the 1997 Plan, which is currently our Board of Directors, then the administrator is authorized to adjust (i) the shares available under the 1997 Plan, (ii) the limitations described in the preceding paragraph, and (iii) all outstanding awards, including adjustments to the number of shares and the exercise prices of options and other affected terms of awards. The administrator is authorized to adjust performance conditions and other terms of awards in response to unusual or nonrecurring events, or in response to changes in applicable laws, regulations or accounting principles.

Eligibility

 

The persons eligible to receive awards under the 1997 Plan consist of our officers, directors, employees and independent contractors and employees of our affiliates. However, incentive stock options may be granted under the 1997 Plan only to our employees, including officers, and those of our affiliates. An employee on leave of absence may be considered as still in our employ or in the employ of an affiliate for purposes of eligibility under the 1997 Plan.

 

Administration

 

Our Board administers the 1997 Plan unless it delegates administration to a committee of our Board. At this time, our Board has not delegated the authority to administer the 1997 Plan to the Compensation Committee of our Board. Together, our Board and any committee(s) delegated to administer the 1997 Plan are referred to as the “Plan Administrator.” Subject to the terms of the 1997 Plan, the Plan Administrator is authorized to select eligible persons to receive awards, determine the type and number of awards to be granted and the number of shares of our common stock to which awards will relate, specify times at which awards will be exercisable or may be settled (including performance conditions that may be required as a condition thereof), set other terms and conditions of awards, prescribe forms of award agreements, interpret and specify rules and regulations relating to the 1997 Plan, and make all other determinations that may be necessary or advisable for the administration of the 1997 Plan.

 

Stock Options and Stock Appreciation Rights

 

The Plan Administrator is authorized to grant stock options, including both incentive stock options, which we refer to as ISOs, and non-qualified stock options. In addition, the Plan Administrator is authorized to grant stock appreciation rights, which entitle the participant to receive upon exercise the appreciation in the fair market value of our common stock between the grant date and the exercise date of the stock appreciation right. The Plan Administrator determines the exercise price per share subject to an option and the grant price of a stock appreciation right. However, the per share exercise price of an ISO and the per share grant price of a stock appreciation right must not be less than the fair market value of a share of our common stock on the grant date. The Plan Administrator generally will fix the maximum term of each option or stock appreciation right, the times at which each stock option or stock appreciation right will be exercisable and provisions requiring forfeiture of unexercised stock options or stock appreciation rights at or following termination of employment or service, except that no ISO may have a term exceeding 10 years. Stock options may be exercised by payment of the exercise price in any form of legal consideration specified by the Plan Administrator, which may include cash, shares, other awards or other property having a fair market value equal to the exercise price. The Plan Administrator determines methods of exercise and settlement and other terms of the stock appreciation rights.

 

Restricted Stock and Stock Units

 

The Plan Administrator is authorized to grant restricted stock and stock units. A restricted stock grant is a grant of shares of our common stock, which is subject to restrictions on transferability, risk of forfeiture and other restrictions and which may be forfeited in the event of certain terminations of employment or service prior to the end of a restricted period specified by the Plan Administrator. A participant granted restricted stock generally has all of the rights of one of our shareholders, unless otherwise determined by the Plan Administrator. An award of a stock unit confers upon a participant the right to receive shares of our common stock, or cash or a combination of both at the end of a specified period, and may be subject to possible forfeiture of the award in the event of certain terminations of employment or service prior to the end of a specified period. Prior to settlement, an award of a stock unit carries no voting or dividend rights or other rights associated with share ownership, although dividend equivalents may be granted, as discussed below.

 

Dividend Equivalents

 

The Plan Administrator is authorized to grant dividend equivalents conferring on participants the right to receive, currently or on a deferred basis, cash, shares of our common stock, other awards or other property equal in value to dividends paid on a specific number of shares of our common stock or other periodic payments. Dividend

equivalents may be granted alone or in connection with another award, may be paid currently or be deemed to have been reinvested in additional shares of our common stock, awards or otherwise as specified by the Plan Administrator.

 

Bonus Stock and Awards in Lieu of Cash Obligations

 

The Plan Administrator is authorized to grant shares of our common stock as a bonus, free of restrictions for services performed for us, or to grant shares of our common stock or other awards in lieu of our obligations to pay cash under the 1997 Plan or other plans or compensatory arrangements, subject to such terms as the Plan Administrator may specify.

 

Other Stock-Based Awards

 

The Plan Administrator is authorized to grant awards under the 1997 Plan that are denominated or payable in, valued by reference to, or otherwise based on or related to shares of our common stock. Such awards might include, without limitation, convertible or exchangeable debt securities, other rights convertible or exchangeable into shares of our common stock, purchase rights for shares of our common stock, awards with value and payment contingent upon our performance or any other factors designated by the Plan Administrator, and awards valued by reference to the book value of shares of our common stock or the value of securities of or the performance of specified subsidiaries or business units. The Plan Administrator determines the terms and conditions of such awards.

 

Performance Awards

 

The right of a participant to exercise or receive a grant or settlement of an award, and the timing thereof, may be subject to such performance conditions, including subjective individual goals, as may be specified by the Plan Administrator. In addition, the 1997 Plan authorizes specific performance awards, which represent a conditional right to receive cash, shares of our common stock or other awards upon achievement of certain pre-established performance goals and subjective individual goals during a specified fiscal year. Performance awards granted to persons whom the Plan Administrator expects will, for the year in which a deduction arises, be “covered employees” (as defined below) will, if and to the extent intended by the Plan Administrator, be subject to provisions that should qualify such awards as “performance-based” compensation not subject to the limitation on tax deductibility by us under Code Section 162(m). For purposes of Section 162(m), the term “covered employee” means our principal executive officer and our three highest compensated officers as of the end of a taxable year as disclosed in our filings with the SEC. If and to the extent required under Section 162(m), any power or authority relating to a performance award intended to qualify under Section 162(m) is to be exercised by the Compensation Committee, and not by our Board.

