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.    )

Filed by the Registrant þ
Filed by a Party other than the Registrant o

Check the appropriate box:

þ		Preliminary Proxy Statement
o		Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
o		Definitive Proxy Statement
o		Definitive Additional Materials
o		Soliciting Material Pursuant to §240.14a-12

ZILA, INC.
(Name of Registrant as Specified In Its Charter)

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

Payment of Filing Fee (Check the appropriate box):

o		No fee required.
þ		Fee computed below per Exchange Act Rules 14a-6(i)(1) and 0-11.

	1)		Title of each class of securities to which transaction applies:
			Common Stock, par value $0.001 per share, of Zila, Inc. Series B Convertible Preferred Stock, par value $0.001 per share, of Zila, Inc. Options to purchase shares of Zila, Inc. Common Stock Warrants to purchase shares of Zila, Inc. Common Stock Senior Secured Convertible Notes (convertible into shares of Zila, Inc. Common Stock)
	2)		Aggregate number of securities to which transaction applies:
			10,455,821.72 shares of Zila, Inc. Common Stock and 100,000 shares of Zila, Inc. Series B Convertible Preferred Stock. Options to purchase 50,000 shares of Zila, Inc. Common Stock at an exercise price of $0.34 per share (options to purchase an additional 354,809.09 shares provide for exercise prices in excess of the per share merger consideration described below and will be cancelled without payment). Zila, Inc.’s Senior Secured Convertible Notes, which are convertible into 779,221 shares of Zila, Inc. Common Stock, are subject to a separate agreement and will receive consideration in that transaction, but will not receive any consideration in this transaction. Warrants to purchase 171,429 shares of Zila, Inc. Common Stock will be converted into the right to receive the per share merger consideration payable to holders of Zila, Inc. Common Stock upon payment of their exercise price (which is equal to $15.54 per share). Warrants to purchase 1,212,995 shares of Zila, Inc. Common Stock (with an exercise price of $14.63 per share) will remain outstanding.
	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):
			The proposed maximum aggregate value of the transaction was determined by adding (i) 10,455,821.72 shares of Zila, Inc. Common Stock multiplied by $0.38 per share, plus (ii) 50,000 shares underlying in-the-money stock options multiplied by the excess of $0.38 per share over the $0.34 exercise price applicable to such stock options, plus (iii) 100,000 shares of Zila, Inc. Series B Convertible Preferred Stock multiplied by $0.44 per share. The other securities described above were not included for purposes of calculating the proposed maximum aggregate value of the transaction because no consideration will be paid to holders of such securities in connection with the transaction.
	4)		Proposed maximum aggregate value of transaction:
			$4,019,212
	5)		Total fee paid:
			$224.27 (calculated by multiplying the proposed maximum aggregate value of the transaction by the fee payable in accordance with Section 14(g) of the Securities Act of 1933, as amended, or $55.80 per $1,000,000)

o		Fee paid previously with preliminary materials.
o		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.

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Amount Previously Paid:

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Form, Schedule or Registration Statement No.:

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Filing Party:

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Date Filed:

 

ZILA, INC.
16430 North Scottsdale Road, Suite 450
Scottsdale, Arizona, 85254-1770

 

July [  ], 2009
Scottsdale, Arizona

 

To the Holders of Capital Stock of Zila, Inc.:

 

You are cordially invited to attend a special meeting of stockholders of Zila, Inc., a Delaware corporation (“ZILA”), on Friday, August 21, 2009, at 8:00 a.m. Arizona time. The special meeting will be held at the Hampton Inn & Suites, 16620 North Scottsdale Road, Scottsdale, Arizona 85254.

 

On June 25, 2009, our Board of Directors approved and we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with TOLMAR Holding, Inc., a Delaware corporation (“TOLMAR”), and Project Z Acquisition Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of TOLMAR (“Acquisition Sub”). Pursuant to the Merger Agreement, Acquisition Sub will merge with and into ZILA, with ZILA surviving as a wholly-owned subsidiary of TOLMAR (the “Merger”). If the Merger is completed, (i) holders of shares of our common stock will be entitled to receive $0.38 in cash, without interest and less any applicable withholding taxes, for each share of ZILA common stock that they own immediately prior to the completion of the Merger, and (ii) holders of our Series B Convertible Preferred Stock (the “Series B Preferred”) will be entitled to receive $0.44 in cash, without interest and less any applicable withholding taxes, for each share of Series B Preferred that they own immediately prior to the completion of the Merger, as more fully described in the enclosed proxy statement. This per share consideration is subject to equitable adjustment in the event of any stock split, stock dividend, reverse stock split or other change in the number of outstanding ZILA shares (or securities convertible or exchangeable into or exercisable for ZILA shares) between the date of the Merger Agreement and the effective time of the Merger. A copy of the Merger Agreement is attached as Annex A to the accompanying proxy statement, and you are encouraged to read it in its entirety. If the Merger is completed, ZILA will no longer be a publicly traded company.

 

At the special meeting, holders of our common stock will be asked to adopt the Merger Agreement and to approve the transactions contemplated by the Merger Agreement, including the Merger. After careful consideration, our Board of Directors has unanimously (with the exception of J. Steven Garrett, who did not participate in the consideration of the Merger Agreement or the proposed Merger because he is employed by TOLMAR, Inc., an affiliate of TOLMAR) approved the Merger Agreement and the transactions contemplated by the Merger Agreement (including the Merger) and determined that the Merger Agreement and the transactions contemplated by the Merger Agreement (including the Merger) are fair, advisable and in the best interests of ZILA and its stockholders. In addition, Columbia West Capital, LLC rendered a written opinion to our Board of Directors dated June 10, 2009 to the effect that, as of that date and based upon and subject to the matters stated in the opinion, the merger consideration to be paid by TOLMAR in connection with the Merger is fair to ZILA’s stockholders from a financial point of view. Accordingly, our Board of Directors recommends that you vote “FOR” the adoption of the Merger Agreement and the approval of the transactions contemplated by the Merger Agreement, including the Merger . Holders of record of our common stock and the Series B Preferred at the close of business on July 2, 2009, the record date for the special meeting, are entitled to receive notice of and to attend the special meeting. Only holders of record of our common stock as of the close of business on July 2, 2009 are entitled to vote at the special meeting or any adjournment thereof.

 

The proxy statement attached to this letter provides you with information about the Merger Agreement, the proposed Merger and the special meeting. I encourage you to read the entire proxy statement carefully. You may also obtain information about ZILA from us or from documents filed with the Securities and Exchange Commission.

 

Your vote is very important.   The Merger cannot be completed unless the Merger Agreement is approved by the affirmative vote of holders of at least a majority of the outstanding shares of ZILA common stock that are entitled to vote at the special meeting. Whether or not you plan to attend the special meeting, we request that you cast your vote either by completing and returning the enclosed proxy card as promptly as possible or by submitting your proxy or voting instructions by telephone or Internet. If you hold your shares through a broker or other nominee, you should follow the procedures provided by your broker or nominee . If you fail to vote by proxy, or fail to instruct your broker on how to vote, it will have the same effect as a vote against the adoption of the Merger Agreement and the approval of the Merger.

 

Thank you in advance for your cooperation and continued support of ZILA.

 

Sincerely,

 

David R. Bethune
Chairman and Chief Executive Officer

 

Neither the Securities and Exchange Commission nor any state securities regulatory agency has approved or disapproved the Merger, passed upon the merits or fairness of the Merger or passed upon the adequacy or accuracy of the disclosure in this document. Any representation to the contrary is a criminal offense.

 

This proxy statement is dated July [  ], 2009 and is first being mailed to the stockholders on or about July [  ], 2009.

 

ZILA, INC.
16430 North Scottsdale Road, Suite 450
Scottsdale, Arizona, 85254-1770

 

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

TO BE HELD ON FRIDAY, AUGUST 21, 2009

 

July [  ], 2009
Scottsdale, Arizona

 

The Board of Directors of Zila, Inc., a Delaware corporation (“ZILA”), is furnishing you with this proxy statement in connection with its solicitation of your proxy, in the form enclosed, for use at a special meeting of stockholders to be held on Friday, August 21, 2009, at 8:00 a.m. Arizona time. The special meeting will be held at the Hampton Inn & Suites, 16620 North Scottsdale Road, Scottsdale, Arizona 85254.

 

The purpose of the special meeting is to:

 

1. Consider and vote upon a proposal to adopt the Agreement and Plan of Merger (the “Merger Agreement”), dated June 25, 2009, by and among TOLMAR Holding, Inc., a Delaware corporation (“TOLMAR”), Project Z Acquisition Sub, Inc., a Delaware corporation (“Acquisition Sub”), and ZILA, a copy of which is attached as Annex A to the accompanying proxy statement, and to approve the transactions contemplated thereunder (including the merger of Acquisition Sub with and into ZILA, with ZILA surviving as a wholly-owned subsidiary of TOLMAR, which is referred to in the attached proxy statement as the “Merger”);

 

2. Consider and vote upon a proposal to approve one or more adjournments of the special meeting, if necessary or appropriate, including adjournments to permit further solicitation of proxies in favor of adopting the Merger Agreement and approving the Merger; and

 

3. Consider and take action upon any other matter that may properly come before the special meeting of stockholders or any adjournment(s) or postponement(s) of the meeting.

 

After careful consideration, our Board of Directors has unanimously (with the exception of J. Steven Garrett, who did not participate in the consideration of the Merger Agreement because he is employed by TOLMAR, Inc., an affiliate of TOLMAR) approved the Merger Agreement, and determined that the Merger Agreement and the transactions contemplated by the Merger Agreement (including the Merger) are fair to, advisable and in the best interests of ZILA and its stockholders. Accordingly, our Board of Directors recommends that you vote “FOR” the adoption of the Merger Agreement and the approval of the transactions contemplated by the Merger Agreement, including the Merger.

 

Holders of record of our common stock and the Series B Preferred at the close of business on July 2, 2009, the record date for the special meeting, are entitled to receive notice of and to attend the special meeting. Only holders of record of our common stock as of the close of business on July 2, 2009 are entitled to vote at the special meeting or any adjournment thereof. These proxy solicitation materials are being sent to our stockholders entitled to vote at the special meeting on or about July [  ], 2009.

 

Your proxy is being solicited by ZILA’s Board of Directors.   We urge you to vote as soon as possible whether or not you plan to attend the special meeting to assure your representation at such meeting. For your convenience, and to help reduce expenses, you may vote through the telephone or the Internet as instructed on the enclosed proxy card. Alternatively, you can complete, sign and mail the enclosed proxy. We have enclosed a return envelope for that purpose, which requires no postage if mailed in the United States. You may revoke a previously delivered proxy at any time prior to the meeting. If you decide to attend the meeting and wish to change your proxy vote, you may do so automatically by voting in person at the special meeting.

 

Holders of ZILA’s common stock who do not vote in favor of the proposal to adopt the Merger Agreement will have the right to seek appraisal of the fair value of their shares of common stock if the Merger is completed, subject to the satisfaction of the requirements for exercising and perfecting such rights under Delaware law, which are summarized in the attached proxy statement. Holders of ZILA’s Series B Convertible Preferred Stock are not entitled to vote at the special meeting but do have the right to seek appraisal of the fair value of their shares.

 

IMPORTANT NOTICE

 

FOR THE MERGER AGREEMENT TO BE APPROVED BY OUR STOCKHOLDERS, A MAJORITY OF OUR OUTSTANDING SHARES OF COMMON STOCK (AS OF THE RECORD DATE FOR THE SPECIAL MEETING) MUST BE VOTED IN FAVOR OF THE MERGER AGREEMENT. ACCORDINGLY, IF YOU DO NOT VOTE YOUR SHARES, IT WILL HAVE THE SAME EFFECT AS A VOTE AGAINST THE ADOPTION OF THE MERGER AGREEMENT AND THE APPROVAL OF THE MERGER. PLEASE VOTE YOUR SHARES.

 

TABLE OF CONTENTS

 

ZILA, INC.
16430 North Scottsdale Road, Suite 450
Scottsdale, Arizona, 85254-1770

 

PROXY STATEMENT FOR THE SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON FRIDAY, AUGUST 21, 2009

 

The enclosed proxy is solicited on behalf of the Board of Directors (the “Board”) of Zila, Inc., a Delaware corporation, for use at the special meeting of stockholders to be held on Friday, August 21, 2009 at 8:00 a.m. Arizona time, and at any adjournment or postponement thereof, at the Hampton Inn & Suites, 16620 North Scottsdale Road, Scottsdale, Arizona 85254. These proxy solicitation materials will be mailed on or about July [  ], 2009 to all stockholders entitled to vote at the special meeting.

 

References to “ZILA,” the “Company,” “we,” “our” or “us” in this proxy statement refer to Zila, Inc. and its subsidiaries unless the context indicates otherwise.

 

The following summary highlights selected information in this proxy statement and may not contain all of the information that may be important to you. Accordingly, we encourage you to read carefully this entire proxy statement, its annexes and the documents referred to or incorporated by reference in this proxy statement. Each item in this summary includes a page reference directing you to a more complete description of that topic. See “Where You Can Find More Information” beginning on page 51.

 

Proposal

 

At the special meeting of stockholders, you will be asked to consider and vote upon a proposal to adopt the Agreement and Plan of Merger (the “Merger Agreement”), dated June 25, 2009 by and among TOLMAR Holding, Inc., a Delaware corporation (“TOLMAR”), Project Z Acquisition Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of TOLMAR (“Acquisition Sub”), and ZILA, and to approve the transactions contemplated under the Merger Agreement, including the merger of Acquisition Sub with and into ZILA, with ZILA surviving as a wholly-owned subsidiary of TOLMAR (the “Merger”).

 

Record Date

 

All holders of record of our common stock as of the close of business on July 2, 2009, which is the record date for the special meeting, are entitled to notice of, attend and vote at the special meeting. You will have one vote for each share of common stock that you owned as of the record date. On the record date, there were 10,455,821.72 shares of common stock issued and outstanding and entitled to vote at the special meeting.

 

Quorum

 

The holders of a majority of the shares of our common stock that were issued and outstanding on the record date and entitled to vote, present in person or represented by proxy, will constitute a quorum at the special meeting.

 

Proxies; Revocation

 

You may vote by returning the enclosed proxy, submitting a proxy by telephone or Internet or by appearing and voting at the special meeting in person. If you hold your shares through a broker or other nominee, you should follow the procedures provided by your broker or nominee.

 

Proxies may be revoked if you: (i) deliver a signed, written revocation letter prior to the special meeting of stockholders, dated later than the proxy, to Gary V. Klinefelter, Vice President, General Counsel and Secretary of Zila, Inc., at 16430 North Scottsdale Road, Suite 450, Scottsdale, Arizona, 85254-1770; (ii) deliver a signed proxy prior to the special meeting of stockholders, dated later than the first one, to Computershare Investor Services,

Proxy Unit, 350 Indiana Street, Suite 800, Golden, Colorado 80401; (iii) vote your shares by telephone or the Internet prior to the special meeting of stockholders differently than you did originally, using the same procedures for those methods; or (iv) attend the special meeting of stockholders and vote in person or by proxy. Simply attending the special meeting will not constitute revocation of your proxy. If you wish to revoke your previously submitted proxy at the special meeting, you must deliver a completed proxy card with a later date in person or complete a ballot to be made available at the special meeting.

 

Vote Required

 

The affirmative vote of the holders of a majority of the outstanding shares of our common stock entitled to vote at the special meeting is required to adopt the Merger Agreement and to approve the Merger. Because the required vote is based on the number of shares of our common stock issued and outstanding rather than on the number of votes cast, failure to vote your shares of our common stock (including as a result of broker non-votes and abstentions) will have the same effect as voting against the Merger. Holders of our Series B Convertible Preferred Stock (the “Series B Preferred”) are not entitled to vote at the special meeting of stockholders.

 

Approval of the adjournment proposal will require the affirmative vote of the holders of a majority of the shares present in person or represented by proxy at the special meeting and entitled to vote on the adjournment proposal.

 

The holders of the Senior Secured Notes (as defined below) have agreed to vote their shares in favor of adopting the Merger Agreement and approving the Merger. In addition, ZILA’s directors and executive officers anticipate executing Transaction Support Agreements with TOLMAR, which will provide that unless the Merger Agreement is terminated, they will vote their shares in favor of adopting the Merger Agreement and approving the Merger.