 

Subject to the requirements of the 1997 Plan, the Plan Administrator will determine performance award terms, including the required levels of performance with respect to specified business criteria, the corresponding amounts payable upon achievement of such levels of performance, termination and forfeiture provisions and the form of settlement. One or more of the following business criteria, based on our consolidated financial statements or those of our affiliates, or for our business units or those of our affiliates (except with respect to the total shareholder return and earnings per share criteria), will be used by the Plan Administrator in establishing performance goals for such performance awards (including for awards designed to comply with the performance-based compensation exception to Section 162(m)): (i) total shareholder return, (ii) total shareholder return compared to total return (on a comparable basis) of a publicly available index, such as the Standard & Poor’s 500 Stock Index; (iii) net income; (iv) pretax earnings; (v) earnings before interest expense, taxes, depreciation and amortization; (vi) pretax operating earnings after interest expense but before bonuses, service fees and extraordinary or special items; (vii) operating margin; (viii) earnings per share; (ix) return on equity; (x) return on capital; (xi) return on investment; (xii) operating earnings; (xiii) working capital or inventory; and (xiv) ratio of debt to shareholders’ equity. In granting performance awards, the Plan Administrator may establish unfunded award “pools,” the amounts of which will be based upon the achievement of a performance goal or goals based on one or more of certain business criteria described in the 1997 Plan. During the first 90 days of a performance period, the Plan Administrator will determine who will potentially receive performance awards for that performance period, either out of the pool or otherwise.

After the end of each performance period, the Plan Administrator (which will be the Compensation Committee for awards intended to qualify as performance-based for purposes of Section 162(m)) will determine (a) the amount of any pools and the maximum amount of potential performance awards payable to each participant in the pools and (b) the amount of any other potential performance awards payable to participants in the 1997 Plan. The Plan Administrator may, in its discretion, determine that the amount payable as a performance award will be reduced from the amount of any potential award.

 

Other Terms of Awards

 

Awards may be settled in the form of cash, shares of our common stock, other awards or other property in the discretion of the Plan Administrator. Awards under the 1997 Plan are generally granted without a requirement that the participant pay consideration in the form of cash or property for the grant (as distinguished from the exercise), except to the extent required by law. The Plan Administrator may require or permit participants to defer the settlement of all or part of an award in accordance with such terms and conditions as the Plan Administrator may establish, including payment or crediting of interest or dividend equivalents on deferred amounts, and the crediting of earnings, gains and losses based on deemed investment of deferred amounts in specified investment vehicles. The Plan Administrator is authorized to place cash, shares of our common stock or other property in trusts or make other arrangements to provide for payment of our obligations under the 1997 Plan. The Plan Administrator may condition any payment relating to an award on the withholding of taxes and may provide that a portion of any shares of our common stock or other property to be distributed will be withheld (or previously acquired shares of our common stock or other property be surrendered by the participant) to satisfy withholding and other tax obligations. Awards granted under the 1997 Plan generally may not be pledged or otherwise encumbered and are not transferable except by will or by the laws of descent and distribution, or to a designated beneficiary upon the participant’s death, except that the Plan Administrator may, in its discretion, permit transfers of nonqualified stock options for estate planning or other purposes subject to any applicable restrictions under Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

 

The Plan Administrator may grant awards in exchange for other awards under the 1997 Plan or under other of our compensation plans, or other rights to payment from us, and may grant awards in addition to or in tandem with such other awards, rights or other awards. In addition, the Plan Administrator may cancel awards granted under the 1997 Plan in exchange for a payment of cash or other property. The terms of any exchange of or purchase of an award will be determined by the Plan Administrator in its sole discretion.

 

Acceleration of Vesting; Change in Control

 

The Plan Administrator may, in its discretion, accelerate the vesting, exercisability, lapsing of restrictions or expiration of deferral or amend the terms of any award. In addition, the Plan Administrator may provide in an award agreement that the performance goals relating to any performance-based award will be deemed to have been met upon the occurrence of any “change in control.” If the participant is terminated by us or our successor without “cause” (as defined in the 1997 Plan) or terminates for “good reason” (as defined in the 1997 Plan) within 12 months after a “change in control” (as defined in the 1997 Plan), then the award will become fully vested and, if applicable, exercisable.

 

In the event of a “corporate transaction” (as defined in the 1997 Plan), the acquiror must assume, continue or substitute for each outstanding stock option. In addition, the Plan Administrator may, in its discretion, provide that, in the event of a “corporate transaction” (as defined in the 1997 Plan), all repurchase or forfeiture rights will lapse.

 

Amendment and Termination

 

Our Board may amend, alter, suspend, discontinue or terminate the 1997 Plan or the Plan Administrator’s authority to grant awards without further shareholder approval, except shareholder approval must be obtained for any amendment or alteration if such approval is required by law or regulation or under the rules of any stock exchange or quotation system on which shares of our common stock are then listed or quoted. Shareholder approval will not be deemed to be required under laws or regulations, such as those relating to ISOs, that condition favorable treatment of participants on such approval, although our Board may, in its discretion, seek shareholder approval in

any circumstance in which it deems such approval advisable. Unless earlier terminated by our Board, the 1997 Plan will terminate on the ten year anniversary of the approval of an increase in the number of shares reserved under the 1997 Plan by our Board (contingent upon such increase being approved by our shareholders). If Proposal 2 is not approved by our shareholders, unless earlier terminated by our Board, the 1997 Plan will terminate upon the earlier of (i) December 16, 2014 (ten years from the adoption of the 1997 Plan), or (ii) such time as no shares of our common stock remain available for issuance under the 1997 Plan and we have no further rights or obligations with respect to outstanding awards under the 1997 Plan. Amendments to the 1997 Plan or any award require the consent of the affected participant if the amendment has a material adverse effect on the participant.

 

Federal Income Tax Consequences of Awards

 

The information set forth above is a summary only and does not purport to be complete. In addition, the information is based upon current federal income tax rules and therefore is subject to change when those rules change. Moreover, because the tax consequences to any recipient may depend on his particular situation, each recipient should consult the recipient’s tax adviser regarding the federal, state, local and other tax consequences of the grant or exercise of an award or the disposition of stock acquired as a result of an award. The 1997 Plan is not qualified under the provisions of Section 401(a) of the Code and is not subject to any of the provisions of the Employee Retirement Income Security Act of 1974.

 

Nonqualified Stock Options

 

Generally, there is no taxation upon the grant of a nonqualified stock option. On exercise, an optionee will recognize ordinary income equal to the excess, if any, of the fair market value on the date of exercise of the stock over the exercise price. If the optionee is our employee or an employee of an affiliate, that income will be subject to withholding tax. The optionee’s tax basis in those shares will be equal to their fair market value on the date of exercise of the option, and the optionee’s capital gain holding period for those shares will begin on that date.

 

Subject to the requirement of reasonableness, the provisions of Section 162(m) and the satisfaction of a tax reporting obligation, we will generally be entitled to a tax deduction equal to the taxable ordinary income realized by the optionee.

 

Incentive Stock Options

 

The 1997 Plan provides for the grant of stock options that qualify as “incentive stock options,” which we refer to as ISOs, as defined in Section 422 of the Code. Under the Code, an optionee generally is not subject to ordinary income tax upon the grant or exercise of an ISO. In addition, if the optionee holds a share received on exercise of an ISO for at least two years from the date the option was granted and at least one year from the date the option was exercised, which we refer to as the “Required Holding Period,” the difference, if any, between the amount realized on a sale or other taxable disposition of that share and the holder’s tax basis in that share will be long-term capital gain or loss.

 

If, however, an optionee disposes of a share acquired on exercise of an ISO before the end of the Required Holding Period, which we refer to as a “Disqualifying Disposition,” the optionee generally will recognize ordinary income in the year of the Disqualifying Disposition equal to the excess, if any, of the fair market value of the share on the date the ISO was exercised over the exercise price. However, if the sales proceeds are less than the fair market value of the share on the date of exercise of the option, the amount of ordinary income recognized by the optionee will not exceed the gain, if any, realized on the sale. If the amount realized on a Disqualifying Disposition exceeds the fair market value of the share on the date of exercise of the option, that excess will be short-term or long-term capital gain, depending on whether the holding period for the share exceeds one year.

 

For purposes of the alternative minimum tax, the amount by which the fair market value of a share of stock acquired on exercise of an ISO exceeds the exercise price of that option generally will be an adjustment included in the optionee’s alternative minimum taxable income for the year in which the option is exercised. If, however, there is a Disqualifying Disposition of the share in the year in which the option is exercised, there will be no adjustment for alternative minimum tax purposes with respect to that share. If there is a Disqualifying Disposition in a later year, no income with respect to the Disqualifying Disposition is included in the optionee’s alternative minimum

taxable income for that year. In computing alternative minimum taxable income, the tax basis of a share acquired on exercise of an ISO is increased by the amount of the adjustment taken into account with respect to that share for alternative minimum tax purposes in the year the option is exercised.

 

We are not allowed an income tax deduction with respect to the grant or exercise of an incentive stock option or the disposition of a share acquired on exercise of an incentive stock option after the Required Holding Period. However, if there is a Disqualifying Disposition of a share, we are allowed a deduction in an amount equal to the ordinary income includible in income by the optionee, provided that amount constitutes an ordinary and necessary business expense for us and is reasonable in amount, and either the employee includes that amount in income or we timely satisfy our reporting requirements with respect to that amount.

 

Stock Awards

 

Generally, the recipient of a stock award will recognize ordinary compensation income at the time the stock is received equal to the excess, if any, of the fair market value of the stock received over any amount paid by the recipient in exchange for the stock. If, however, the stock is not vested when it is received (for example, if the employee is required to work for a period of time in order to have the right to sell the stock), the recipient generally will not recognize income until the stock becomes vested, at which time the recipient will recognize ordinary compensation income equal to the excess, if any, of the fair market value of the stock on the date it becomes vested over any amount paid by the recipient in exchange for the stock. A recipient may, however, file an election with the Internal Revenue Service, within 30 days of his or her receipt of the stock award, to recognize ordinary compensation income, as of the date the recipient receives the award, equal to the excess, if any, of the fair market value of the stock on the date the award is granted over any amount paid by the recipient in exchange for the stock.

 

The recipient’s basis for the determination of gain or loss upon the subsequent disposition of shares acquired as stock awards will be the amount paid for such shares plus any ordinary income recognized either when the stock is received or when the stock becomes vested. Subject to the requirement of reasonableness, the provisions of Section 162(m) and the satisfaction of a tax reporting obligation, we will generally be entitled to a tax deduction equal to the taxable ordinary income realized by the recipient of the stock award.

 

Stock Appreciation Rights

 

We may grant stock appreciation rights separate from any other award, which we refer to as stand-alone stock appreciation rights, or in tandem with options, which we refer to as tandem stock appreciation rights, under the 1997 Plan.

 

With respect to stand-alone stock appreciation rights, if the recipient receives the appreciation inherent in the stock appreciation rights in cash, the cash will be taxable as ordinary compensation income to the recipient at the time that the cash is received. If the recipient receives the appreciation inherent in the stock appreciation rights in shares of stock, the recipient will recognize ordinary compensation income equal to the excess of the fair market value of the stock on the day it is received over any amounts paid by the recipient for the stock.

 

With respect to tandem stock appreciation rights, if the recipient elects to surrender the underlying option in exchange for cash or shares of stock equal to the appreciation inherent in the underlying option, the tax consequences to the recipient will be the same as discussed above relating to the stand-alone stock appreciation rights. If the recipient elects to exercise the underlying option, the holder will be taxed at the time of exercise as if he or she had exercised a nonqualified stock option (discussed above).

 

Subject to the requirement of reasonableness, the provisions of Section 162(m), and the satisfaction of a tax reporting obligation, we will generally be entitled to a tax deduction equal to the taxable ordinary income realized by the recipient of the stock appreciation right.

Dividend Equivalents

 

Generally, the recipient of a dividend equivalent award will recognize ordinary compensation income at the time the dividend equivalent award is received equal to the fair market value dividend equivalent award received. Subject to the requirement of reasonableness, the provisions of Section 162(m) and the satisfaction of a tax reporting obligation, we will generally be entitled to a tax deduction equal to the taxable ordinary income realized by the recipient of the dividend equivalent.

 

Section 162 Limitations

 

Section 162(m) denies a deduction to any publicly-held corporation for compensation paid to certain “covered employees” in a taxable year to the extent that compensation to such covered employee exceeds $1 million. It is possible that compensation attributable to stock awards, when combined with all other types of compensation received by a covered employee from us, may cause this limitation to be exceeded in any particular year. For purposes of Section 162(m), the term “covered employee” means our principal executive officer and our three highest compensated officers as of the end of a taxable year as disclosed in our filings with the SEC. Certain kinds of compensation, including qualified “performance-based” compensation, are disregarded for purposes of the Section 162(m) deduction limitation. In accordance with Treasury regulations issued under Section 162(m), compensation attributable to certain stock awards will qualify as performance-based compensation if the award is granted by a committee of the Board of Directors consisting solely of “outside directors” and the stock award is granted (or exercisable) only upon the achievement (as certified in writing by the committee) of an objective performance goal established in writing by the committee while the outcome is substantially uncertain, and the material terms of the plan under which the award is granted is approved by shareholders. A stock option or stock appreciation right may be considered “performance-based” compensation as described in previous sentence or by meeting the following requirements: the incentive compensation plan contains a per-employee limitation on the number of shares for which stock options and stock appreciation rights may be granted during a specified period, the material terms of the plan are approved by the shareholders, and the exercise price of the option or right is no less than the fair market value of the stock on the date of grant.