 

ZILA, headquartered in Scottsdale, Arizona, is a diagnostic company dedicated to the prevention, detection and treatment of oral cancer and periodontal disease. We manufacture and market ViziLite ^® Plus with TBlue ^® (“ViziLite ^® Plus”), our flagship product for the early detection of oral abnormalities that could lead to cancer. ViziLite ^® Plus is an adjunctive medical device cleared by the U.S. Food and Drug Administration (“FDA”) for use in a population at increased risk for oral cancer. In addition, ZILA designs, manufactures and markets a suite of proprietary products sold exclusively and directly to dental professionals for periodontal disease, including the Rotadent ^® Professional Powered Brush, the Pro-Select Platinum ^® ultrasonic scaler and a portfolio of oral pharmaceutical products for both in-office and home-care use. All of our products are marketed and sold in the United States and Canada primarily through our direct field sales force and telemarketing organization. Our products are marketed and sold in other international markets through the sales forces of third party distributors. Historically, our marketing programs have reached most U.S. dental offices by direct marketing efforts and various media outlets. However, because of cost control and cash preservation initiatives, during fiscal 2009 we have significantly reduced our marketing efforts, which has impacted our reach to new and existing customers. We are an approved American Dental Association continuing education provider and recently submitted our renewal applicable to the Academy of General Dentistry to continue as an approved continuing education provider.

 

TOLMAR’s primary operating subsidiary, TOLMAR, Inc., is a Colorado-based pharmaceutical research, development, manufacturing and commercial operations company. TOLMAR, Inc. develops and manufacturers both proprietary and generic pharmaceutical products with specific focus in therapeutic areas of dental, dermatology, and oncology. The company’s strengths include a proven developmental, clinical, regulatory and manufacturing infrastructure with highly trained and experienced staff. TOLMAR, Inc.’s lead dental product is ATRIDOX ^® , which is the only locally applied antimicrobial that is clinically proven for all three of the following indications: gain in clinical attachment, reduction in probing depth, and reduction in bleeding on probing. TOLMAR, Inc. also manufactures and sells ATRISORB ^® FreeFlow ^tm and Atrisorb ^® -D FreeFlow ^tm , which are bioabsorbable guided tissue regeneration barriers indicated for use in periodontal surgical procedures.

 

Acquisition Sub was formed solely for the purpose of completing the Merger. Acquisition Sub is a wholly-owned subsidiary of TOLMAR and has not engaged in any business except for activities incidental to its formation and as contemplated by the Merger Agreement.

 

Upon the terms and subject to the conditions of the Merger Agreement, at the effective time, Acquisition Sub will merge with and into ZILA, with ZILA surviving as a wholly-owned subsidiary of TOLMAR. Each holder of shares of common stock of ZILA will be entitled to receive $0.38 in cash, without interest and less any applicable withholding taxes, for each share of common stock such holder owns immediately prior to the completion of the Merger (the “Common Stock Merger Consideration”), and each holder of ZILA’s Series B Preferred will be entitled to receive $0.44 in cash, without interest and less any applicable withholding taxes, for each share of Series B Preferred such holder owns immediately prior to the completion of the Merger, as more fully described in the enclosed proxy statement. This per share consideration is subject to equitable adjustment in the event of any stock split, stock dividend, reverse stock split or other change in the number of outstanding ZILA shares (or securities convertible or exchangeable into or exercisable for ZILA shares) between the date of the Merger Agreement and the effective time of the Merger.

 

As a result of the Merger, ZILA will cease to be a publicly traded company. Holders of our common stock and Series B Preferred will not own any shares of the surviving corporation and will not have any continuing rights as a stockholder.

 

Warrants.   The treatment of outstanding warrants to purchase our common stock will vary depending on their respective terms. By virtue of the Merger, certain of our warrants will automatically become rights to receive the Common Stock Merger Consideration in exchange for payment of their exercise price (which is equal to $15.54 per share). Certain other warrants (with an exercise price of $14.63 per share) will remain outstanding. Of these warrants that would otherwise remain outstanding, ZILA is obligated under the terms of the Merger Agreement to attempt to cancel them prior to the closing of the Merger.

 

Stock Options.   Immediately prior to the effective time of the Merger, all outstanding options to purchase common stock under our equity incentive plans will become immediately vested and exercisable in full. At the effective time of the Merger, each then outstanding option will, by virtue of the Merger, be converted into and will become a right to receive an amount in cash, without interest and less any applicable withholding taxes, with respect to each share subject thereto, equal to the excess, if any, of the Common Stock Merger Consideration over the per share exercise price of such option, and each such option will terminate at the effective time. Only 50,000 stock options have an exercise price less than the Common Stock Merger Consideration and thus will receive any payment in connection with the Merger.

 

Restricted Stock.   At the effective time and by virtue of the Merger, the restrictions on the restricted stock issued and outstanding immediately before the effective time will lapse, and such restricted stock will be treated as common stock for purposes of receiving the merger consideration.

 

After careful consideration, our Board has unanimously (with the exception of J. Steven Garrett, who did not participate in the consideration of the Merger Agreement because he is employed by TOLMAR, Inc., an affiliate of TOLMAR) approved the Merger Agreement and the transactions contemplated by the Merger Agreement and determined that the Merger Agreement and the transactions contemplated by the Merger Agreement (including the Merger) are fair, advisable and in the best interests of ZILA and its stockholders. In addition, our Board engaged Columbia West Capital, LLC (“Columbia West”), an investment bank, to advise it in connection with considering the proposed Merger. Columbia West has rendered a written opinion to our Board dated June 10, 2009 to the effect that, as of that date and based upon and subject to the matters stated in the opinion, the merger consideration to be paid by TOLMAR in connection with the Merger is fair to ZILA’s stockholders from a financial point of view. Accordingly, our Board recommends that you vote “FOR” the adoption of the Merger Agreement and the approval of the transactions contemplated by the Merger Agreement, including the Merger .

In reaching its decision, our Board evaluated a variety of business, financial and market factors and consulted with our management team and our legal and financial advisors. See “The Merger — Reasons for the Merger” beginning on page 21 for a description of the factors that the Board considered in reaching its decision.

 

Our directors and executive officers may have interests in the Merger that are different from, or in addition to, the interests of our stockholders. Specifically:

 

 

Promptly following the effective time of the Merger, a payment agent will mail a letter of transmittal and instructions to you and the other ZILA stockholders. The letter of transmittal will tell you how to surrender your stock certificates in exchange for the merger consideration. You should not return your stock certificates with the proxy card, but you should return your stock certificates with the letter of transmittal.

 

Our Board considered the financial analyses and opinion of Columbia West delivered orally to our Board and confirmed in writing, to the effect that, as of June 10, 2009, and based upon and subject to the factors and assumptions set forth therein, the total value of the proposed merger consideration to be received in the aggregate by the holders of shares of our common stock and Series B Preferred pursuant to the Merger Agreement which amounts were proposed to be $0.28 per share and $0.32 per share, respectively, as of the date on which the letter was delivered, was fair from a financial point of view to our stockholders as a whole. The full text of the written opinion of Columbia West, dated June 10, 2009, which sets forth assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with the opinion, is attached as Annex B and is incorporated in this proxy statement by reference.

 

Columbia West provided its opinion for the information and assistance of our Board in connection with its consideration of the Merger. Columbia West’s opinion does not constitute a recommendation as to how any holder of shares of common stock should vote with respect to the adoption of the Merger Agreement or any other matter.

 

The exchange of shares for cash pursuant to the Merger Agreement generally will be a taxable transaction for U.S. federal income tax purposes. Stockholders who exchange their shares in the Merger will generally recognize gain or loss in an amount equal to the difference, if any, between the cash received in the Merger and their adjusted tax basis in their shares surrendered. Because individual circumstances may differ, we urge you to consult your tax advisor for a complete analysis of the effect of the Merger on your federal, state and local and/or foreign taxes.

 

Before we can complete the Merger, the following conditions must be satisfied:

 

 

Under the Merger Agreement, TOLMAR, Inc. is entitled to waive, in writing, some of the above conditions to the Merger including, without limitation, the condition that the number of dissenting shares in the form of ZILA common stock not exceed 15% of the total number of shares of our common stock and the condition that at least 70% of the warrants to purchase ZILA common stock that we issued in our November 2006 private placement must be cancelled.

 

The Merger Agreement requires us to immediately cease and terminate any solicitation, encouragement, discussions or negotiations with any third-party with respect to an acquisition proposal relating to ZILA. The

Merger Agreement prohibits us from initiating, facilitating or encouraging any offers from a third-party regarding an alternative acquisition of ZILA, and it prohibits us from engaging in discussions or negotiations, or actually entering into an agreement with a third-party regarding an alternative acquisition of ZILA. Notwithstanding these prohibitions, under certain circumstances required for our Board to comply with its fiduciary duties, our Board may respond to an unsolicited alternative acquisition proposal that is (or would reasonably be expected to lead to) a superior proposal (as that term is defined in the Merger Agreement).

 

The Merger Agreement may be terminated at any time prior to the consummation of the Merger, whether before or after stockholder approval has been obtained, upon the following:

 

 

 

 

 

 

We will be required to pay TOLMAR’s expenses (including legal fees and expenses) incurred in connection with the Merger Agreement, not to exceed $200,000, as well as a termination fee of $300,000 if:

 

 

In addition, if the Merger Agreement is terminated because our stockholders do not adopt the Merger Agreement or the Merger is not consummated by November 22, 2009, and at or before the date of termination an alternative acquisition proposal has been made or announced, then:

 

 

Under Delaware law, if you do not vote for adoption of the Merger Agreement and, prior to the adoption of the Merger Agreement at the special meeting, you make a written demand and you strictly comply with the other statutory requirements of the General Corporation Law of the State of Delaware (the “DGCL”), you may elect to receive, in cash, the fair value of your shares of common stock in lieu of the Common Stock Merger Consideration, as determined by the Delaware Court of Chancery. Holders of Series B Preferred Stock are not entitled to vote at the special meeting, but do have the right to seek appraisal of the fair value of their shares of Series B Preferred in lieu of the $0.44 per share otherwise payable to them under the terms of the Merger Agreement. The judicially determined appraisal amount could be more or less than, or the same as, the consideration provided for under the Merger Agreement.

 

In order to exercise appraisal rights, you must demand and perfect the rights in accordance with Section 262 of the DGCL, the full text of which is set forth in Annex C to this proxy statement. Your failure to follow the procedures set forth in Section 262 will result in the loss of your appraisal rights.

 

Our common stock is listed on the NASDAQ Capital Market under the trading symbol “ZILA.” The closing sale price of common stock on the NASDAQ Capital Market on June 24, 2009, the last trading day prior to board approval of the Merger Agreement, was $0.32 per share. The $0.38 per share to be paid for each share of common stock in the Merger represents a premium of approximately 18% to the closing price on June 24, 2009. The closing sale price of our common stock as reported on July [  ], 2009, the last trading day before the date of this proxy statement, was $[     ].

 

TOLMAR, Inc., an affiliate of TOLMAR, entered into a Senior Note Purchase Agreement with Visium Balanced Master Fund, Ltd. and Atlas Master Fund, Ltd., dated May 6, 2009 (the “Senior Note Purchase Agreement”), pursuant to which TOLMAR, Inc. agreed to purchase for $5,000,000 in cash all of our Third Amended and Restated Senior Secured Notes (the “Senior Secured Notes”), which are currently outstanding in the aggregate principal amount at maturity of $12,000,000. The Senior Note Purchase Agreement provides, among other things, that, without TOLMAR, Inc.’s prior written consent, the holders of the Senior Secured Notes are prohibited from exercising certain rights available to them under the terms of the Senior Secured Notes. TOLMAR, Inc.’s obligation to purchase the Senior Secured Notes is conditioned upon certain things and events, including the completion of the Merger, but TOLMAR, Inc. is entitled to waive that condition and purchase the Senior Secured Notes even if the Merger is not completed. The Senior Note Purchase Agreement may be terminated by either or both of the parties under certain circumstances, including mutual written consent.

 

The following questions and answers are intended to address briefly some commonly asked questions regarding the Merger, the Merger Agreement and the special meeting. These questions and answers may not address all questions that may be important to you. Please refer to the “Summary Term Sheet” and the more detailed information contained elsewhere in this proxy statement, the annexes to this proxy statement and the documents referred to or incorporated by reference in this proxy statement, which you should read carefully. See “Where You Can Find More Information” beginning on page 51.

 

 

 

 

 

 

This proxy statement includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act. In some cases, you can identify these statements by the use of forward-looking words such as “may,” “will,” “should,” “anticipate,” “estimate,” “expect,” “plan,” “believe,” “predict,” “potential,” “project” or “intend.” The forward-looking information is based on various factors and was derived using numerous assumptions. The forward-looking statements only reflect predictions and are not a guarantee of future performance. These statements, which are based on information currently available to us, are not guarantees of future performance and may involve risks and uncertainties that could cause our actual growth, results of operations, performance and business prospects, and opportunities to materially differ from those expressed in, or implied by, these statements. These forward-looking statements speak only as of the date on which the statements were made and we expressly disclaim any obligation to release publicly any updates or revisions to any forward-looking statement included in this proxy statement or elsewhere. In addition to other factors and matters contained or incorporated in this document, these statements are subject to risks, uncertainties and other factors, including, among others:

 

 

Many of the factors that will determine our future results are beyond our ability to control or predict. In light of the significant uncertainties inherent in the forward-looking statements contained herein, readers should not place undue reliance on forward-looking statements, which reflect management’s views only as of the date hereof. We cannot guarantee any future results, levels of activity, performance or achievements.

THE SPECIAL MEETING

 

ZILA is furnishing this proxy statement to you, as a stockholder of ZILA, as part of the solicitation of proxies by our Board for use at the special meeting of stockholders and any adjournments or postponements of the special meeting.

 

 

PLEASE VOTE — YOUR VOTE IS IMPORTANT

 

This discussion of the Merger is qualified by reference to the Merger Agreement, which is attached to this proxy statement as Annex A. You should read the entire Merger Agreement carefully as it is the legal document that governs the Merger.

 

Zila, Inc.

16430 North Scottsdale Road, Suite 450

Scottsdale, Arizona 85254

(602) 266-6700

 

ZILA, headquartered in Scottsdale, Arizona, is a diagnostic company dedicated to the prevention, detection and treatment of oral cancer and periodontal disease. We manufacture and market ViziLite ^® Plus with TBlue ^® (“ViziLite ^® Plus”), our flagship product for the early detection of oral abnormalities that could lead to cancer. ViziLite ^® Plus is an adjunctive medical device cleared by the U.S. Food and Drug Administration (“FDA”) for use in a population at increased risk for oral cancer. In addition, ZILA designs, manufactures and markets a suite of proprietary products sold exclusively and directly to dental professionals for periodontal disease, including the Rotadent ^® Professional Powered Brush, the Pro-Select Platinum ^® ultrasonic scaler and a portfolio of oral pharmaceutical products for both in-office and home-care use. All of our products are marketed and sold in the United States and Canada primarily through our direct field sales force and telemarketing organization. Our products are marketed and sold in other international markets through the sales forces of third party distributors. Historically, our marketing programs have reached most U.S. dental offices by direct marketing efforts and various media outlets. However, because of cost control and cash preservation initiatives, during fiscal 2009 we have significantly reduced our marketing efforts, which has impacted our reach to new and existing customers. We are an approved American Dental Association continuing education provider and recently submitted our renewal applicable to the Academy of General Dentistry to continue as an approved continuing education provider.

 

TOLMAR Holding, Inc.

 

c/o TOLMAR, Inc.

701 Centre Avenue

Fort Collins, Colorado 80526

(970) 212-4500

 

TOLMAR’s primary operating subsidiary, TOLMAR, Inc., is a Colorado-based pharmaceutical research, development, manufacturing and commercial operations company. TOLMAR, Inc. develops and manufacturers both proprietary and generic pharmaceutical products with specific focus in therapeutic areas of dental, dermatology, and oncology. The company’s strengths include a proven developmental, clinical, regulatory and manufacturing infrastructure with highly trained and experienced staff. TOLMAR, Inc.’s lead dental product is ATRIDOX ^® , which is the only locally applied antimicrobial that is clinically proven for all three of the following indications: gain in clinical attachment, reduction in probing depth, and reduction in bleeding on probing. TOLMAR, Inc. also manufactures and sells ATRISORB ^® FreeFlow ^tm and Atrisorb ^® -D FreeFlow ^tm , which are bioabsorbable guided tissue regeneration barriers indicated for use in periodontal surgical procedures.