 

The regulations under Section 162(m) require that the directors who serve as members of the committee must be “outside directors.” The 1997 Plan provides that directors serving on the committee must be “outside directors” within the meaning of Section 162(m). This limitation would exclude from the committee directors who are (i) our current employees or those of one of our affiliates, (ii) our former employees or those of one of our affiliates who is receiving compensation for past services (other than benefits under a tax-qualified pension plan), (iii) our current and former officers or those of one of our affiliates, (iv) directors currently receiving direct or indirect remuneration from us or one of our affiliates in any capacity other than as a director, and (v) any other person who is not otherwise considered an “outside director” for purposes of Section 162(m). The definition of an “outside director” under Section 162(m) is generally narrower than the definition of a “non-employee director” under Rule 16b-3 of the Exchange Act.

 

New Plan Benefits

 

Benefits obtained by our employees under the 1997 Plan are made on a discretionary basis by the Plan Administrator. Accordingly, it is not possible to determine the benefits that will be received by our executive officers and our other employees under the 1997 Plan in 2008. As of November 9, 2007, no shares had been issued under the 1997 Plan on the basis of the share increase subject to this proposal.

 

Stock Options and Restricted Stock

 

The table below shows, as to our Named Executive Officers (as defined under “Executive Officer Compensation” below) and the other individuals and groups indicated, the (i) grants of restricted stock and (ii) number of shares of common stock subject to option grants made under the 1997 Plan, for our 2007 fiscal year, together with the weighted average exercise price payable per share in the case of the stock options. In fiscal 2007, we have not granted any awards under the 1997 Plan other than the awards listed below.

 

 

 

 

THE BOARD OF DIRECTORS RECOMMENDS A VOTE
“FOR” THE ADOPTION OF THE AMENDEMENT TO
THE 1997 STOCK AWARD PLAN TO INCREASE THE
NUMBER OF AUTHORIZED SHARES TO EIGHT MILLION.

 

 

 

COMPENSATION DISCUSSION AND ANALYSIS

 

The following compensation discussion and analysis (“CD&A”) should be read in conjunction with the “Summary Compensation Table” and related tables that are presented elsewhere in this Proxy Statement.

 

Introduction and Summary

 

The purpose of this CD&A is to provide information about each material element of compensation that we pay or award to, or that is earned by, our named executive officers and to explain the numerical and related information contained in the tables located below. For our 2007 fiscal year, our named executive officers were:

 

 

Douglas D. Burkett, our former Chief Executive Officer, Andrew A. Stevens, our former Vice President and Chief Financial Officer and Lawrence A. Gyenes, our former Chief Financial Officer, are also named executive officers because each served in their respective positions during our 2007 fiscal year.

 

The Compensation Committee

 

The three members of the Compensation Committee are O.B. Parrish (Chair), J. Steven Garrett and Leslie H. Green. ZILA’s Board has determined that Mr. Garrett and Ms. Green are “independent” under NASDAQ Marketplace Rules. Additional information regarding our Compensation Committee can be found under the “Board Committee” heading in the “Board Information” section of this Proxy Statement.

 

In September 2007, as part of its annual equity grant process, the Board issued options to purchase shares our common stock to our named executive officers as follows: (i) Mr. Bellizzi received 120,000 options to purchase common stock, (ii) Mr. Klinefelter received 40,000 options to purchase common stock, and (iii) Ms. Klein received 40,000 options to purchase common stock. The Board also granted stock options to other executives and a significant number of key employees. The Board was unable to fully implement its long-term equity incentive plans for fiscal 2008 related to these named executive officers and other executives because of the lack of available authorized shares. In the event that Proposal 2 is approved by ZILA’s shareholders, and ZILA’s authorized shares are increased, the Board plans to issue additional options to its named executive officers.

 

Compensation Philosophy and Objectives

 

ZILA has developed a compensation program for executives and employees designed to meet the following goals:

 

 

To meet these objectives, the Compensation Committee did utilize competitive compensation data to implement the programs discussed below.

 

Compensation Peer Group

 

In setting compensation for fiscal 2007, the Compensation Committee reviewed companies similar to ZILA in terms of industry (pharmaceutical, biotech/clinical trial phase III companies, and dental companies), revenue and market capitalization. While this market data is an important factor considered by the Compensation Committee when setting compensation, it is only one of multiple factors considered by the Compensation Committee, including individual performance and responsibilities, the executive’s ability to meet current and future challenges and objectives, ZILA’s expectation of the executive’s contribution to its future success, and ZILA’s cash position.

 

ZILA engaged Pearl Meyer & Partners at the end of the 2006 fiscal year to review the competitiveness of cash compensation and equity ownership levels for selected executive and senior management positions, which included Messrs. Bellizzi, Klinefelter and Ms. Klein. ZILA’s total cash compensation for its named executive officers ranged below the 25 ^th  percentile for its identified peer group, with Mr. Bellizzi’s total cash compensation falling between the 25 ^th  and 50 ^th  percentiles. The equity ownership of the named executive officers (as a percentage of total shares outstanding) averaged between the 25 ^th  and 50 ^th  percentiles when compared to its ZILA’s identified peer group. ZILA’s peer group, as determined by Pearl Meyer, consisted of the following companies:

 

 

Compensation Programs Design and Discussion

 

ZILA’s executive compensation program is composed of cash-based compensation, in the form of base salaries and discretionary bonuses, and equity-based compensation that currently takes the form of stock option and restricted stock grants. In addition, our named executive officers have the opportunity to participate in our company-wide 401(k) plan and our company-wide Employee Stock Purchase Plan (the “ESPP”).

 

The table below lists each material element of our executive compensation program, the compensation objective or objectives that each element is designed to achieve and the characteristics of each compensation element.

 

 

During fiscal 2007 and the beginning of fiscal 2008, the Board determined that given ZILA’s current cash position and operational goals and objectives for its business, the Board would maintain base salaries for its management at their current amounts and would not distribute cash bonuses to management for fiscal 2007. The Board has instead focused on long-term equity awards to incentivize its management, as evidenced by grants provided to management in September 2007. The Board believes that this approach further aligns management’s interests with ZILA’s shareholders and is also consistent with ZILA’s current goals and objective.

 

Base Salary

 

Base salary, which is designed to attract and retain qualified executives, provides a fixed amount of cash to our named executive officers. Base salaries for named executive officers are generally determined on an individual basis by evaluating each executive’s scope of responsibility, performance, prior experience and salary history and are set forth in letter agreements that allow for discretionary adjustment to base salaries from time to time. In setting fiscal 2007 base salaries, the Compensation Committee considered executive compensation for the peer companies listed above, as these companies are most likely to compete with us for the services of our executives. As compared to our compensation peer group, we target our named executive salaries to be in the 25th — 50th percentile, although according to the Pearl Meyer study (as discussed above) we were generally below that range for all our named executive officers in fiscal 2007, except Mr. Bellizzi.

2007

 

The approved fiscal 2007 salaries, as compared to fiscal 2006 salaries, include the following for our continuing named executive officers:

 

 

 

 

Douglas D. Burkett, our former Chief Executive Officer, was paid a base salary of $347,524 in fiscal 2007, as compared to $356,688 in fiscal 2006. Andrew A. Stevens, our former Vice President and Chief Financial Officer, was paid a base salary of $101,662 in fiscal 2007, as compared to $215,965 in fiscal 2006. Lawrence A. Gyenes, our former Chief Financial Officer, was not employed by ZILA during fiscal 2006 and was paid $113,308 in base salary in fiscal 2007.

 

Incentive Bonuses

 

As part of ZILA’s compensation program, employees may be eligible to participate in its Employee Incentive Bonus Plan (the “Bonus Plan”). The parameters of the Bonus Plan are set, in part, based on publicly available information from comparable companies in our industry, as these companies are most likely to compete with us for the services of our executives. The Compensation Committee has historically viewed cash incentive compensation as a means of closely tying a portion of the total potential annual cash compensation for executives to the financial performance of ZILA.

 

As described below, the letter agreements with each of Mr. Bellizzi, Mr. Klinefelter and, formerly, Mr. Gyenes, provide each with a maximum incentive bonus of 50% of base salary. The letter agreements for Ms. Klein, Mr. Stevens and Mr. Burkett did not specify an incentive bonus, but did provide that each is or was eligible to participate in the Bonus Plan.

 

2007

 

In fiscal 2007, ZILA’s executive officers were eligible for cash bonuses for their performance to the extent that ZILA met certain EBITDA (earnings before interest, taxes, depreciation and amortization) and revenue growth targets at the corporate or business unit level compared with the operating plan for that year. In addition, performances were to be measured against the achievement of certain specified corporate, division and personal performance goals.

 

As discussed above, the Board determined to that it would not award any cash bonus awards for fiscal 2007 in connection with ZILA’s efforts to direct its cash resources toward activities in support of its operational goals and objectives. However, on July 24, 2007, the Board approved a one-time $20,000 cash bonus for Ms. Klein as a reward for her for serving as the ZILA’s Chief Financial Officer between December 22, 2006 and March 12, 2007.

 

Equity-Based Compensation

 

The purpose of the equity-based compensation component is to instill the economic incentives of ownership in our named executive officers and to create long-term incentives for management to increase shareholder value. ZILA frequently uses vesting periods in its awards to encourage executives to remain with it and to focus on longer-term results.

Equity-based compensation is awarded pursuant to our 1997 Stock Award Plan, as amended and restated, (the “1997 Plan”), which is described in greater detail in Proposal Two of this Proxy Statement. Although the 1997 Plan allows the Compensation Committee to make a variety of awards, typically the Compensation Committee will award stock options and shares of restricted stock under the 1997 Plan.

 

The Compensation Committee recommends, on a discretionary basis, whether to grant stock options or restricted stock, as well as the amount of shares of common stock subject to, and the terms of, the grants. The Compensation Committee does not adhere to a policy in recommending the mix between stock options and restricted stock, but prefers a flexible approach to permit awards to be tailored to the needs and motivations of each recipient. In making these discretionary recommendations, the Compensation Committee takes into account eligibility and participation in the Bonus Plan and the executive’s responsibilities and position. In addition, based on publicly available information, the Compensation Committee considers option grants by comparable companies in our industry, as these companies are most likely to compete with ZILA for the services of our executives. The Compensation Committee also seeks the recommendation of senior management with respect to awards granted to all employees.

 

Stock Options

 

Stock options align executives’ interests with those of shareholders, as options only have realizable value if the share price of ZILA stock increases relative to the grant, or exercise, price. The exercise price of options granted under the 1997 Plan is never less than the fair market value of ZILA’s common stock on the grant date.

 

Traditionally, in connection with the first Board meeting of the fiscal year in September the Board makes grants of option awards to ZILA’s employees, including its named executive officers. The grant date and exercise price of such option awards are set as of the date of such Board meeting. Quarterly grants are made if special circumstances demand and generally coincide with the date of a regularly planned meeting, with grant dates and exercise price set as of the date of such meeting.

 

2007

 

In fiscal 2007, we granted to our named executive officers options to purchase shares of ZILA common stock, as compared to the number of options in fiscal 2006, as follows:

 

 

 

 

Douglas D. Burkett, our former Chief Executive Officer, was granted options to purchase 150,000 shares of common stock in fiscal 2007, as compared to 100,000 options in fiscal 2006. Andrew A. Stevens, our former Vice President and Chief Financial Officer, was granted no options to purchase shares of common stock in fiscal 2007, as compared to 50,000 options in fiscal 2006. Lawrence A. Gyenes, our former Chief Financial Officer, was not employed by ZILA during fiscal 2006 and was granted options to purchase 200,000 shares of common stock in fiscal 2007. All of the 2007 and 2006 option grants were forfeited by such executive officer in connection with their departures.

 

Restricted Stock

 

Restricted stock is granted to executives to facilitate retention and, for newly hired executives, recruitment. The restrictions on the restricted stock awards granted to executives typically lapse periodically over the course of three years. The restrictions generally provide that, unless the Compensation Committee in its discretion determines

otherwise, during the term of the restrictions the shares may not be sold or otherwise transferred, and the shares will be immediately forfeited in the event of the executive’s termination of employment for any reason other than death, disability or retirement. The grant price of restricted stock granted under the 1997 Plan is never less than the fair market value of ZILA’s common stock on the grant date.

 

2007

 

In fiscal 2007, we granted to our named executive officers shares of restricted stock, as compared to the number of shares of restricted stock in fiscal 2006, as follows:

 

 

 

 

Douglas D. Burkett, our former Chief Executive Officer, was granted 100,000 shares of restricted common stock in fiscal 2007, as compared to none in fiscal 2006. Andrew A. Stevens, our former Vice President and Chief Financial Officer, was granted no shares of restricted common stock in fiscal 2007 and fiscal 2006. Lawrence A. Gyenes, our former Chief Financial Officer, was not employed by ZILA during fiscal 2006 and was granted 50,000 shares of restricted common stock in fiscal 2007.