 

Project Z Acquisition Sub, Inc.

 

Project Z Acquisition Sub, Inc.

c/o TOLMAR, Inc.

701 Centre Avenue

Fort Collins, Colorado 80526

(970) 212-4500

 

Acquisition Sub, a Delaware corporation, was formed solely for the purpose of completing the proposed Merger. Acquisition Sub is a wholly-owned subsidiary of TOLMAR and has not engaged in any business except for activities incidental to its formation and as contemplated by the Merger Agreement.

 

Under the terms of the Merger Agreement, TOLMAR will acquire ZILA and its subsidiaries through the merger of Acquisition Sub with and into ZILA, with ZILA surviving as a wholly-owned subsidiary of TOLMAR. In the Merger, each share of our common stock issued and outstanding immediately prior to the effective time of the Merger will be converted into the right to receive $0.38 in cash, without interest and less any applicable withholding taxes. Each share of our Series B Preferred issued and outstanding immediately prior to the effective time of the Merger will be converted into the right to receive $0.44 in cash, without interest and less any applicable withholding taxes.

 

The Merger will become effective under all applicable laws upon the filing of a certificate of merger with the Secretary of State of the State of Delaware. We sometimes use the term “effective time” in this proxy statement to describe the time that the Merger will become effective under all applicable laws. If the Merger Agreement proposal is approved at the special meeting on Friday, August 21, 2009, we expect to complete the Merger on or about August 24, 2009. The affirmative vote of holders of a majority of the outstanding shares of ZILA common stock as of the record date for the special meeting is required to approve the adoption of the Merger Agreement.

 

During 2008 and 2009, through investment bankers, asset lenders, private equity and public and private institutional fund managers, and senior dental management contacts, ZILA had discussions regarding prospective strategic or capital raising transactions with 31 strategic buyers, 10 of which, including TOLMAR, executed non disclosure agreements; seven individual equity investors, three of whom executed non disclosure agreements; and 19 investment and private equity firms, 14 of which executed non disclosure agreements. The names of the parties that executed non disclosure agreements are subject to confidentiality and cannot be disclosed.

 

During this same period of time, ZILA attempted repeatedly to negotiate with the holders of our Senior Secured Notes (the “Noteholders”), without success, to allow ZILA to use its accounts receivable and inventory to secure a working capital line of credit that could be used to grow the business.

 

On September 23, 2008, ZILA engaged William Blair & Company (“Blair”) as its exclusive investment banker to provide financial advice with respect to strategic alternatives and to advise it in connection with debt restructuring and mergers and acquisition transactions.

 

On October 23, 2008, ZILA was contacted by several shareholders of a company that by virtue of various business dispositions had limited current operations but a significant amount of cash (the “Prospective Merger Partner”). The shareholders expressed interest in a merger of ZILA and the Prospective Merger Partner.

 

On October 27, 2008, ZILA contacted the Prospective Merger Partner’s CEO concerning this inquiry.

 

On October 30, 2008, David R. Bethune, our Chairman and Chief Executive Officer, and Diane E. Klein, our Vice President of Finance and Treasurer, met with the CEO, an outside director and a group of shareholders of Prospective Merger Partner to discuss a possible merger transaction.

 

On November 7, 2008, after indicating its doubts about the possibility of ZILA being able to arrange for a repurchase of the Senior Secured Notes at a discount acceptable to potential purchasers and with no interest from strategic buyers, Blair terminated its engagement letter with ZILA.

 

On November 7, 2008, Mr. Bethune sent the Prospective Merger Partner a letter indicating ZILA’s interest in pursuing a merger of the two companies.

 

On November 14, 2008, a mutual confidentiality and standstill agreement was executed by ZILA and the Prospective Merger Partner.

On November 17, 2008, the Prospective Merger Partner sent ZILA a list of questions regarding its history, business and prospects. ZILA responded to that inquiry on the same day.

 

On November 20, 2008, ZILA sent a merger proposal to the Prospective Merger Partner’s Board of Directors.

 

On or about November 21, 2008, Mr. Bethune sent the Prospective Merger Partner’s directors a proposed term sheet for a merger with ZILA.

 

On November 24, 2008, ZILA engaged Lyon Partners, Ltd. (“Lyon”) on a non exclusive basis to act as agent, consultant and advisor for the purposes of providing financial advice, including but not limited to restructuring of its senior notes and the raising of equity capital.

 

On December 11, 2008, our Board met and discussed the status of discussions with the Prospective Merger Partner and negotiations with the Noteholders regarding a possible discount upon prepayment.

 

On December 15, 2008, Mr. Bethune sent another letter to the directors of the Prospective Merger Partner with a modified merger proposal.

 

On December 17, 2008, the CEO of the Prospective Merger Partner responded to the December 15, 2008 letter and requested certain additional information from ZILA.

 

On December 19, 2008, ZILA responded to the December 17, 2008 letter enclosing the information requested by the Prospective Merger Partner’s CEO.

 

On January 5, 2009, Mr. Bethune sent a letter to the CEO of the Prospective Merger Partner proposing a $10,000,000 investment in ZILA, which would result in the Prospective Merger Partner owning a majority of ZILA.

 

In spite of the persistence on the part of ZILA, on January 15, 2009, discussions with the Prospective Merger Partner were terminated at the request of the Prospective Merger Partner.

 

On January 27, 2009, our Board met via teleconference. At the meeting, ZILA’s legal counsel from Snell & Wilmer discussed the duties of directors in the context of financial restructurings. In addition, Mr. Bethune gave an update on the Senior Secured Notes discount negotiation status, including the fact that the Noteholders were unwilling to discuss any significant discount to the Senior Secured Notes.

 

On January 31, 2009, ZILA failed to make its quarterly interest payment due on the Senior Secured Notes.

 

In early February, 2009, ZILA approached TOLMAR and representatives of TOLMAR began discussions with Mr. Bethune about a potential investment in ZILA. (During the summer of 2008, ZILA had included TOLMAR’s products in its educational seminars, in exchange for which TOLMAR paid ZILA aggregate fees of approximately $60,000.) On February 11, 2009, TOLMAR representatives meet with Mr. Bethune and other ZILA employees to learn more about ZILA in order to consider a potential investment in, or acquisition of, ZILA.

 

On March 10, 2009, ZILA entered into a confidentiality agreement with a large public dental company (“Large Public Dental Company”) for the purpose of exploring a possible merger. Significant due diligence commenced and continued for two months with visits to all of the ZILA facilities and an in depth sales and marketing review.

 

On March 23, 2009, ZILA received a proposal for the acquisition of ZILA by TOLMAR. The proposed purchase price was $3,000,000, reduced by the amount of all contractual obligations of ZILA payable upon a change in control. The proposal was conditioned upon TOLMAR’s ability to acquire the Senior Secured Notes for a purchase price not to exceed $5,000,000. The proposal involved the purchase of all of ZILA’s outstanding capital stock or a purchase of assets.

 

On March 31, 2009, ZILA received a preliminary offer from a financial buyer (“Financial Buyer”) offering to recapitalize ZILA by repurchasing the Senior Secured Notes and providing working capital necessary for ZILA to reach profitability. Up to $4,000,000 would be used to retire the Senior Secured Notes and the remainder would be used for general corporate purposes. The offer was contingent upon ZILA’s ability to negotiate the retirement of the Senior Secured Notes for no more than $4,000,000 with the proceeds. In return for the $8,000,000, the Financial Buyer would receive at least 80% of our outstanding equity. The preliminary offer was subject to ZILA reaching an

agreement with the Noteholders and completing due diligence. The Noteholders were contacted and they were unwilling to retire the Senior Secured Notes for $4,000,000

 

On April 1, 2009, TOLMAR submitted a due diligence request list to ZILA.

 

On April 3, 2009, TOLMAR submitted a slightly revised proposal to our Board of Directors proposing to purchase all of ZILA’s outstanding capital stock for up to $3,000,000 reduced by any contractual obligations payable upon change of control. Such purchase would be conditioned upon TOLMAR’s ability to acquire all of the Senior Secured Notes on terms acceptable to TOLMAR. On the same day, TOLMAR proposed to purchase the Senior Secured Notes from the Noteholders for up to $5,000,000 in cash, conditioned upon TOLMAR’s completion of its proposed acquisition of ZILA.

 

During the week of April 6, 2009, representatives of TOLMAR met in person with ZILA management and key personnel to review various aspects of the ZILA’s sales, marketing and operations activities. They also visited ZILA’s Batesville, Arkansas facilities.

 

On April 6 and 7, 2009, our Board of Directors met and discussed various strategic alternatives under consideration. During that meeting, the Board, having received and intending to consider possible change in control transactions, including the proposal submitted by TOLMAR, considered potential conflicts of interest by J. Steven Garrett, a member of the Board who is employed by TOLMAR, Inc., an affiliate of TOLMAR, and by Mr. Bethune, who has an adult son who is employed by TOLMAR as a sales manager and who was formerly the chairman and chief executive officer of Atrix Laboratories, Inc. (“Atrix”). In 2004 Atrix was sold to QLT USA and Mr. Bethune ended his relationship with Atrix. Subsequent to Mr. Bethune’s departure, some of the assets that QLT USA acquired in the Atrix transaction were sold to TOLMAR. The Board also acknowledged that Mr. Bethune had a prior working relationship with TOLMAR’s current chief executive officer. The Board resolved that Dr. Garrett should not be involved in any way with the Board’s consideration or negotiation of any strategic transactions. With respect to Mr. Bethune, the Board recognized his considerable efforts to generate as many strategic and financial options as possible, as well as his commitment to obtain the best reasonably available terms and the best price for the shareholders and holders of the Senior Notes in connection with the Board’s consideration of various transactions. After having considered all the facts and circumstances that the Board deemed relevant the Board determined that (i) Mr. Bethune’s past relationship with TOLMAR’S CEO and his present relationship with his son do not give rise to any material financial or other personal interest (whether direct or indirect); (ii) it was advisable and in the best interest of ZILA for Mr. Bethune to participate in the consideration of the potential transactions; and (iii) it was not necessary to form a special committee of the Board to consider and negotiate any transactions provided that Dr. Garrett is not involved in such process.

 

On April 7, 2009, Mr. Bethune sent a letter to Lyon confirming a conversation earlier in the day in which Mr. Bethune asked Lyon to consider an $8,000,000 equity investment in ZILA at a market price of $.20 per share in exchange for approximately 80% of ZILA’s total outstanding stock. ZILA would use the proceeds from such sale to retire the Senior Secured Notes with $5,000,000 of such proceeds and use the remaining $3,000,000 to fund sales and marketing programs to grow the business. Lyon never responded to this proposal.

 

On April 8, 2009, at the request of ZILA, TOLMAR executed an agreement to refrain from soliciting ZILA employees to become employed by TOLMAR. In addition, on that date, TOLMAR submitted a revised legal due diligence request to ZILA.

 

On April 14, 2009, TOLMAR submitted to ZILA an initial draft of a merger agreement. On April 24, 2009, ZILA provided its initial comments on the draft merger agreement presented by TOLMAR. At various periods between April 24, 2009 and June 16, 2009, ZILA and TOLMAR continued negotiating the terms and conditions of a potential merger including negotiating the Merger Agreement and related documents.

 

On April 15, 2009, ZILA entered into a confidentiality agreement with a small public dental company (“Small Public Dental Company”) for the purpose of exploring the possibility selling substantially all of the assets of ZILA, while retaining the Senior Secured Notes and ViziLite ^® Plus.

 

On April 20, 2009, ZILA received a letter of interest from another financial buyer (“Other Financial Buyer”) proposing, in general terms, the acquisition of the Senior Secured Notes and their conversion to equity.

On April 21, 2009, ZILA established an electronic data room for TOLMAR and other interested parties.

 

On April 30, 2009, ZILA failed to make its quarterly interest payment due on the Senior Secured Notes.

 

On May 8, 2009, the Large Public Dental Company notified ZILA that it was no longer pursuing an acquisition by merger with ZILA.

 

On May 11, 2009, the Noteholders executed a Senior Note Purchase Agreement with TOLMAR pursuant to which TOLMAR agreed to purchase and the Noteholders agreed to sell the Senior Secured Notes for $5,000,000, subject to certain terms and conditions. ZILA is not a party to the Senior Note Purchase Agreement. The Senior Note Purchase Agreement was negotiated between TOLMAR and the Noteholders and was not provided to ZILA until after it was executed by the parties.

 

On May 27, 2009 ZILA engaged Columbia West Capital, LLC (“Columbia West”) to provide a fairness opinion in connection with the proposed merger transaction with TOLMAR.

 

On May 29, 2009, the draft merger agreement included for the first time merger consideration of $3,000,000 expressed in an amount per share of common stock. The draft indicated a payment of $0.28 per share of common stock and $0.32 per share of the Series B Preferred.

 

On June 3, 2009, ZILA received a letter of intent for the acquisition of ZILA from an investor group headed by a non-management stockholder of a dental products company (the “Investor Group”). No diligence had been completed at this time.

 

On June 8, 2009, ZILA received a revised letter of intent from the Other Financial Buyer whereby such buyer would acquire the Senior Secured Notes for $5,500,000 and such notes would be amended so they would automatically convert to common stock at $0.20 per share following ZILA’s achievement of two consecutive quarters of positive EBITA and other conditions that were not fully disclosed. This proposal was subject to due diligence that had not yet been significantly begun.

 

On June 9, 2009, ZILA received a communication from the Small Public Dental Company indicating that the ZILA business had declined to the point where they were no longer interested in pursuing a purchase.

 

Also on June 9, 2009, ZILA received a third letter of intent from the Investor Group proposing the purchase of up to $5,000,000 in common stock and $5,000,000 in convertible debentures with $6,000,000 of such proceeds payable to the holders of the Senior Secured Notes in satisfaction thereof and the remainder used for general corporate purposes. Again, with no diligence having been completed and no confirmation of the funding source.

 

On June 10, 2009, ZILA sent the Investor Group a request for additional clarity regarding its most recent proposal.

 

On June 11, 2009, ZILA entered into a confidentiality agreement with Intelident Solutions, Inc., the parent company of a national account customer (“Intelident”), who was interested in a possible strategic acquisition.

 

On June 17, 2009, the Other Financial Buyer withdrew its offer from consideration.

 

On June 19, 2009, our Board met and after receiving a report on ZILA’s current financial condition, Mr. Bethune updated the Board on the status of various strategic alternatives, including TOLMAR, the Investor Group and five other interested parties that were in early stages of evaluating a possible transaction. The Board reviewed in detail TOLMAR’s merger agreement proposal which was in substantially final form. The Board also reviewed the fairness opinion and received a presentation from Columbia West regarding the same. Representatives of Columbia West advised the Board that based upon and subject to the assumptions made, the matters considered and the limits of the review undertaken, the TOLMAR merger was fair from a financial point of view to the shareholders of ZILA. Following a review of the terms of the TOLMAR merger agreement, the status of the other alternatives and the execution risk associated with the other alternatives given that no party other than TOLMAR had completed due diligence or proposed definitive documentation and the fact that the holders of the Senior Secured Notes had executed the Senior Note Purchase Agreement with TOLMAR, the Board expressed support for the TOLMAR Merger Agreement provided that the purchase price could be increased to an amount in excess of the then-current market price. During a break in the Board meeting, Mr. Bethune called representatives of TOLMAR

and indicated that the Board required a higher price to agree to an acquisition of ZILA. Also during that meeting, ZILA received a presentation from the lead investor in the Investor Group.

 

On June 24, 2009, representatives of TOLMAR called Mr. Bethune and indicated it was willing to increase its offer to $0.38 per share of common stock.

 

On June 25, 2009, Intelident indicated that they were only interested in acquiring the assets of ZILA through a Chapter 11 Section 363 sale.