 

Other Compensation

 

Our named executive officers also either participate or are eligible to participate in our other benefit plans and programs on the same terms as other employees, including a 401(k) plan, the ESPP, medical and dental insurance, term life insurance, short-term disability insurance, long-term disability insurance and paid time-off plan.

 

Severance and Change in Control Payments

 

We also provide certain of our named executive officers with severance and change in control benefits. We believe these arrangements are a fair reward for hard work and value creation, assist us in retaining our named executive officers, and provide incentives to our named executive officers to remain with us during periods of uncertainty at the end of which such executives may not be retained. Generally, the Compensation Committee does not provide benefits if employment is terminated for cause, death or disability or if employment is voluntarily terminated by the named executive officer.

 

In general, severance payments, other than those made in connection with a change in control, are only payable upon termination of a named executive officer without cause because the Compensation Committee does not believe named executive officers should be rewarded for failing to perform their respective jobs.

 

With respect to payments upon changes of control, the Compensation Committee requires a “double trigger” prior to any payment in that both a change in control and a termination of employment must occur. The letter agreements for Mr. Klinefelter and Ms. Klein establish a presumption that a termination was because of a change in control if the termination occurs within 18 months following the change in control. Mr. Bellizzi’s agreement does not establish any such presumption. Similar to severance payments made for termination without cause, payments made following a termination upon a change in control are only payable if the named executive officer provides a release of claims to ZILA and the named executive officer does not violate any other contractual obligations to ZILA or solicit additional employees to leave ZILA following the departure.

Please see the “Employment Agreement” discussion below the Summary Compensation Table for additional information on these arrangements and agreements.

 

Other Compensation Policies and Considerations

 

Tax Code Considerations

 

Section 162(m) of the Internal Revenue Code disallows a corporate income tax deduction for executive compensation paid to its chief executive officer or any of its four other highest compensated “covered employees” in excess of $1 million per year unless it is performance-based and is paid under a plan satisfying the requirements of Section 162(m). Qualifying performance-based compensation is not subject to the deduction limit if certain requirements are met. The Compensation Committee believes that the compensation arrangements with ZILA’s executive officers will not exceed the limits on deductibility during the current fiscal year. The Compensation Committee currently intends to structure the performance-based portion of the compensation of executive officers in a manner that complies with Section 162(m).

 

Accounting Considerations

 

The Board and Compensation Committee generally consider accounting considerations related to forms and amounts of compensation of our named executive officers, although this has not typically been a significant factor in compensation decisions for ZILA.

 

 

 

 

EMPLOYMENT AGREEMENTS

 

Named Executive Officers

 

Frank J. Bellizzi

 

We entered into a letter agreement, effective as of May 22, 2006, with Frank J. Bellizzi setting forth the terms of his employment as President of Zila Pharmaceuticals, Inc. and Executive Vice President of ZILA. The agreement provides for an initial annual base salary of $325,000 and an automobile allowance of $800 per month, in addition to various other customary benefits. It provides for an initial grant of options to purchase 500,000 shares of common stock, vesting in thirteen equal amounts, with the first tranche vesting on Mr. Bellizzi’s start date and the remaining tranches vesting on a quarterly basis thereafter. The letter agreement does not obligate us to employ Mr. Bellizzi for any period of time, but provides for severance payments in connection with an actual or constructive termination without cause, or upon a change in control, equal to the greater of $650,000 or two years of base salary at the time of the triggering event, if certain other conditions are satisfied.

 

Gary V. Klinefelter

 

We entered into a letter agreement, effective as of December 15, 2004, with Gary V. Klinefelter setting forth the terms of his employment as Vice President and General Counsel. The agreement provides for an initial annual base salary of $200,000 and an automobile allowance of $800 per month. It also provides for an initial grant of options to purchase 100,000 shares of common stock, vesting in two equal increments on the second and third anniversary of the grant. Also included was an additional grant of options to purchase 50,000 shares of common stock on the first anniversary of the date of hire, with such options vesting equally on the first, second and third anniversary of the grant. The letter agreement does not obligate us to employ Mr. Klinefelter for any period of time, but provides for severance payments equivalent to his then-current base salary for (i) twelve months in the event of a change in control and (ii) six months under certain other circumstances. In connection with the execution of the letter agreement, Mr. Klinefelter received a $25,000 signing bonus.

On December 14, 2006, the Compensation Committee approved changes to Mr. Klinefelter’s letter agreement, increasing his base salary, effective January 1, 2007, to $240,000 and providing Mr. Klinefelter with a severance payment equal to two years base salary plus bonuses if Mr. Klinefelter is terminated upon a change in control of ZILA. Any such severance payment will be in the form of a lump sum on the six-month anniversary of termination of employment. These arrangements were memorialized in an amended letter agreement on March 30, 2007. For additional information regarding severance and change in control payments that could become due to Mr. Klinefelter, please see the “Severance and Change in Control Payments” section below and in the “Compensation Programs Design and Discussion” section above.

 

Diane E. Klein

 

We entered into a letter agreement, effective as of March 4, 2005, with Diane E. Klein setting forth the terms of her employment as Vice President and Treasurer. The agreement does not provide for an annual base salary. The letter agreement provides that Ms. Klein is eligible for future awards of stock options. The letter agreement does not obligate us to employ Ms. Klein for any period of time, but provides for severance payments equivalent to her then-current base salary for (i) twelve months in the event of a change in control and (ii) six months under certain other circumstances.

 

On December 14, 2006, the Compensation Committee granted to Mr. Klein a cash bonus award of $7,000 and increased her then current annual base salary to $160,000, effective January 1, 2007. In addition, the Compensation Committee approved changes to Ms. Klein’s letter agreement, providing her with a severance payment equal to 18 months base salary plus bonuses if Ms. Klein is terminated upon a change in control of ZILA. Any such severance payment will be in the form of a lump sum on the six-month anniversary of termination of employment. These arrangements were memorialized in an amended letter agreement on March 30, 2007. Effective August 1, 2007, Diane E. Klein, Vice President and Treasurer, was promoted to Vice President of Finance and Treasurer and has assumed the duties of the principal financial officer of the Company. On September 27, 2007, the Board approved an increase in annual base salary for Ms. Klein from $160,000 to $185,000 related to the assumption of duties as the ZILA’s principal financial officer. For additional information regarding severance and change in control payments that could become due to Ms. Klein, please see the “Severance and Change in Control Payments” section below and in the “Compensation Programs Design and Discussion” section above.

 

Former Executives that are Named Executive Officers

 

Douglas D. Burkett

 

Employment Agreement

 

We entered into an employment agreement, effective as of July 24, 2002, with Douglas D. Burkett, Ph.D., pursuant to which Dr. Burkett was employed as our President and Chief Executive Officer. Pursuant to Board approval, effective October 21, 2003, we amended Dr. Burkett’s employment agreement to: (i) extend the term of the agreement from January 24, 2004 to October 20, 2008; (ii) increase his annual base salary to $310,000; (iii) provide a severance payment of two times his annual base salary if his employment is terminated other than for cause; and (iv) provide for a payment of the balance of the annual base salary due to him for the remaining term of the agreement, but not less than two years of such salary, if a change in control and termination other than for cause occurs, as those terms are defined in the employment agreements. Effective October 2, 2005 Dr. Burkett’s base salary was increased to $350,000. Dr. Burkett was eligible to participate in any of our applicable bonus plans or programs or stock option plans or programs. As a result, he was eligible for a performance bonus of up to 100% of his annual base salary as determined by the Board or its Compensation Committee at the end of each fiscal year. In addition to his base salary, Dr. Burkett also received an automobile allowance of $950 per month, reimbursement of certain financial, tax and estate planning expenses up to $5,000 annually and other benefits, including those generally provided to our other employees.

 

Severance Agreement

 

On June 13, 2007, ZILA accepted the resignation of Dr. Burkett from his positions as ZILA’s President and Chief Executive Officer and as a member of the Board and entered into a severance agreement and release of claims

with Dr. Burkett. Under the severance agreement, Dr. Burkett provided a general release of claims against ZILA and ZILA agreed to pay to Dr. Burkett a $90,000 severance payment, payable in installments on regular Company paydays, net of applicable withholding, and COBRA coverage for six months following resignation. All of Dr. Burkett’s vested and unvested options to purchase shares of ZILA common stock terminated upon resignation; provided, however, that 200,000 options that vested prior to the resignation and that are exercisable at $0.76 per share survived resignation and remain exercisable for two years. Dr. Burkett was also permitted to retain 100,000 shares of restricted stock previously awarded to him.

 

The severance agreement also contained other customary provisions, including mutual non-disparagement and cooperation covenants and a limited release by ZILA of claims it may have against Dr. Burkett.

 

Andrew A. Stevens

 

Employment Agreement

 

We entered into a letter agreement, effective as of January 22, 2004 and as amended on March 4, 2005, with Andrew A. Stevens setting forth the terms of his employment as Vice President and Chief Financial Officer, and at that time, Treasurer and Secretary. Effective December 22, 2006, Mr. Stevens resigned from his employment with ZILA.

 

The agreement provided for an annual base salary of $190,000 and an automobile allowance of $800 per month. In connection with the execution of the letter agreement, Mr. Stevens received a $5,000 signing bonus and an initial grant of options to purchase 100,000 shares of common stock, vesting in three equal increments on the first, second and third anniversary of the grant.

 

Also included was an additional grant of options to purchase 50,000 shares of common stock on the first anniversary of the date of hire, with such options also vesting equally on the first, second and third anniversary of the grant. Effective October 2, 2005 Mr. Stevens’ base salary was increased to $208,000. The agreement did not obligate us to employ Mr. Stevens for any period of time, but provides for severance payments equivalent to his then-current base salary for (i) twelve months in the event of a change in control and (ii) six months under certain other circumstances.

 

Separation Agreement

 

On December 22, 2006, ZILA accepted the resignation of Mr. Stevens from his position as ZILA’s Vice President and Chief Financial Officer and entered into a severance agreement with Mr. Stevens. Under the severance agreement, ZILA agreed to pay to Mr. Stevens a $104,000 severance payment, payable in installments on regular company paydays, net of applicable withholding, and COBRA coverage for six months following resignation.

 

Lawrence A. Gyenes

 

Offer Letter

 

Lawrence A. Gyenes accepted an offer letter from ZILA on March 7, 2007 to become ZILA’s Chief Financial Officer. Under the offer letter, Mr. Gyenes was entitled to receive a base salary of $300,000 per year, a one-time $25,000 cash bonus, a performance bonus of up to 50% of his base salary under ZILA’s Bonus Plan and an auto allowance, insurance, and other benefits consistent with his position as a member of ZILA’s executive management. The offer letter also provided Mr. Gyenes with (i) options to purchase 200,000 shares of ZILA’s common stock under the 1997 Plan, which options were to vest in three equal installments on the first, second, and third anniversaries of the date on which Mr. Gyenes begins employment with ZILA, (ii) additional stock option grants based on individual performance or as commensurate with grants to other executive management members, and (iii) a grant of 50,000 shares of restricted stock, the restrictions on which were to be removed in equal amounts on the first, second, and third anniversaries of the date on which Mr. Gyenes begins employment with ZILA.

 

Mr. Gyenes also received (i) reasonable out-of-pocket expenses for trips by Mr. Gyenes or Mr. Gyenes’ fiancée from New Jersey to Arizona to transition living arrangements not to exceed $10,000, (ii) actual costs for

professional transportation of belongings from New Jersey to Arizona, (iii) reasonable out-of-pocket expenses relating to transportation for Mr. Gyenes and his fiancée from New Jersey to Arizona, (iv) temporary housing in Phoenix for up to six months at a maximum of $3,000 per month and (v) realtor and other closing fees relating to the sale of Mr. Gyenes’ home in New Jersey and the purchase of a home in Arizona not to exceed $50,000. These relocation benefits must be repaid on a sliding scale by Mr. Gyenes if he voluntarily terminates his employment with Zila prior to 24 months following the date on which he started his employment with Zila.

 

Under the offer letter, and provided that Mr. Gyenes provides ZILA with a written release of liability, Mr. Gyenes was also entitled to severance payments if his employment was terminated because of a change in control or without cause. If Mr. Gyenes was terminated following a change in control, he would have been entitled to 18 months of salary and an amount equal to the maximum cash bonus to which Mr. Gyenes would have been entitled in the 18 months following his termination. If Mr. Gyenes was terminated without cause, he would have been entitled to 18 months salary. In either case, all options held by Mr. Gyenes would immediately vest and all restrictions on any restricted stock held by Mr. Gyenes would lift upon his termination. Mr. Gyenes’ rights to these severance payments will immediately cease if he breaches any contractual obligations he owes to ZILA or if he breaches standard non-competition and non-solicitation obligations.

 

The offer letter was to be effective for three years and renewed automatically for one year terms at the end of the initial three year term unless ZILA provided written notice 120 days prior to any such anniversary of its intent to not extend the offer letter.