 

On June 25, 2009, our Board met via conference call and after asking a variety of questions, approved the Merger and authorized ZILA to enter into the Merger Agreement at the higher $0.38 per share price offered by TOLMAR.

 

Also on June 25, 2009, after the meeting of our Board, but before the execution of the Merger Agreement or its public announcement, the Investor Group withdrew from consideration due to its lack of funding.

 

Later on June 25, 2009, the Merger Agreement was executed and delivered by ZILA and TOLMAR. ZILA issued a press release announcing the execution of the Merger Agreement and the proposed Merger on the same day.

 

On June 26, 2009, ZILA filed a Form 8-K with the Securities and Exchange Commission disclosing its entry into the Merger Agreement.

 

On July 1, 2009, ZILA received an unsolicited, non-binding merger acquisition proposal from Intelident proposing the acquisition of ZILA’s common stock for $0.42 in cash per share of common stock and $0.48 in cash per share of Series B Preferred Stock. The proposal states that Intelident anticipates, as part of its acquisition, negotiating the purchase of the Senior Secured Notes, which is outside of ZILA’s control. Intelident indicated it will be providing additional terms and information with respect to its proposal on or before July 8, 2009. Our Board has not yet had the opportunity to determine what, if any, actions it will take in response to this proposal.

 

After careful consideration, our Board unanimously (with the exception of J. Steven Garrett, who did not participate in the consideration of the Merger Agreement because he is employed by TOLMAR, Inc., an affiliate of TOLMAR) approved the Merger Agreement, and determined that the Merger Agreement and the transactions contemplated by the Merger Agreement (including the Merger) are fair, advisable and in the best interests of ZILA and its stockholders.

 

In reaching its conclusion that the Merger Agreement and the proposed Merger are fair to, and in the best interests of, ZILA and its stockholders, the Board consulted with the Company’s management, as well as its financial and legal advisors, and considered a number of factors that it believed supported the Board’s decision, including the following:

 

 

 

 

 

 

 

 

 

 

In the course of its deliberations, the Board also identified and considered a variety of risks and other countervailing factors related to entering into the Merger Agreement, including the following:

 

 

The foregoing discussion of the factors considered by our Board is not intended to be exhaustive, but does set forth the principal factors considered by the Board. The Board unanimously (with the exception of J. Steven Garrett, who did not participate because he is employed by TOLMAR, Inc., an affiliate of TOLMAR) reached the conclusion to approve the Merger Agreement in light of the various factors described above and other factors that each director deemed relevant. In view of the wide variety of factors considered by the members of the Board in connection with their evaluation of the Merger Agreement and the complexity of these matters, the Board did not consider it practical, and did not attempt, to quantify, rank or otherwise assign relative weights to the specific factors it considered in reaching its decision and did not undertake to make any specific determination as to whether any particular factor, or any aspect of any particular factor, was favorable or unfavorable to the ultimate determination of the Board. Rather, the Board made its decision based on the totality of information presented to and considered by it. In considering the factors discussed above, individual directors may have given different weights to different factors.

 

The Board recommends that ZILA’s stockholders vote FOR the adoption of the Merger Agreement and approval of the Merger.   The recommendation of the Board was made after careful consideration of all the material factors, both positive and negative, as described above and elsewhere in this proxy statement.

 

Each share of our common stock issued and outstanding immediately prior to the effective time of the Merger will be converted into the right to receive $0.38 in cash, and each share of Series B Preferred issued and outstanding immediately prior to the effective time of the Merger will be converted into the right to receive $0.44 in cash, in each case without interest and less any applicable withholding taxes, other than the following shares:

 

 

The per share merger consideration is subject to equitable adjustment in the event of any stock split, stock dividend, reverse stock split or other change in the number of outstanding shares of our capital stock (or securities convertible or exchangeable into, or exercisable for, shares of our capital stock) between the date of the Merger Agreement and the effective time of the Merger.

 

Columbia West has provided a fairness opinion to our Board in connection with its consideration of the Merger Agreement and the financial terms of the proposed Merger. Columbia West is an investment banking firm focused on providing investment banking services to companies in a wide array of key industry sectors. In May 2009, ZILA contacted and interviewed five investment banking firms regarding the fairness option. Following the interviews and after determining that it had no prior relationship with ZILA or TOLMAR, ZILA selected Columbia West.

 

At the June 19, 2009 meeting of our Board, representatives of Columbia West delivered its oral opinion, which was also confirmed in writing, to our Board to the effect that, as of June 10, 2009, based upon and subject to the assumptions made, matters considered and limits of the review undertaken by Columbia West, the cash consideration to be paid for each share of ZILA common stock and each share of ZILA Series B Preferred pursuant to the Merger (which amounts were proposed to be $0.28 per share and $0.32 per share, respectively, as of the date on which the letter was delivered) was fair, from a financial point of view, to our stockholders as a whole. Columbia West did not opine specifically as to the fairness of the Merger Agreement.

 

The full text Columbia West’s written opinion, dated June 10, 2009, which sets forth, among other things, the assumptions made, matters considered and limits on the review undertaken by Columbia West in connection with the opinion, is attached as Annex B to this proxy statement and is incorporated herein by reference. We urge stockholders to read and consider the Columbia West opinion in its entirety.

 

Columbia West provided its opinion for the information and assistance of our Board in connection with its consideration of the Merger. Columbia West did not express any opinion as to the underlying decision of our Board to recommend the Merger, nor as to the fairness, from a financial point of view, as to the allocation of consideration paid and payable pursuant to the Merger Agreement among the two classes of our capital stock. The Columbia West

opinion is not a recommendation as how holders of our common stock should vote with respect to the Merger. In connection with Columbia West arriving at its opinion, Columbia West has, among other things:

 

 

In rendering the opinion, Columbia West did not assume responsibility for independently verifying, and did not independently verify, any financial or other information concerning ZILA furnished to it by ZILA, or the publicly-available financial and other information regarding ZILA and other companies used in its analysis. Columbia West assumed that all such information was accurate and complete. Columbia West further relied on assurances of management of ZILA that they were not aware of any facts that would make such financial or other information relating to such entities inaccurate, incomplete or misleading.

 

With respect to forecasts and financial projections prepared by ZILA’s management provided to Columbia West, Columbia West assumed, with the consent of the Board, that they were reasonably prepared on a basis reflecting the best currently available estimates and judgments of ZILA’s management. Columbia West further relied upon the assurances of ZILA’s management that they were not aware of any facts or circumstances that would make any information provided to Columbia West, when considered in light of all of the information provided to it, inaccurate or misleading. In addition, Columbia West did not make, and was not provided with, any independent evaluation or appraisal of specific assets and liabilities (contingent or otherwise) of ZILA. The opinion was based only on information available to Columbia West and the financial, market, economic, regulatory and other conditions, facts, and circumstances as they existed and were subject to evaluation on the date of its opinion.

 

The following is a summary of the material financial analyses delivered by Columbia West to our Board in connection with rendering the opinion described above. The following summary, however, does not purport to be a complete description of the financial analyses performed by Columbia West, nor does the order of analyses described represent relative importance or weight given to those analyses by Columbia West. Some of the summaries of the financial analyses include information presented in tabular format. The tables must be read together with the full text of each summary and are alone not a complete description of Columbia West’s financial analyses. Except as otherwise noted, the following quantitative information, to the extent that it is based on market data, is based on market data as it existed on or before June 10, 2009 and is not necessarily indicative of current market conditions.

 

Selected Companies Analysis

 

Columbia West reviewed and compared certain financial information for ZILA to corresponding financial information, ratios and public market multiples for the following publicly traded companies in the dental supply/

point-of-care diagnostic companies, which Columbia West refers to collectively as the comparable public companies:

 

 

These companies were selected, among other reasons, because they share similar business characteristics to ZILA and they operate in a similar industry as ZILA.

 

In this analysis, Columbia West compared the Enterprise Value (“EV”) being paid for ZILA as implied by the aggregate consideration being paid, expressed as a multiple of ZILA’s last twelve months (“LTM”) revenue and EBITDA, to the respective multiples of LTM of the comparable companies implied by the public trading prices of their common stock.

 

Discounted Cash Flow Analysis

 

Columbia West performed a discounted cash flow analysis on ZILA using ZILA’s management’s projections. Columbia West calculated indications of present values of unlevered free cash flows for ZILA for fiscal years 2008 through 2012.

 

The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. Selecting portions of the analyses or of the summary set forth above, without considering the analyses as a whole, could create an incomplete view of the processes underlying the Columbia West opinion. In arriving at its fairness determination, Columbia West considered the results of all of its analyses and did not attribute any particular weight to any factor or analysis considered by it. Rather, Columbia West made its determination as to fairness on the basis of its experience and professional judgment after considering the results of all of its analyses. The conclusions by Columbia West may involve significant elements of subjective judgment and qualitative analysis. In performing its analyses, Columbia West considered general economic, market and financial conditions and other matters, many of which are beyond our control.

 

Columbia West prepared these analyses for purposes of providing its opinion to our Board as to the fairness from a financial point of view to ZILA’s stockholders as a whole of the consideration to be paid to the holders of the shares of common stock and Series B Preferred pursuant to the Merger Agreement. These analyses do not purport to be appraisals nor do they necessarily reflect the prices at which businesses or securities actually may be sold. Analyses based upon forecasts of future results are not necessarily indicative of actual future results, which may be significantly more or less favorable than suggested by these analyses. Because these analyses are inherently subject to uncertainty, being based upon numerous factors or events beyond the control of the parties or their respective advisors, none of ZILA, TOLMAR, Acquisition Sub or any other person assumes responsibility if future results are materially different from those forecast.

 

The merger consideration to be paid pursuant to the Merger Agreement was determined through arms’ length negotiations between ZILA and TOLMAR and was approved by our Board. Columbia West provided advice to

ZILA during these negotiations. Columbia West did not, however, recommend any specific amount of consideration to ZILA or our Board or that any specific amount of consideration constituted the only appropriate consideration for the Merger.

 

As described above, the Columbia West opinion to our Board was one of many factors taken into consideration by our Board in making its determination to approve the Merger Agreement. The foregoing summary does not purport to be a complete description of the analyses performed by Columbia West in connection with the fairness opinion, a copy of which is attached as Annex B.

 

If the Merger Agreement is adopted by ZILA’s stockholders and the other conditions to the closing of the Merger are either satisfied or waived, Acquisition Sub will be merged with and into ZILA, and ZILA will be the surviving corporation. When the Merger is completed, ZILA will cease to be a publicly traded company and will instead become a wholly-owned subsidiary of TOLMAR.

 

When the Merger is completed, each share of ZILA common stock issued and outstanding immediately prior to the effective time of the Merger (other than certain excluded shares identified in the section entitled “The Merger Consideration”, which begins on page 36 of this proxy statement) will be converted into the right to receive $0.38 in cash, without interest and less any applicable withholding taxes, and each share of Series B Preferred issued and outstanding immediately prior to the effective time of the Merger will be converted into the right to receive $0.44 in cash, without interest and less any applicable withholding taxes.

 

Warrants.   The treatment of outstanding warrants to purchase our common stock will vary depending on their respective terms. By virtue of the Merger, certain of our warrants will automatically become rights to receive the Common Stock Merger Consideration in exchange for payment of their exercise price (which is equal to $15.54 per share). Certain other warrants (with an exercise price of $14.63 per share) will remain outstanding. Of these warrants that would otherwise remain outstanding, ZILA is obligated under the terms of the Merger Agreement to attempt to cancel them prior to the closing of the Merger.

 

Stock Options.   Immediately prior to the effective time of the Merger, all outstanding options to purchase common stock under our equity incentive plans, will become immediately vested and exercisable in full. At the effective time, each then outstanding option will, by virtue of the Merger, be converted into and will become a right to receive an amount in cash, without interest and less any applicable withholding taxes, with respect to each share subject thereto, equal to the excess, if any, of the Common Stock Merger Consideration over the per share exercise price of such option, and each such option will terminate at the effective time. Only 50,000 stock options have an exercise price less than the Common Stock Merger Consideration and thus will receive any payment in connection with the Merger.

 

Restricted Stock.   At the effective time and by virtue of the Merger, the restrictions on the restricted stock issued and outstanding immediately before the effective time will lapse, and such restricted stock shall be treated as common stock for purposes of receiving the merger consideration.

 

At the effective time of the Merger, ZILA’s current stockholders will cease to have ownership interests in ZILA or rights as ZILA stockholders. Therefore, ZILA’s current stockholders will not participate in any of ZILA’s future earnings or growth and will not benefit from any subsequent appreciation in ZILA’s value.

 

ZILA’s common stock is currently registered under the Exchange Act and is traded on the NASDAQ Capital Market under the symbol “ZILA.” As a result of the Merger, ZILA will no longer be a publicly traded company, and there will be no public market for ZILA common stock. After the Merger, ZILA common stock will cease to be traded on the NASDAQ Capital Market, and price quotations with respect to sales of shares of common stock in the public market will no longer be available. In addition, registration of ZILA common stock under the Exchange Act will be terminated. This termination will make certain provisions of the Exchange Act, such as the requirement of furnishing a proxy or information statement in connection with stockholders’ meetings, no longer applicable to ZILA. After the effective time of the Merger, ZILA will also no longer be required to file periodic reports with the SEC on account of ZILA’s common stock.

If the Merger Agreement is terminated under certain circumstances described in greater detail in “The Merger Agreement — Termination of the Merger Agreement” on page 43 of this proxy statement, ZILA will be obligated to reimburse TOLMAR for its expenses (including legal fees and expenses) incurred in connection with the Merger Agreement, not to exceed $200,000, and pay a termination fee of $300,000.

 

In considering the recommendation of ZILA’s Board to vote “FOR” the proposal to adopt the Merger Agreement, holders of shares of ZILA’s common stock should be aware that ZILA’s directors and executive officers may have interests in the Merger that may be different from, or in addition to, those of ZILA’s stockholders generally. These interests may create potential conflicts of interest. Our Board was aware of these potential conflicts of interest and considered them, among other matters, in reaching its decision to approve the Merger Agreement and to recommend that ZILA stockholders vote in favor of adopting the Merger Agreement.

 

Stock, Stock Options and Restricted Stock

 

As of the record date, there were approximately 404,809 shares of our common stock subject to stock options, of which approximately 130,022 were unvested, and approximately 9,524 shares of unvested restricted stock granted to our executive officers and directors. Our executive officers and directors owned an aggregate of 317,958 shares of our common stock as of the record date.

 

The Merger Agreement provides that, immediately prior to the effective time of the Merger, all outstanding options to purchase common stock under our equity incentive plans, will become immediately vested and exercisable in full. At the effective time and by virtue of the Merger, the restrictions on the restricted stock issued and outstanding immediately before the effective time will lapse, and such restricted stock shall be treated as common stock for purposes of receiving the merger consideration. Certain of our current and former directors and executive officers may be entitled to receive consideration for their options and restricted stock. Such consideration is summarized under “The Merger Agreement — Stock Options and Restricted Stock.”

The following table summarizes (i) the vested and unvested stock options with exercise prices less than the per share merger consideration, (ii) the unvested restricted stock awards held by each of our executive officers and directors in each case as of June 25, 2009, and (iii) the merger consideration that each of our directors and executive officers (including any person serving in such capacities since August 1, 2007) will receive with respect to their stock options and restricted stock awards in connection with the Merger. The information with respect to options is based on the treatment of the options as provided in the Merger Agreement.

 

 

 

 

Employment Letters

 

The consummation of the Merger will constitute a “change in control” under the employment letters that we have entered into with David R. Bethune, Gary V. Klinefelter and Diane E. Klein. As a result, such individuals would be entitled to receive the following compensation in the event they were terminated by TOLMAR without cause within a specified period of time (which varies by agreement) following the completion of the Merger:

 

 

TOLMAR has advised us that it does not expect to terminate the employment of any of the individuals listed above as of the effective time of the Merger. The employment letters also provide for the same severance benefits if such executive officers decide to terminate their employment for “good reason” (defined as a material diminution in base salary or job responsibilities, a material breach of the employment letter by ZILA or a material change in the location at which they perform services).

Indemnification and Insurance

 

The Merger Agreement provides that for a period of 60 months after the Merger effective time, ZILA will provide, at its sole expense, each individual who served as a director or officer of ZILA at any time prior to the effective time with liability insurance containing the same coverage and in the same amount as ZILA’s policies in effect immediately prior to the effective time; provided, however , in the event that the cost of liability insurance for such coverage exceeds 150% of the annual cost of such insurance in effect immediately before the effective time, ZILA may reduce the coverage and amount of liability insurance only to the extent necessary so that the annual cost of liability insurance does not exceed 150% of the annual cost of the insurance in effect immediately before the effective time.

 

In addition, for a period of 60 months after the effective time, ZILA must fulfill and honor in all respects the obligations of ZILA and its subsidiaries pursuant to any indemnification provision and any exculpation provision set forth in the organizational documents of ZILA or any of its subsidiaries as in effect on the date of the Merger Agreement. During such period, the organizational documents of ZILA must contain the provisions with respect to indemnification and exculpation from liability set forth in ZILA’s organizational documents on the date of the Merger Agreement, and such provisions are not to be amended, repealed or otherwise modified in any manner (including any amendment accomplished through merger, recapitalization, consolidation or reorganization) that could adversely affect the rights of any indemnified party thereunder.

 

Other Relationships

 

J. Steven Garrett, a member of the Board, is employed by TOLMAR, Inc. as its Vice President of Clinical Development. Due to his conflict of interest, Mr. Garrett completely recused himself from and had no involvement in the process of discussing, considering and negotiating the terms of the proposed Merger on behalf of ZILA. Mr. Garrett was not present at the Board’s meeting on June 25, 2009, at which the Merger Agreement was approved by the Board.

 

David R. Bethune, Chairman of the Board and our Chief Executive Officer, has certain relationships with TOLMAR, Inc. and its employees, which are described below:

 

 

The Board considered Mr. Bethune’s relationships with TOLMAR, Inc. and determined that he did not have any material financial or other personal interest (whether direct or indirect) in connection with the proposed Merger. Accordingly, and because the Board recognized Mr. Bethune’s extraordinary efforts to generate strategic and financial alternatives to maximize value for ZILA’s stockholders, it determined that it was advisable and in ZILA’s best interests for Mr. Bethune to participate in the process of considering TOLMAR’s proposal, discussing and negotiating the Merger Agreement and determining whether to approve the Merger.

 

It is expected that if the Merger is not completed, the current management of ZILA, under the direction of the Board, will continue to manage ZILA as an ongoing business. It is expected that, from time to time, ZILA will evaluate and review its business operations, properties, dividend policy and capitalization, among other things, make such changes as are deemed appropriate and continuing to seek to identify strategic alternatives to enhance

stockholder value. If the Merger is not consummated for any reason, there can be no assurance that any other transaction acceptable to ZILA will be offered or that ZILA’s business and operations will not be adversely affected.

 

We are not in compliance with the terms of the Senior Secured Notes with respect to the quarterly interest payments due January 31, 2009 and April 30, 2009, which have not been made as of the date of this filing, and we do not anticipate being able to pay the quarterly interest payment due under the Senior Secured Notes on July 31, 2009. The failures to make these payments are events of default under the Senior Secured Notes. Upon an event of default, the Senior Secured Notes may be accelerated and immediately become due and payable. We do not have sufficient resources to repay the Senior Secured Notes. In the event of acceleration, we would likely be forced to file for protection under Chapter 11 of the Federal Bankruptcy Code or liquidate ZILA under Chapter 7 of the Federal Bankruptcy Code, which would likely result in our common stock becoming worthless. Pursuant to the Senior Note Purchase Agreement, TOLMAR, Inc. has secured the agreement of the holders of the Senior Secured Notes to forbear (except in certain limited circumstances relating to our insolvency or bankruptcy) from exercising their remedies under the Senior Secured Notes until TOLMAR, Inc. acquires the Senior Secured Notes in connection with the Merger. If the Senior Note Purchase Agreement is terminated, there can be no assurance the holders of the Senior Secured Notes will continue to forbear from declaring an event of default and accelerating the Senior Secured Notes.

 

In accordance with 31 C.F.R. § 10.35(b)(5), we hereby notify you that both the discussion of the tax aspects provided herein and any discussion of tax issues throughout this proxy statement (i) is not intended or written to be relied upon, and cannot be used by any person, for the purpose of avoiding any federal tax penalties, and (ii) was written to support the promotion or marketing of the transactions or matters addressed herein, including the solicitation of an approval of the Merger. Each stockholder should seek advice based on such person’s particular circumstances from an independent tax advisor.

 

The following is a discussion of certain material United States (“U.S.”) federal income tax consequences of the Merger applicable to holders of shares of ZILA stock whose shares are converted into the right to receive cash in accordance with the Merger Agreement. This discussion does not purport to be a complete analysis of all of the potential U.S. federal income tax issues that might (i) be relevant to holders of shares of ZILA stock, or (ii) relate to the Merger. This discussion is for general information purposes only and does not constitute legal advice. This discussion does not describe the federal estate, federal gift, state, local, or foreign tax consequences associated with the matters addressed herein.

 

The following discussion is based on the Internal Revenue Code of 1986, as amended (the “Code”), existing Treasury Department regulations (the “Treasury Regulations”), and administrative rulings and judicial decisions interpreting the Code as in effect at the time this Proxy Statement was drafted. All of these authorities may change without notice, possibly affecting the tax consequences discussed herein on a retroactive basis.

 

This discussion is limited to holders of shares of ZILA stock who hold such shares of stock as “capital assets” within the meaning of Code § 1221. This discussion does not describe the U.S. federal income tax issues that may be relevant to a holder of shares of ZILA stock in light of such holder’s particular circumstances or to holders subject to special rules such as dealers or traders in securities or currencies; persons holding shares of stock as part of a “straddle,” “hedge,” “wash sale,” “synthetic security,” “conversion,” or similar integrated transaction; banks; insurance companies; financial institutions; organizations generally exempt from U.S. federal income taxation under Code § 501(a) or Code § 401; partnerships; trusts; estates; custodians, nominees, or similar financial intermediaries holding stock for others; persons subject to the alternative minimum tax; or former citizens or former residents of the U.S. ( i.e. , expatriates). This discussion does not describe the U.S. federal income tax issues that may be relevant to a holder of warrants, stock options or restricted stock, or receipt of Merger consideration in connection with the Merger by any such holder. In addition, with respect to Non-U.S. Holders (defined below), this discussion only generally addresses certain U.S. federal income tax issues that may be relevant to such Non-U.S. Holder with respect to the Merger. This discussion does not discuss the application of any tax treaties or conventions, the terms of which may benefit a Non-U.S. Holder, nor does this discussion describe the U.S. federal income tax issues that may be relevant to a Non-U.S. Holder that is either (i) a “controlled foreign corporation”

under Code § 957(a), or (ii) a “passive foreign investment company” under Code § 1297(a). Holders of ZILA stock, such as the ones described in this paragraph, should consult their tax advisors regarding the U.S. federal income tax consequences of the Merger.

 

If an entity that is classified as a partnership for U.S. federal income tax purposes holds shares of ZILA stock, then the U.S. federal income tax consequences to such partnership and its partners generally will depend on the activities of the partnership and the status of each of its partners. Partners of entities that are classified as partnerships for U.S. federal income tax purposes should consult their tax advisors regarding the U.S. federal income tax consequences of the Merger.

 

ZILA has not and does not intend to obtain an opinion from counsel with respect to this discussion of certain material U.S. federal income tax considerations. In addition, no rulings have been or will be requested from the Internal Revenue Service (“IRS”) with respect to the matters discussed herein. Therefore, there can be no assurances that the IRS or any other governmental agency or taxing jurisdiction will agree with the statements set forth below.

 

Holders of shares of ZILA stock should consult with their own respective tax advisors concerning their situations and the impact which the Merger may have on their U.S. federal income tax liability as well as how state, local, and foreign income and other tax laws, including the tax laws of any foreign taxing jurisdiction and any applicable tax treaty, may apply to them. In evaluating the Merger, each holder of shares of ZILA stock should take into account the cost of obtaining such advice.

 

U.S. Holders

 

As used herein, the term “U.S. Holder” means a beneficial owner of shares of ZILA stock that is, for U.S. federal income tax purposes: (i) an individual citizen or resident of the U.S. (as defined in Treasury Regulations § 301.7701(b)-1), (ii) a corporation or any other entity created or organized in or under the laws of the U.S. or any of its political subdivisions, or (iii) an estate or trust, the income of which is subject to U.S. federal income taxation regardless of the source of such income.

 

Exchange of Shares for Cash Pursuant to the Merger Agreement

 

In general, the U.S. federal income tax consequences of the Merger, specifically the exchange of shares of ZILA stock for cash pursuant to the Merger Agreement, will be a taxable transaction for U.S. federal income tax purposes. In general, a holder of shares of ZILA stock whose shares are converted into the right to receive cash in the Merger will recognize gain or loss for U.S. federal income tax purposes equal to the difference, if any, between (i) the amount of cash received with respect to such shares, and (ii) the stockholder’s adjusted tax basis in such shares. In general, gain or loss is determined separately for each holder’s block of shares ( i.e. , shares acquired at the same cost in a single transaction). ZILA anticipates that gain or loss recognized by a U.S. Holder upon consummation of the Merger will be capital gain or loss for U.S. federal income tax purposes. Whether such capital gain will be long-term or short-term will depend on such U.S. Holder’s particular facts and circumstances. In general, gain or loss is long-term if the shares disposed of have been held for more than twelve (12) months at the time of the consummation of the Merger. In general, long-term capital gains of U.S. Holders who are individuals are eligible for reduced rates of taxation. In general, there are limitations to the deductibility of capital losses.

 

Information Reporting and Backup Withholding

 

In general, unless an exemption applies, information reporting requirements will apply to certain non-corporate U.S. Holders of shares of ZILA stock with respect to payments to such U.S. Holders pursuant to the Merger Agreement.

 

In addition, under the backup withholding laws applicable to certain non-corporate U.S. Holders, withholding at a rate of twenty eight percent (28%) may be required on the amount of any payments made to such U.S. Holder pursuant to the Merger Agreement. Backup withholding generally applies if the U.S. Holder:

 

 

 

In addition, if a U.S. Holder does not provide correct information then, in addition to subjecting payments to such holder to backup withholding, such holder may also be subject to penalties imposed by the IRS.

 

To prevent backup withholding, a U.S. Holder should complete, sign and return to the paying agent a certification on the Substitute Form W-9 that such U.S. Holder will receive with the letter of transmittal following the Merger. Backup withholding is not an additional tax and any amounts withheld under the backup withholding rules may be refunded or credited against a U.S. Holder’s U.S. federal income tax liability, if any, provided that such U.S. Holder furnishes the required information to the IRS in a timely manner.

 

Non-U.S. Holders

 

As used herein, the term “Non-U.S. Holder” means a beneficial owner of shares of ZILA stock that is, for U.S. federal income tax purposes, not a U.S. Holder (as such term is defined above).

 

Exchange of Shares for Cash Pursuant to the Merger Agreement

 

A Non-U.S. Holder of shares of ZILA stock generally will not be subject to U.S. withholding tax in respect of any gain on the taxable disposition of shares of ZILA stock pursuant to the Merger so long as:

 

 

Gain realized by a Non-U.S. Holder that is effectively connected with such Non-U.S. Holder’s conduct of a U.S. trade or business (or U.S. permanent establishment if a tax treaty applies) generally will be subject to U.S. federal income tax on a net basis, and at graduated rates, in substantially the same manner as a U.S. Holder (except as otherwise provided by an applicable tax treaty). Additionally, in such a case, if, for U.S. federal income tax purposes, such Non-U.S. Holder is a corporation, then such Non-U.S. Holder may also be subject to a branch profits tax at a thirty percent (30%) rate (or such lower rate as may be specified by an applicable tax treaty).

 

Generally, a corporation such as ZILA, would constitute a USRPHC if, during the applicable testing period, the fair market value of its U.S. real property interests equals or exceeds fifty percent (50%) of the sum of the fair market value of its worldwide real property interests and its other assets used or held for use in a trade or business. ZILA does not believe that it is or has been, during the applicable testing period, a USRPHC nor does ZILA anticipate becoming one.

 

Information Reporting and Backup Withholding

 

In general, payments of proceeds on the disposition of shares of ZILA stock made to a Non-U.S. Holder may be subject to information reporting. Pursuant to tax treaties or other similar agreements, the IRS may make such information available to tax authorities in a Non-U.S. Holder’s country of residence.

In addition, payments of proceeds on the disposition of shares of ZILA stock made to a Non-U.S. Holder may be subject to backup withholding unless (i) the Non-U.S. Holder establishes an exemption, for example, by properly certifying under penalties of perjury its non-U.S. status on an IRS Form W-8BEN or other appropriate version of IRS Form W-8 ( e.g. , IRS Form W-8IMY), and (ii) the payor does not have actual knowledge or reason to know that such holder is a U.S. person, as such term is defined in the Code and the Treasury Regulations, or U.S. Holder.

 

To prevent backup withholding, each Non-U.S. Holder should complete, sign (under penalties of perjury) and return to the paying agent a certification of foreign status on the applicable IRS Form W-8, unless an applicable exemption exists and is provided in a timely and satisfactory manner. Backup withholding is not an additional tax and any amounts withheld under the backup withholding rules may be refunded or credited against a Non-U.S. Holder’s U.S. federal income tax liability, if any, provided that such Non-U.S. Holder furnishes the required information to the IRS in a timely manner.

 

Appraisal Rights

 

U.S. Holders and Non-U.S. Holders considering the exercise of their appraisal rights should consult their own tax advisors concerning the application of the U.S. federal income tax laws to their particular situation, as well as any consequences of the exercise of such rights arising under the laws of any other taxing jurisdiction.

 

Possible Changes in U.S. Federal Tax Laws

 

The Code is subject to change by Congress, and interpretations of the Code may be modified or affected by (i) judicial decisions, (ii) the Treasury Department, through changes in Treasury Regulations, and (iii) the IRS, through its audit policy, announcements, and published and private rulings. Significant tax law changes affecting holders of shares of ZILA stock or the Merger may be enacted by Congress. Although significant changes historically have been given prospective application, no assurance can be given that any changes made in the tax law affecting holders of shares of ZILA stock or the Merger would be limited to prospective effect. Accordingly, the ultimate effect on a holder’s tax situation may be governed by laws, regulations or interpretations of laws or regulations which have not yet been proposed, passed or made, as the case may be.

 

Importance of Obtaining Professional Advice

 

No rulings have been or will be requested from the IRS and no opinions from counsel have been or will be obtained with respect to any of the U.S. federal income tax matters discussed in this Proxy Statement. No assurances can be given that the IRS will agree with the above discussion of certain material U.S. federal income tax considerations. The foregoing is not intended to be a substitute for careful tax planning. Accordingly, each holder of shares of ZILA stock should consult with and rely on such holder’s own advisors with respect to the possible tax consequences of the Merger.

 

We believe that we are not required to make any filings or obtain any governmental consents or approvals prior to the completion of the Merger.

 

Pursuant to the Senior Note Purchase Agreement, TOLMAR, Inc., an affiliate of TOLMAR, agreed to purchase for $5,000,000 in cash all of our Senior Secured Notes (which are currently outstanding in the aggregate principal amount at maturity of $12,000,000). The Senior Note Purchase Agreement provides, among other things, that:

 

 

 

 

 

TOLMAR, Inc.’s obligation to purchase the Senior Secured Notes is conditioned upon certain things and events, including (i) the condition that the Merger be completed and (ii) the condition set forth in Section 6(c) of the Senior Note Purchase Agreement that no suit or proceeding shall be pending before any court, administrative agency or arbitrator wherein an unfavorable judgment would prevent consummation (or cause rescission of the consummation) of any of the transactions contemplated by the Senior Note Purchase Agreement. That the condition set forth in Section 6(c) of the Senior Note Purchase Agreement be satisfied is, in turn, a condition in the Merger Agreement that must be satisfied in order for TOLMAR to be required to consummate the Merger. Even though TOLMAR, Inc.’s obligation to purchase the Senior Secured Notes is conditioned upon the completion of the Merger, TOLMAR, Inc. is entitled under the terms of the Senior Note Purchase Agreement to waive that condition and purchase our Senior Secured Notes regardless of whether the Merger is consummated. The Senior Note Purchase Agreement may be terminated by either or both of the parties under certain circumstances, including mutual written consent.

 

This section of the proxy statement describes the material provisions of the Merger Agreement but does not purport to describe all of the terms of the Merger Agreement, a copy of which is attached as Annex A to this proxy statement and incorporated into this proxy statement by reference. We urge you to read the full text of the Merger Agreement because it is the legal document that governs the Merger. It is not intended to provide you with any other factual information about us. Such information can be found elsewhere in this proxy statement and in the public filings we make with the SEC, as described in “Where You Can Find More Information” beginning on page 51.

 

The Merger Agreement provides for the Merger of Acquisition Sub with and into ZILA upon the terms, and subject to the conditions, of the Merger Agreement. As the surviving corporation (the “Surviving Corporation”), ZILA will continue to exist following the Merger as a wholly-owned subsidiary of TOLMAR. Upon consummation of the Merger, the directors and officers of Acquisition Sub will be the initial directors and officers of the Surviving Corporation.

 

The Merger will be effective at the time the certificate of merger is filed with the Secretary of State of the State of Delaware (or at a later time, if agreed upon by the parties and specified in the certificate of merger). We expect to complete the Merger as promptly as practicable after our stockholders adopt the Merger Agreement and approve the Merger.

 

Each share of our common stock issued and outstanding immediately prior to the effective time of the Merger will be converted into the right to receive $0.38 in cash, and each share of Series B Preferred issued and outstanding immediately prior to the effective time of the Merger will be converted into the right to receive $0.44 in cash, in each case without interest and less any applicable withholding taxes, other than the following shares:

 

 

The per share merger consideration is subject to equitable adjustment in the event of any stock split, stock dividend, reverse stock split or other change in the number of outstanding shares of our capital stock (or securities convertible or exchangeable into, or exercisable for, shares of our capital stock) between the date of the Merger Agreement and the effective time of the Merger.

 

After the Merger is effective, each holder of a certificate representing any shares of common sock or Series B Preferred (other than shares for which appraisal rights have been properly and validly perfected) will no longer have any rights with respect to the shares, except for the right to receive the merger consideration. See “Dissenters’ Rights of Appraisal” beginning on page 48.

 

Warrants.   The treatment of outstanding warrants to purchase our common stock will vary depending on their respective terms. By virtue of the Merger, certain of our warrants will automatically become rights to receive the

Common Stock Merger Consideration in exchange for payment of their exercise price (which is equal to $15.54 per share). Certain other warrants (with an exercise price of $14.63 per share) will remain outstanding. Of these warrants that would otherwise remain outstanding, ZILA is obligated under the terms of the Merger Agreement to attempt to cancel them prior to the closing of the Merger.

 

Stock Options.   Immediately prior to the effective time of the Merger, all outstanding options to purchase common stock under our equity incentive plans, will become immediately vested and exercisable in full. At the effective time, each then outstanding option will, by virtue of the Merger, be converted into and will become a right to receive an amount in cash, without interest and less any applicable withholding taxes, with respect to each share subject thereto, equal to the excess, if any, of the Common Stock Merger Consideration over the per share exercise price of such option, and each such option will terminate at the effective time. Only 50,000 stock options have an exercise price less than the Common Stock Merger Consideration and thus will receive any payment in connection with the Merger.

 

Restricted Stock.   At the effective time and by virtue of the Merger, the restrictions on the restricted stock issued and outstanding immediately before the effective time will lapse, and such restricted stock shall be treated as common stock for purposes of receiving the merger consideration.

 

Immediately following the effective time of the Merger, TOLMAR will deposit, or cause to be deposited, with Computershare Trust Company, ZILA’s transfer agent and the paying agent for the Merger, an amount of cash sufficient for the paying agent to make full payment of the merger consideration to the record holders of ZILA common stock and Series B Preferred issued and outstanding immediately before the effective time (other than certain excluded shares identified in the section entitled “Merger Consideration”, which begins on page 36 of this proxy statement).

 

Immediately following the effective time of the Merger, TOLMAR will cause the paying agent to mail to you a letter of transmittal and instructions advising you how to surrender your certificates in exchange for the merger consideration. The paying agent will pay you your merger consideration after you have (i) surrendered your certificates to the paying agent and (ii) provided to the paying agent your signed letter of transmittal and any other items specified by the letter of transmittal. Interest will not be paid or accrued in respect of the merger consideration. The paying agent may reduce the amount of any merger consideration paid to you by any applicable withholding taxes. YOU SHOULD NOT FORWARD YOUR STOCK CERTIFICATES TO THE PAYING AGENT WITHOUT A LETTER OF TRANSMITTAL, AND YOU SHOULD NOT RETURN YOUR STOCK CERTIFICATES WITH THE ENCLOSED PROXY .

 

Any portion of the funds deposited with the paying agent that remain undistributed to holders of common stock and Series B Preferred for 180 days after the effective time will be delivered to the Surviving Corporation, together with interest and other income received by the paying agent. Holders of common stock and Series B Preferred who at that time have not yet complied with the exchange procedures outlined above shall thereafter look only to the Surviving Corporation, as general creditors of the Surviving Corporation, for delivery of any merger consideration, without interest and less any applicable withholding taxes, that may be payable upon due surrender of their respective share certificates.

 

If the paying agent is to pay some or all of your merger consideration to a person other than you, as the registered owner of a stock certificate, you must have your certificates properly endorsed and otherwise in proper form for transfer, and you must pay any transfer or other taxes payable by reason of the transfer or establish to the satisfaction of TOLMAR (or any agent designated by TOLMAR) that the taxes have been paid or are not required to be paid.

 

The transmittal instructions will tell you what to do if you have lost your certificate, or if it has been stolen or destroyed. You will have to provide an affidavit to that fact and, if required by the Surviving Corporation, post a bond in an amount that the Surviving Corporation reasonably directs as indemnity against any claim that may be made against TOLMAR, the Surviving Corporation or the paying agent with respect to the lost, stolen or destroyed certificate.

 

The Merger Agreement contains representations and warranties made by us to TOLMAR and Acquisition Sub and representations and warranties made by TOLMAR and Acquisition Sub to us. Some of those representations and warranties may not be accurate or complete as of any particular date because they are subject to a contractual standard of materiality or material adverse effect different from that generally applicable to public disclosures to stockholders or used for the purpose of allocating risk between the parties to the Merger Agreement rather than establishing matters of fact. For the foregoing reasons, you should not rely on the representations and warranties contained in the Merger Agreement as statements of factual information.

 

In the Merger Agreement, ZILA made representations and warranties relating to:

 

 

In the Merger Agreement, TOLMAR and Acquisition Sub made representations and warranties relating to:

 

 

Under the Merger Agreement, ZILA, TOLMAR and Acquisition Sub agreed to the following with respect to the period from and after the execution of the Merger Agreement:

 

 

 

 

 

The Merger Agreement requires us to immediately cease and terminate any solicitation, encouragement, discussions or negotiations with any third-party with respect to an Acquisition Proposal (as defined below). The Merger Agreement prohibits us from initiating, facilitating or encouraging any offers from a third-party regarding an Acquisition Proposal, and it prohibits us from engaging in discussions or negotiations, or actually entering into an agreement, with a third-party regarding an Acquisition Proposal.

 

Notwithstanding the forgoing prohibitions, if, prior to obtaining the requisite stockholder approval required under the terms of the Merger Agreement and following the receipt by ZILA of a bona fide written Acquisition Proposal from any person, our Board determines in good faith, after consultation with its financial advisors and its outside legal counsel, that (i) such Acquisition Proposal constitutes or would reasonably be expected to lead to a Superior Proposal (as defined below) and (ii) the failure to respond to such Acquisition Proposal would be inconsistent with its fiduciary duties, then ZILA may in response to such Acquisition Proposal (A) furnish information with respect to ZILA to the person who has made such Acquisition Proposal pursuant to a confidentiality agreement and (B) participate in discussions and negotiations regarding such Acquisition Proposal.

 

ZILA is required to, within three business days after receipt of an Acquisition Proposal, advise TOLMAR orally and in writing of the receipt of any Acquisition Proposal specifying the material terms and conditions and the identity of the party making such Acquisition Proposal and ZILA will provide to TOLMAR a copy of all written materials provided to ZILA in connection with any such Acquisition Proposal.

 

An “Acquisition Proposal” means any proposal or offer from any person (other than TOLMAR, Acquisition Sub or any of their respective affiliates) or group (as defined in Section 13(d) of the Exchange Act) relating to any direct or indirect acquisition or purchase of 15% or more of the assets of ZILA and its subsidiaries, taken as a whole, or 15% or more of the total outstanding voting securities of ZILA or any of its subsidiaries then outstanding, any tender offer, exchange offer or equity issuance that if consummated would result in any person beneficially owning 15% or more of the total outstanding voting securities of ZILA or any of its subsidiaries then outstanding, and any merger, consolidation, business combination, recapitalization, liquidation, dissolution or similar transaction involving ZILA, other than the transactions contemplated by the Merger Agreement.

 

“Superior Proposal” means any bona fide written Acquisition Proposal not solicited or initiated in violation of the Merger Agreement that (a) relates to an acquisition by a person or group (as defined in Section 13(d) of the Exchange Act) of either (i) more than 50% of the voting securities of ZILA pursuant to a tender offer, equity issuance, merger or otherwise or (ii) more than 50% of the assets used in the conduct of the business of ZILA, (b) ZILA’s Board determines in its good faith judgment (after consultation with its financial advisors and, after considering, among other things, the financial, legal and regulatory aspects of such Acquisition Proposal) would, if consummated, result in a transaction that is more favorable to ZILA’s stockholders from a financial point of view than the transactions contemplated by the Merger Agreement, (c) the potential acquirer has the financial wherewithal to consummate without having to obtain new financing other than financing as to which it has obtained binding commitments from reputable sources and (d) ZILA’s Board determines in good faith (after consultation with its financial advisors and its outside legal counsel) is reasonably capable of being consummated.

 

We are not entitled to enter into any agreement with respect to a Superior Proposal unless the Merger Agreement has been or is concurrently terminated in accordance with its terms and we have concurrently paid to TOLMAR the $300,000 termination fee and up to $200,000 in expenses as described in further detail in “Termination Fees and Expenses” beginning on page 44.

 

 

The Merger Agreement provides that for a period of 60 months after the effective time of the Merger, ZILA will provide, at its sole expense, each individual who served as a director or officer of ZILA at any time prior to the effective time with liability insurance containing the same coverage and in the same amount as ZILA’s policies in effect immediately prior to the effective time; provided, however , in the event that the cost of liability insurance for such coverage exceeds 150% of the annual cost of such insurance in effect immediately before the effective time, ZILA may reduce the coverage and amount of liability insurance only to the extent necessary so that the annual cost of liability insurance does not exceed 150% of the annual cost of the insurance in effect immediately before the effective time.

In addition, for a period of 60 months after the effective time, ZILA is required to fulfill and honor in all respects the obligations of ZILA and its subsidiaries pursuant to any indemnification provision and any exculpation provision set forth in the organizational documents of ZILA or any of its subsidiaries as in effect on the date of the Merger Agreement. During such period, the organizational documents of ZILA must contain the provisions with respect to indemnification and exculpation from liability set forth in ZILA’s organizational documents on the date of the Merger Agreement, and such provisions are not to be amended, repealed or otherwise modified in any manner (including any amendment accomplished through merger, recapitalization, consolidation or reorganization) that could adversely affect the rights of any indemnified party thereunder.

 

The obligations of the parties to complete the Merger are subject to the following conditions:

 

 

The Merger Agreement may be terminated at any time prior to the consummation of the Merger, as follows:

 

 

 

 

 

 

Under certain circumstances, if the Merger Agreement is terminated by us, we must pay TOLMAR a termination fee and/or reimburse TOLMAR for certain expenses, as described in further detail in “Termination Fees and Expenses” below.

 

We will be required to pay TOLMAR’s expenses (including legal fees and expenses) incurred in connection with the Merger Agreement, not to exceed $200,000, and a termination fee of $300,000 if:

 

 

In addition, if the Merger Agreement is terminated because our stockholders do not adopt the Merger Agreement or the Merger is not consummated by November 22, 2009, and at or before the date of termination an Acquisition Proposal has been made or announced, then:

 

 

The parties may amend the Merger Agreement at any time, except that after our stockholders have adopted the Merger Agreement, there shall be no amendment that by law requires further approval by our stockholders without such approval having been obtained. All amendments to the Merger Agreement must be approved by the parties’ respective boards of directors and shall be in a writing signed by us, TOLMAR and Acquisition Sub.

 

The Merger Agreement is governed by and will be construed in accordance with the laws of the State of Delaware, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws.

 

At the special meeting, ZILA common stockholders will be asked to consider and vote upon a proposal to adopt the Merger Agreement and approve the transactions contemplated under the Merger Agreement, including the Merger. The Merger Agreement provides that at the effective time of the Merger, Acquisition Sub will be merged with and into ZILA. As a result of the Merger, ZILA will cease to be a publicly traded company and will become a wholly-owned subsidiary of TOLMAR.

 

The terms of, reasons for and other aspects of the Merger Agreement and the Merger are described in detail in the other sections of this proxy statement.

 

Vote Required; Recommendation of Board

 

The affirmative vote of holders of a majority of the outstanding shares of ZILA’s common stock as of the record date for the special meeting is required to adopt the Merger Agreement and approve the Merger.

 

A failure to submit a proxy card or vote at the ZILA special meeting, or an abstention, vote withheld or “broker non-vote” for the adoption of the Merger Agreement will have the same effect as a vote against the proposal to adopt the Merger Agreement and approve the Merger.

 

THE ZILA BOARD RECOMMENDS THAT ZILA’S STOCKHOLDERS VOTE “FOR” PROPOSAL NO. 1 TO ADOPT THE MERGER AGREEMENT AND APPROVE THE MERGER.

 

If ZILA fails to receive a sufficient number of votes to adopt the Merger Agreement and approve the Merger, ZILA may propose to adjourn the ZILA special meeting, for a period of not more than 30 days, for the purpose of soliciting additional proxies to approve Proposal No. 1. ZILA currently does not intend to propose adjournment at the special meeting if there are sufficient votes to approve the proposal to adopt the Merger Agreement and approve the Merger.

 

Vote Required; Recommendation of Board

 

The affirmative vote of the holders of a majority of ZILA’s common stock present in person or represented by proxy at the special meeting and entitled to vote is required to approve the adjournment of the special meeting for the purpose of soliciting additional proxies to approve the proposal to adopt the Merger Agreement.

 

An abstention will have the same effect as a vote against Proposal No. 2. A failure to submit a proxy card or vote at the special meeting or a “broker non-vote” will have no effect on the outcome of this proposal.

 

THE ZILA BOARD RECOMMENDS THAT ZILA’S STOCKHOLDERS VOTE “FOR” PROPOSAL NO. 2 TO ADJOURN THE SPECIAL MEETING, IF NECESSARY, TO SOLICIT ADDITIONAL PROXIES IF THERE ARE NOT SUFFICIENT VOTES IN FAVOR OF THE PROPOSAL TO ADOPT THE MERGER AGREEMENT AND APPROVE THE MERGER.

MARKET PRICE OF COMMON STOCK

 

Our common stock is quoted on the NASDAQ Capital Market under the symbol “ZILA.” The following table sets forth, for the periods indicated, the high and low sale prices of our common stock as reported by the NASDAQ Capital Market.

 

 

The closing sale price of our common stock on the NASDAQ Capital Market on June 24, 2009, the last trading day prior to our Board’s approval of the Merger Agreement, was $0.32 per share. On July [  ], 2009, the most recent practicable date before this proxy statement was printed, closing sale price of our common stock on the NASDAQ Capital Market was $[     ] per share. You are encouraged to obtain current market quotations for common stock in connection with voting your shares.

 

Dividends

 

We have not paid dividends on our common stock and we do not presently intend to do so. The policy of our Board has been to retain earnings to finance the growth and development of our business. Furthermore, the payment of cash dividends on our common stock is prohibited by the terms of our Senior Secured Notes.

 

The following tables list the ownership of our common stock for the persons or the groups specified. Ownership includes direct and indirect (beneficial) ownership, as defined by the SEC’s rules. To our knowledge, each person, along with his or her spouse, has sole voting and investment power over the shares unless otherwise noted. The following tables set forth information concerning the beneficial owners of our common stock by (i) the directors, (ii) the “named executive officers” (as such term is defined under SEC rules), (iii) any person holding at least 5% of our shares, and (iv) all current directors and executive officers of ZILA as a group. Beneficial ownership and percentage ownership of shares of our common stock is as of the record date, July 2, 2009, based on 10,455,821.72 shares of our common stock issued and outstanding.

 

Certain Beneficial Owners

 

 

 

 

 

Directors and Executive Officers

 

 

 

 

Under the DGCL, holders of ZILA common stock and Series B Preferred have the right to dissent from the Merger and to receive payment in cash for the fair value of their shares as determined by the Delaware Court of Chancery, together with a fair rate of interest, if any, as determined by the court, in lieu of the consideration he/she would otherwise be entitled to pursuant to the Merger Agreement. These rights are known as appraisal rights. ZILA’s stockholders electing to exercise appraisal rights must comply with the provisions of Section 262 of the DGCL in order to perfect their rights. ZILA will require strict compliance with the statutory procedures.

 

The following is intended as a brief summary of the material provisions of the Delaware statutory procedures required to be followed by a stockholder in order to dissent from the Merger and perfect appraisal rights.

 

This summary, however, is not a complete statement of all applicable requirements and is qualified by reference to Section 262 of the DGCL, the full text of which appears in Annex C to this proxy statement. Failure to precisely follow any of the statutory procedures set forth in Section 262 of the DGCL may result in a termination or waiver of your appraisal rights.

 

Section 262 requires that stockholders be notified that appraisal rights will be available not less than twenty (20) days before the stockholders’ meeting to vote on the Merger. A copy of Section 262 must be included with such notice. This proxy statement constitutes ZILA’s notice to its stockholders of the availability of appraisal rights in connection with the Merger in compliance with the requirements of Section 262. If you wish to consider exercising your appraisal rights, you should carefully review the text of Section 262 contained in Annex C since failure to

timely and properly comply with the requirements of Section 262 will result in the loss of your appraisal rights under the DGCL.

 

If you elect to demand appraisal of your shares, you must satisfy each of the following conditions:

 

 

All demands for appraisal should be addressed to Zila, Inc., 16430 North Scottsdale Road, Suite 450, Scottsdale, Arizona, 85254-1770, Attention: Gary V. Klinefelter, Vice President, General Counsel and Secretary, must be delivered before the vote on the Merger Agreement is taken at the special meeting and should be executed by, or on behalf of, the record holder of the shares. The demand must reasonably inform ZILA of the identity of the stockholder and the intention of the stockholder to demand appraisal of his, her or its shares.

 

To be effective, a demand for appraisal by a stockholder must be made by, or in the name of, such registered stockholder, fully and correctly, as the stockholder’s name appears on his or her stock certificate(s). Beneficial owners who do not also hold the shares of record may not directly make appraisal demands to ZILA. The beneficial holder must, in such cases, have the registered owner, such as a broker or other nominee, submit the required demand in respect of those shares . If shares are owned of record in a fiduciary capacity, such as by a trustee, guardian or custodian, execution of a demand for appraisal should be made by or for the fiduciary; and if the shares are owned of record by more than one person, as in a joint tenancy or tenancy in common, the demand should be executed by or for all joint owners. An authorized agent, including an authorized agent for two or more joint owners, may execute the demand for appraisal for a stockholder of record; however, the agent must identify the record owner or owners and expressly disclose the fact that, in executing the demand, he or she is acting as agent for the record owner. A record owner, such as a broker, who holds shares as a nominee for others, may exercise his or her rights of appraisal with respect to the shares held for one or more beneficial owners, while not exercising this right for other beneficial owners. In that case, the written demand should state the number of shares as to which appraisal is sought. Where no number of shares is expressly mentioned, the demand will be presumed to cover all shares held in the name of the record owner.

 

If you hold your shares in a brokerage account or in other nominee form and you wish to exercise appraisal rights, you should consult with your broker or the other nominee to determine the appropriate procedures for the making of a demand for appraisal by the nominee.

 

Within ten (10) days after the effective time of the Merger, the Surviving Corporation must give written notice that the Merger has become effective to each ZILA stockholder who has properly filed a written demand for appraisal and who did not vote in favor of or consent to the Merger Agreement. At any time within sixty (60) days after the effective time of the Merger, any stockholder who has demanded an appraisal but has not commenced an appraisal proceeding or joined an appraisal proceeding as a named party has the right to withdraw the demand and to accept the cash payment specified by the Merger Agreement for his or her shares. Within one hundred twenty (120) days after the effective date of the Merger, any stockholder who has complied with Section 262 shall, upon written request to the Surviving Corporation, be entitled to receive a written statement setting forth the aggregate number of shares not voted in favor of the Merger Agreement and with respect to which demands for appraisal rights have been received and the aggregate number of holders of such shares. Such written statement will be mailed to the requesting stockholder within ten (10) days after such written request is received by the Surviving Corporation or within ten (10) days after expiration of the period for delivery of demands for appraisal, whichever is later. Within one hundred twenty (120) days after the effective time of the Merger, either the Surviving Corporation or any

stockholder who has complied with the requirements of Section 262 may file a petition in the Delaware Court of Chancery demanding a determination of the fair value of the shares held by all stockholders entitled to appraisal. Upon the filing of the petition by a stockholder, service of a copy of such petition shall be made upon the Surviving Corporation. The Surviving Corporation has no obligation to file such a petition in the event there are dissenting stockholders. Accordingly, the failure of a stockholder to file such a petition within the period specified could nullify the stockholder’s previously written demand for appraisal.

 

If a petition for appraisal is duly filed by a stockholder and a copy of the petition is delivered to the Surviving Corporation, the Surviving Corporation will then be obligated, within twenty (20) days after receiving service of a copy of the petition, to provide the Chancery Court with a duly verified list containing the names and addresses of all stockholders who have demanded an appraisal of their shares and with whom agreements as to the value of their shares have not been reached by the Surviving Corporation. After notice, if so ordered by the Chancery Court, to dissenting stockholders who demanded appraisal of their shares, the Chancery Court is empowered to conduct a hearing upon the petition, and to determine those stockholders who have complied with Section 262 and who have become entitled to the appraisal rights provided thereby. The Chancery Court may require the stockholders who have demanded payment for their shares to submit their stock certificates to the Register in Chancery for notation thereon of the pendency of the appraisal proceedings; and if any stockholder fails to comply with that direction, the Chancery Court may dismiss the proceedings as to that stockholder.

 

After determination of the stockholders entitled to appraisal of their shares, the Chancery Court will appraise the shares, determining their fair value exclusive of any element of value arising from the accomplishment or expectation of the Merger, together with interest, if any, from the effective date of the Merger through the date of payment of the judgment, which shall be compounded quarterly and shall accrue at a default rate 5% over the Federal Reserve discount rate (including any surcharge) as established from time to time during the period between the effective date of the Merger and the date of payment of the judgment. When the value is determined, the Chancery Court will direct the payment of such value, with interest, if any, to the stockholders entitled to receive the same, upon surrender by such holders of the certificates representing those shares.

 

In determining fair value, the Chancery Court is required to take into account all relevant factors. You should be aware that the fair value of your shares as determined under Section 262 could be more than, the same as, or less than the value that you are entitled to receive under the terms of the Merger Agreement .

 

Costs of the appraisal proceeding may be imposed upon the Surviving Corporation and the stockholders participating in the appraisal proceeding by the Chancery Court as the Chancery Court deems equitable in the circumstances. Upon the application of a stockholder, the Chancery Court may order all or a portion of the expenses incurred by any stockholder in connection with the appraisal proceeding, including, without limitation, reasonable attorneys’ fees and the fees and expenses of experts, to be charged pro rata against the value of all shares entitled to appraisal. Any stockholder who had demanded appraisal rights will not, after the effective time of the Merger, be entitled to vote shares subject to that demand for any purpose or to receive payments of dividends or any other distribution with respect to those shares, other than with respect to payment as of a record date prior to the effective time of the Merger; however, if no petition for appraisal is filed within one hundred twenty (120) days after the effective time of the Merger, or if the stockholder delivers a written withdrawal of his or her demand for appraisal and an acceptance of the terms of the Merger within sixty (60) days after the effective time of the Merger, then the right of that stockholder to appraisal will cease and that stockholder will be entitled to receive the cash payment for his, her or its shares pursuant to the Merger Agreement. Any withdrawal of a demand for appraisal made more than sixty (60) days after the effective time of the Merger may only be made with the written approval of the Surviving Corporation. In addition, no appraisal proceeding may be dismissed as to any stockholder without the approval of the Chancery Court, and such approval may be conditioned upon such terms as the Chancery Court deems just.

 

In view of the complexity of Section 262, stockholders who may wish to dissent from the Merger and pursue appraisal rights should consult their legal advisors.

 

If the Merger is consummated, we will not have public stockholders and there will be no public participation in any future meeting of stockholders. However, if the Merger is not completed or if we are otherwise required to do so under applicable law, we would hold a 2009 annual meeting of stockholders. Any stockholder proposals to be considered timely for inclusion in next year’s proxy statement must be submitted in writing to our principal executive offices, to Zila, Inc., 16430 North Scottsdale Road, Suite 450, Scottsdale, Arizona, 85254-1770, Attention: Gary V. Klinefelter, Vice President, General Counsel and Secretary, within a reasonable time before we begin to print and send our proxy materials. Such proposals must also comply with the SEC’s rules concerning the inclusion of stockholder proposals in company-sponsored proxy materials as set forth in Rule 14a-8 promulgated under the Exchange Act and our bylaws.

 

Pursuant to Rule 14a-8 under the Exchange Act, shareholder proposals for the 2009 annual meeting must be received at our principal executive offices by July 13, 2009 to be considered for inclusion in our proxy materials relating to such meeting. Any notice of a shareholder proposal submitted outside the process of Rule 14a-8 of the Exchange Act after July 13, 2009 will be considered untimely. We reserve the right to reject, rule out of order, or take other appropriate action with respect to any proposal that does not comply with these and all other applicable requirements.

 

The SEC has adopted rules that permit companies and intermediaries (such as brokers) to satisfy the delivery requirements for proxy statements and annual reports with respect to two or more stockholders sharing the same address by delivering a single proxy statement addressed to those stockholders. This process, which is commonly referred to as “householding,” potentially means extra convenience for stockholders and cost savings for companies.

 

This year, a number of brokers with account holders who are our stockholders will be “householding” our proxy materials. A single copy of this notice and proxy statement will be delivered to multiple stockholders sharing an address unless contrary instructions have been received from the affected stockholders. Once you have received notice from your broker that they will be “householding” communications to your address, “householding” will continue until you are notified otherwise or until you revoke your consent. If, at any time, you no longer wish to participate in “householding” and would prefer to receive a separate proxy statement, please notify your broker or direct your written request to Zila, Inc., 16430 North Scottsdale Road, Suite 450, Scottsdale, Arizona, 85254-1770, Attention: Gary V. Klinefelter, Vice President, General Counsel and Secretary, or contact our Vice President, General Counsel and Secretary at (800) 922-7887. Stockholders who currently receive multiple copies of the proxy statement at their address and would like to request “householding” of their communications should contact their broker.

 

We file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any document we file at the SEC’s public reference room located at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Our SEC filings are also available to the public at the SEC’s website at http://www.sec.gov.

 

Any person, including any beneficial owner, to whom this proxy statement is delivered may request copies of reports, proxy statements or other information concerning us, without charge, by written or telephonic request directed to Zila, Inc., 16430 North Scottsdale Road, Suite 450, Scottsdale, Arizona, 85254-1770, Attention: Gary V. Klinefelter, Vice President, General Counsel and Secretary, or contact our Vice President, General Counsel and

Secretary at (800) 922-7887. Georgeson Shareholder, which ZILA has retained to assist it with soliciting proxies for the special meeting, can be contacted toll-free at (877) 278-9674.

 

No persons have been authorized to give any information or to make any representations other than those contained in this proxy statement and, if given or made, such information or representations must not be relied upon as having been authorized by us or any other person. This proxy statement is dated July [  ], 2009. You should not assume that the information contained in this proxy statement is accurate as of any date other than that date, and the mailing of this proxy statement to stockholders shall not create any implication to the contrary.

 

Sincerely,

 

David R. Bethune

Chairman and Chief Executive Officer

 

 

AGREEMENT AND PLAN OF MERGER
AMONG
TOLMAR HOLDING, INC.
as Parent
PROJECT Z ACQUISITION SUB, INC.,
as Acquisition Sub, and
ZILA, INC.
as Target
Dated as of June 25, 2009

 

TABLE OF CONTENTS

 

 

Exhibit A — Certificate of Merger

Exhibit B — Form of Bylaws

Disclosure Schedule — Exceptions to Representations and Warranties

AGREEMENT AND PLAN OF MERGER

 

This Agreement and Plan of Merger (this “ Agreement ”), dated as of June 25, 2009, is among TOLMAR Holding, Inc. , a Delaware corporation (“ Parent ”), Project Z Acquisition Sub, Inc. , a Delaware corporation (“ Acquisition Sub ”), and Zila, Inc. , a Delaware corporation (“ Target ”). Parent, Acquisition Sub and Target sometimes are referred to collectively herein as the “ Parties. ”

 

Recitals

 

A. This Agreement contemplates a transaction in which Parent will acquire all of Target’s outstanding stock for cash through a reverse subsidiary merger of Acquisition Sub with and into Target.

 

B. The board of directors of Target has unanimously (other than with respect to one director, who recused himself from the vote) (i) determined that it is fair to and in the best interests of Target and its stockholders, and declared it advisable, to enter into this Agreement with Parent and Acquisition Sub providing for the merger (the “ Merger ”) of Acquisition Sub with and into Target in accordance with the General Corporation Law of the State of Delaware, as amended (the “ DGCL ”), upon the terms and subject to the conditions set forth herein, (ii) approved this Agreement in accordance with the DGCL, upon the terms and subject to the conditions set forth herein and (iii) resolved to recommend the adoption of this Agreement by the stockholders of Target.

 

C. Parent has entered into a Senior Note Purchase Agreement (such agreement, as it may be amended, restated, supplemented or otherwise modified from time to time, the “ Note Purchase Agreement ”) with Visium Balanced Master Fund, Ltd. and Atlas Master Fund, Ltd. (collectively, the “ Noteholders ”), whereby, among other things, Parent expects, at the Effective Time (as defined below), to purchase for cash all of the outstanding Third Amended and Restated Senior Secured Convertible Notes, dated November 28, 2006, made by Target (the “ Senior Notes ”).

 

D. The current officers and directors of Target who own Target Shares (as defined below) have agreed to enter into transaction support agreements in favor of Parent and Acquisition Sub with respect to, among other things, voting such shares in favor of the Merger.

 

Agreement

 

In consideration of the representations, warranties, covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are acknowledged, the Parties agree as follows:

 

ARTICLE I

 

Definitions and References

 

1.1   General Definitions .   As used herein the terms “Agreement,” “Parent,” “Acquisition Sub,” “Target,” “Parties,” “Merger,” “DGCL,” “Note Purchase Agreement,” “Noteholders” and “Senior Notes” shall have the meanings ascribed thereto above, and the following terms shall have the following meanings:

 

“ Acquisition Proposal ” means any proposal or offer (whether or not binding) from any Person (other than Parent, Acquisition Sub or any of their respective Affiliates) or group (as defined in Section 13(d) of the Securities Exchange Act) relating to any direct or indirect acquisition or purchase of 15% or more of the assets of Target and its Subsidiaries, taken as a whole, or 15% or more of the total outstanding voting securities of Target or any of its Subsidiaries then outstanding, any tender offer, exchange offer or equity issuance that if consummated would result in any Person beneficially owning 15% or more of the total outstanding voting securities of Target or any of its Subsidiaries then outstanding, and any merger, consolidation, business combination, recapitalization, liquidation, dissolution or similar transaction involving Target, other than the transactions contemplated by this Agreement.

 

“ Affiliate ” has the meaning set forth in Rule 12b-2 of the regulations promulgated under the Securities Exchange Act.

“ Available Free Cash ” has the meaning set forth in Section 3.6(b).

 

“ Business Day ” means any day on which banks are not required or authorized by Law to close in New York, New York.

 

“ Certificate of Merger ” has the meaning set forth in Section 2.3.

 

“ Closing ” has the meaning set forth in Section 2.2.

 

“ Closing Date ” has the meaning set forth in Section 2.2.

 

“ Code ” shall mean the Internal Revenue Code of 1986, as amended.

 

“ Common Stock Merger Consideration ” has the meaning set forth in Section 2.4(e).

 

“ Continuing Employees ” has the meaning set forth in Section 5.12.

 

“ Contract ” means any contract, subcontract, agreement, commitment, note, bond, mortgage, indenture, lease, license, sublicense or other instrument or binding arrangement or understanding of any kind or character, whether oral or in writing.

 

“ Copyrights ” means all registered and unregistered copyrights in both published and unpublished works, rights in mask works and mask works applications, all sui generis rights in data and databases, and any other rights of authorship in any other published and unpublished works, including all moral rights therein.

 

“ Covered D&O’s ” has the meaning set forth in Section 5.9(a).

 

“ CSA ” has the meaning set forth in Section 3.18(a).

 

“ Current Assets ” has the meaning set forth in Section 3.6(b).

 

“ Current Liabilities ” has the meaning set forth in Section 3.6(b).

 

“ Definitive Proxy Materials ” means the definitive proxy materials relating to the Special Meeting.

 

“ Disclosure Schedule ” has the meaning set forth in ARTICLE III.

 

“ Dissenting Share ” means any Target Share, issued and outstanding immediately before the Effective Time, and held of record by any holder who or that has properly exercised his, her or its appraisal rights under the DGCL with respect to the proposal for the Merger.

 

“ Effective Time ” has the meaning set forth in Section 2.4(a).

 

“ Entity ” means any corporation (including any non-profit corporation), general partnership, limited partnership, limited liability partnership, joint venture, estate, trust, company (including any company limited by shares, limited liability company or joint stock company), firm, society or other enterprise, association, organization or entity.

 

“ Environmental Law ” means any Law relating to pollution or protection of the environment (including, without limitation, Laws relating to recycling, reuse, product content and product take-back requirements as well as any carbon emission reduction legislation), worker safety or the exposure of any individual to any hazardous materials including any regulated emissions, discharges or releases of the following which shall all be deemed hazardous materials hereunder: chemicals, pollutants, contaminants, emissions, wastes, hazardous substances and toxic substances, radioactive and biological materials and wastes, and petroleum and petroleum related products and wastes.

 

“ ERISA ” means the Employee Retirement Income Security Act of 1974, as amended, and the rules and regulations promulgated thereunder, or any successor statue, rules and regulations thereto.

 

“ ERISA Affiliate ” means any trade or business (whether or not incorporated) that, together with Target, is treated as a single employer under Section 414(b) or (c) of the Code or, solely for purposes of Section 302 of ERISA and Section 412 of the Code, is treated as a single employer under Section 414 of the Code.

“ Facilities ” means any real property or interest in real property that is being used or has ever been used by Target or any of its Subsidiaries and all buildings, structures or other improvements thereon.

 

“ FDA ” has the meaning set forth in Section 3.18(b).

 

“ FDCA ” has the meaning set forth in Section 3.18(a).

 

“ GAAP ” means United States generally accepted accounting principles as in effect from time to time, consistently applied.

 

“ Governmental Authorization ” means any permit, license, registration, qualification or authorization granted by any Governmental Entity.

 

“ Governmental Entity ” means any Federal, state, local, tribal or foreign government or any court of competent jurisdiction, administrative or regulatory body, agency, bureau or commission, governing body of any national securities exchange or other governmental authority or instrumentality in any domestic or foreign jurisdiction and any appropriate division of any of the foregoing.

 

“ Health Care Laws ” has the meaning set forth in Section 3.18(g).

 

“ Intellectual Property ” means any intellectual property that may exist under the Laws of any jurisdiction throughout the world, including all Marks, Patents, Copyrights and Trade Secrets, any applications for registration and registrations of the foregoing property and the foregoing rights (whether pending, existing, abandoned or expired), and any physical embodiments of the foregoing property and the foregoing rights.

 

“ Knowledge ” means, in the case of Target, the actual awareness by one or more of the current officers of Target of such fact or matter.

 

“ Law ” means any applicable Federal, state, local, municipal, foreign, tribal or other law, statute, legislation, constitution, principle of common law, resolution, ordinance, code, edict, decree, proclamation, treaty, convention, rule, regulation, ruling, directive, pronouncement, requirement, specification, determination, decision, opinion or interpretation that is, has been or may in the future be issued, enacted, adopted, passed, approved, promulgated, made, implemented or otherwise put into effect, whether legislative, municipal, administrative or judicial in nature.

 

“ Legal Proceeding ” means any action, claim, counterclaim, suit, litigation, hearing, arbitration, grievance, proceeding (public or private), criminal prosecution or investigation by or before any Governmental Entity.

 

“ License-In Contract ” means any Contract under which Target or any of its Subsidiaries has acquired, obtained, or been granted any license, permission or any other right to utilize or otherwise exploit any Intellectual Property.

 

“ License-Out Contract ” means any Contract under which Target or any of its Subsidiaries has licensed, permitted or otherwise granted any right to any Person to utilize or otherwise exploit any Intellectual Property.

 

“ Licensed-In IP ” means the rights or permissions to any Intellectual Property acquired, obtained or granted under or through a License-In Contract.

 

“ Lien ” means any mortgage, pledge, assessment, security interest, lease, lien, adverse claim, levy, charge, preference, restriction on the right of possession or use, encroachment, negative pledge, right of first refusal or offer, preemptive right, community or other marital property interest, imperfection of title, or other encumbrance of any kind, including any conditional sales Contract, title retention Contract or other Contract to give any of the foregoing.

 

“ Marks ” means all registered or unregistered trademarks, service marks, trade names, fictitious business names, and general intangibles of a similar nature (including corporate names, logos, trade dress, slogans, and product names), and the goodwill associated therewith, and all rights in internet web sites, internet domain names, uniform resource locators, and keywords and purchased search terms.

“ Material Adverse Change ” means any effect, change, condition, event or development that, individually or in the aggregate, would be (or could reasonably be expected to be) materially adverse, whether in the near-term or the long-term, to the business, properties, assets, liabilities, capitalization, stockholders’ equity, condition (financial or otherwise), operations, licenses, results of operations or prospects of Target or any of its Subsidiaries, as determined from the perspective of a reasonable person in the Parent’s position, excluding any adverse effect, change, condition, event or development (unless such effect, change, condition, event or development adversely impacts Target and its Subsidiaries disproportionately compared to other companies operating in the same industry) arising from or relating to: (a) any general social, political or economic condition or event, including stock market fluctuations, acts of war or terrorism or the consequences of any of the foregoing, (b) any change in currency exchange rates or interest rates, (c) any legislative changes or other changes in Law and (d) natural disasters.

 

“ Merger Consideration ” has the meaning set forth in Section 2.4(e).

 

“ Most Recent Balance Sheet ” means the balance sheet as of the Most Recent Fiscal Quarter End included in the financial statements Target has filed with the SEC on Form 10-Q for the fiscal quarter ended as of the Most Recent Fiscal Quarter End.

 

“ Most Recent Fiscal Quarter End ” has the meaning set forth in Section 3.5.

 

“ Net Working Capital ” has the meaning set forth in Section 3.6(b).

 

“ Option Proceeds ” has the meaning set forth in Section 2.5(b).

 

“ Ordinary Course of Business ” means an action taken by Target or any of its Subsidiaries if such action is (a) consistent in nature, scope and magnitude with the past practices of such Person, (b) taken in the ordinary course of the normal day-to-day operations of such Person, (c) taken in accordance with sound and prudent business practices and (d) not required to be authorized by the stockholders or other equity owners of such Person, the board of directors of such Person or any committee of the board of directors of such Person, and does not require any other separate or special authorization of any nature.

 

“ Organizational Documents ” means the articles or certificate of incorporation or formation, articles of incorporation, organization or association, general or limited partnership agreement, limited liability company or operating agreement, bylaws and other agreements, documents or instruments relating to the organization, management or operation of any Person that is an entity or relating to the rights, duties and obligations of the equityholders of any such Person, including any equityholders’ agreements, voting agreements, voting trusts, joint venture agreements, registration rights agreements or similar agreements.

 

“ Parent-owned Share ” means any Target Share, issued and outstanding immediately before the Effective Time, that Parent or Acquisition Sub owns of record.

 

“ Patents ” means any United States and non-United States patents, patent applications, patent disclosures, invention disclosures or other rights relating to the protection of inventions throughout the world (and all rights related thereto, including any continuations, continuations in part, divisionals, extensions, renewals, reissues or reexaminations of any of the foregoing).

 

“ Paying Agent ” has the meaning set forth in Section 2.6(a).

 

“ Payment Fund ” has the meaning set forth in Section 2.6(a).

 

“ Permitted Investments ” means investments in short-term obligations of the United States with maturities of no more than 30 days or guaranteed by the United States and backed by the full faith and credit of the United States or in commercial paper obligations rated A-1 or P-1 or better by Moody’s Investors Service, Inc. or Standard & Poor’s Corporation, respectively.

 

“ Permitted Lien ” means (a) with respect to any capital stock, membership interests or other similar equity interests of any Subsidiary of Target, (i) the provisions of the Governing Documents of such Subsidiary and (ii) the restrictions on the transfer of securities provided in the Securities Act and any state or “blue sky” securities Laws, and (b) with respect to any other asset, property or right, (i) Liens for Taxes not yet due or

delinquent and (ii) statutory Liens arising in the Ordinary Course of Business by operation of Law, including mechanic’s, materialmen’s, repairmen’s, employee’s, contractor’s, operator’s and other similar liens to the extent relating to an obligation that is not yet due or delinquent.

 

“ Person ” means an individual, an Entity or a Governmental Entity.

 

“ PHSA ” has the meaning set forth in Section 3.18(a).

 

“ Prime Rate ” means a rate per annum equal to the floating commercial loan rate as published in the Wall Street Journal (Western Edition) from time to time as the “Prime Rate,” adjusted in each case as of the banking day in which a change in the Prime Rate occurs, as reported in The Wall Street Journal (Western Edition); provided, however , that if such rate is no longer published in The Wall Street Journal, then it shall mean an annual rate of interest which equals the floating commercial loan rate of Citibank N.A., or its successors and assigns, announced from time to time as its “base rate,” adjusted in each case as of the banking day in which a change in the base rate occurs.

 

“ Product ” has the meaning set forth in Section 3.9(a).

 

“ Requisite Stockholder Approval ” means the affirmative vote in favor of this Agreement and the Merger of the holders of a majority of the outstanding Target Common Stock on the record date for the Special Meeting.

 

“ SEC ” means the Securities and Exchange Commission.

 

“ Securities Act ” means the Securities Act of 1933, as amended.

 

“ Securities Exchange Act ” means the Securities Exchange Act of 1934, as amended.

 

“ Software ” means all computer software and all versions, forms and embodiments thereof, including all source code, object code, executable code, binary code, files, objects, comments, screens, user interfaces, report formats, templates, menus, buttons and icons and all data, materials, manuals, design notes and other items and documentation related thereto or associated with the foregoing.

 

“ Special Meeting ” has the meaning set forth in Section 5.4(b).

 

“ Specified Representations ” has the meaning set forth in Section 6.1(e).

 

“ Subsidiary ” means, with respect to any Person at any time of determination, any corporation, limited liability company, partnership, association or other business entity of which (a) if a corporation, a majority of the total voting power of shares of stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more of the other Subsidiaries of that Person or a combination thereof or (b) if a limited liability company, partnership, association or other business entity (other than a corporation), a majority of the membership, partnership or other similar ownership interests thereof is at the time owned or controlled, directly or indirectly, by that Person or one or more Subsidiaries of that Person or a combination thereof and for this purpose, such Person, Subsidiaries or combination owns a majority ownership interest in such a business entity (other than a corporation) if such Person, Subsidiaries or combination is allocated a majority of such business entity’s gains or losses or is or controls any managing director or general partner of such business entity (other than a corporation). The term “Subsidiary” shall include all Subsidiaries of such Subsidiary.

 

“ Superior Proposal ” means any bona fide written Acquisition Proposal not solicited or initiated in violation of Section 5.8 that (a) relates to an acquisition by a Person or group (as defined in Section 13(d) of the Securities Exchange Act) of either (i) more than 50% of the voting securities of Target pursuant to a tender offer, equity issuance, merger or otherwise or (ii) more than 50% of the assets used in the conduct of the business of Target, (b) Target’s board of directors determines in its good faith judgment (after consultation with its financial advisors and, after considering, among other things, the financial, legal and regulatory aspects of such Acquisition Proposal) would, if consummated, result in a transaction that is more favorable to Target’s stockholders from a financial point of view than the transactions contemplated by this Agreement (taking into account any alterations to this Agreement agreed to by Parent in response thereto in accordance with

Section 7.1(f) as well as any payments resulting from the termination of this Agreement), (c) the potential acquirer has the financial wherewithal to consummate without having to obtain new financing other than financing as to which it has obtained binding commitments from reputable sources and (d) Target’s board of directors determines in good faith (after consultation with its financial advisors and its outside legal counsel) is reasonably capable of being consummated.

 

“ Surviving Corporation ” has the meaning set forth in Section 2.1.

 

“ Target Benefit Plans ” has the meaning set forth in Section 3.14.

 

“ Target Black Diamond Warrant ” means that certain amended and restated warrant to purchase 171,429 shares of Target Common Stock at an exercise price of $15.54 per share issued to BDC Finance, L.L.C. by Target on June 6, 2006.

 

“ Target Bylaws ” has the meaning set forth in Section 3.1.

 

“ Target Certificate of Incorporation ” has the meaning set forth in Section 3.1.

 

“ Target Common Stock ” means the common stock, $0.001 par value per share, of Target.

 

“ Target Equity Plans ” means Target’s 1997 Stock Award Plan, as amended and restated, and any other compensatory option plans or Contracts of Target, including any employee stock purchase plan and any option plans or Contracts assumed by Target pursuant to a merger or acquisition.

 

“ Target Expense Reimbursement Amount ” means an amount in cash equal to Parent’s expenses (including legal fees and expenses) incurred in connection with this Agreement (not to exceed $200,000).

 

“ Target Intellectual Property ” means any Intellectual Property (or portion thereof): (a) owned or licensed by Target or any of its Subsidiaries or which Target or any of its Subsidiaries otherwise has rights in or to; or (b) utilized in, necessary for, useful in, or incident to the conduct of the business of Target or any of its Subsidiaries in any manner as currently conducted or as proposed to be conducted.

 

“ Target Material Contracts ” has the meaning set forth in Section 3.11.

 

“ Target Non-Disclosure and Invention Assignment Contract ” has the meaning set forth in Section 3.9(i).

 

“ Target Options ” means any outstanding options to purchase Target Shares, whether granted by Target pursuant to the Target Equity Plans or otherwise.

 

“ Target PIPE Warrants ” means those certain warrants to purchase an aggregate of 1,212,995 shares of Target Common Stock at an exercise price of $14.63 per share issued to various investors by Target on or about November 29, 2006 and December 14, 2006.

 

“ Target Preferred Stock ” means the preferred stock, $0.001 par value per share, of Target.

 

“ Target Restricted Stock ” means the Target Common Stock issued pursuant to, and that is subject to vesting and other restrictions set forth in, Target’s 1997 Stock Award Plan, as amended and restated.

 

“ Target SEC Documents ” has the meaning set forth in Section 3.5.

 

“ Target Series B Convertible Preferred Stock ” means the Target Preferred Stock designated as Series B Convertible Preferred Stock.

 

“ Target Share ” means any share of Target Common Stock (including the Target Restricted Stock) or Target Preferred Stock (including Target Series B Convertible Preferred Stock).

 

“ Target Software ” means all Software, (a) owned or licensed by Target or any of its Subsidiaries, or (b) utilized in, necessary for, useful in, or incident to the conduct of the business of Target or any of its