 

Severance Agreement

 

Mr. Gyenes resigned from his employment with ZILA effective July 31, 2007. In connection with Mr. Gyenes’ resignation, on July 30, 2007, ZILA entered into a severance agreement and release with Mr. Gyenes that provided for, among other things, the following: (i) ZILA will pay $150,000, less applicable withholdings, to Mr. Gyenes over a period of six months according to ZILA’s regular payroll schedule; (ii) ZILA will pay for COBRA coverage for Mr. Gyenes for 12 months following resignation; (iii) ZILA will pay the expense of moving Mr. Gyenes’ personal property to New Jersey and reimburse Mr. Gyenes for all relocation expenses properly submitted for his move to Arizona; (iv) all restrictions on a prior grant of 50,000 shares of restricted stock will be lifted and a stock certificate for such shares, less the number of shares required for applicable withholdings, will be issued to Mr. Gyenes and (v) Mr. Gyenes’ offer letter was terminated. The severance agreement also contained other customary provisions, including non-disparagement and cooperation covenants and a mutual release of claims.

 

 

 

 

 

 

 

 

 

 

SEVERANCE AND CHANGE IN CONTROL PAYMENTS

 

As discussed elsewhere in this Proxy Statement, we have letter agreements with certain of our current named executive officers that provide severance benefits to the named executive officers upon termination following a change in control or without cause. In the table below, we summarize the estimated payments that will be made to each of our current named executive officers upon a termination of employment without cause or in connection with a change in control of ZILA. The major assumptions that we used in creating the table are set forth directly below. The table includes an estimate of the compensation that would accrue for each executive if the triggering event occurred on July 31, 2007 (ZILA’s fiscal year-end) and, unless otherwise noted, is based on each executive’s compensation on that date. Calculations requiring a per share stock price are made on the basis of the closing price of $1.30 per share of our common stock on the NASDAQ Global Market on July 31, 2007.

 

Change in Control

 

No cash payment will be made solely because of a “Change in Control.” For each current named executive officer, the cash payments described under the table heading “Change in Control” will be triggered upon a termination in connection with a “Change in Control.” Cash payments described under the table heading “Without Cause” will be triggered upon a termination without cause as further described below in “Terms of Officer Agreements.”

Acceleration upon a Change in Control

 

Under the 1997 Plan, all outstanding options accelerate upon a “Change in Control,” as defined in such plan, if the option holder is employed by us on the date of the “Change in Control.” However, the exercise price for all such options that would be accelerated for the current named executive officers is higher than the closing price of our common stock at July 31, 2007 ($1.30), so our named executive officers would derive no intrinsic value from the acceleration of these unvested option awards. Accordingly, for purposes of the table, we have assumed no value for all outstanding options accelerated on a Change in Control.

 

For purpose of the “Restricted Stock Award” column, we have assumed the acceleration of the restricted stock awards for Messrs. Bellizzi and Klinefelter upon a “Change in Control” as defined in the 1997 Plan. However, only Mr. Klinefelter’s letter agreement provides for acceleration of restricted stock upon a termination “Without Cause.”

 

Medical and Other Benefits

 

The table below does not discuss certain medical, disability or outplacement services benefits that may be payable on termination to our current named executive officers. We also do not include any amounts payable on termination that are generally available to all employees on a non-discriminatory basis. In addition, this table does not include specific treatment of a normal retirement.

 

Terms of Officer Agreements

 

Pursuant to the terms of his letter agreement, Mr. Bellizzi is entitled to his severance payments if ZILA actually or constructively terminates his employment without “Cause.” For purposes of his agreement, “constructive termination” is deemed to have occurred in the event of a material diminution of compensation or job responsibilities. “Cause” means (i) a failure to correct a specific conduct or job-performance issue or issues about which Mr. Bellizzi has been informed in writing and been given an opportunity to correct; or (ii) conduct or job performance that ZILA believes is sufficiently willful and/or egregious for which providing written notice and an opportunity to correct is an inadvisable business practice, or (iii) an inability to perform the job (e.g., due to incapacity or death). If Mr. Bellizzi’s employment is terminated for any other reason, including, without limitation, because of a change in control of ZILA, such termination will be deemed without “Cause.”

 

Mr. Klinefelter and Ms. Klein are entitled to severance payments upon a termination in connection with either a change in control event or a termination “Without Cause.” For purposes of their letter agreements, “Change in Control” is defined and governed by the definition of “change in control” contained in the 1997 Plan. By the terms of their letter agreements, if Mr. Klinefelter or Ms. Klein are terminated within eighteen (18) months of a “Change in Control,” there is a rebuttable presumption that such termination was as a result of such “Change in Control.” “Without Cause” means (i) a failure to correct a specific conduct or job-performance issue or issues about which he or she has been informed in writing and been given an opportunity to correct; or (ii) conduct or job performance that ZILA believes is sufficiently willful and/or egregious for which providing written notice and an opportunity to correct is an inadvisable business practice, or (iii) an inability to perform the job (e.g., due to incapacity or death). If Mr. Klinefelter’s or Ms. Klein’s employment is terminated for any other reason, (with the exception of a Change in Control) such termination will be deemed “Without Cause.”

In addition, our severance benefits are subject to the current named executive officers signing a general release acceptable to ZILA in order for such severance benefits to take effect.

 

 

 

 

DIRECTOR COMPENSATION

 

Employee directors do not receive any separate compensation for their Board activities. Non-employee directors each receive a $10,000 annual retainer. The Audit Committee Chairman receives an additional $5,000 annual retainer and the Compensation Committee Chairman and the Nomination Committee Chairman each receive an additional $2,500 annual retainer. Each non-employee director also receives $2,000 for each Board meeting attended in person and $1,000 for each telephonic meeting. Each non-employee director receives $1,000 for each committee meeting he or she attends. We reimburse directors for any reasonable expenses related to their Board service.

 

On November 9, 2006, ZILA’s Board amended the 1997 Stock Award Plan to eliminate the annual automatic grant of options to non-employee directors.

 

The following table summarizes compensation paid to our each of our non-employee directors who served in such capacity during fiscal 2007. David Goldman was appointed to the Board on September 27, 2007, and therefore no compensation is reflected for him in the table below.

 

 

 

 

On August 16, 2007, David R. Bethune accepted an offer letter to become the Executive Chairman of the Board. Under the offer letter, which is effective until the earlier of Mr. Bethune’s departure from ZILA’s Board or July 31, 2008, Mr. Bethune is entitled to a base salary of $255,000 per year, less applicable withholdings, to be paid in accordance with ZILA’s regular payroll practices. In addition, Mr. Bethune is also entitled to stock option grants based on individual performance or commensurate with other executive-level employees and received, in each case as of August 16, 2007: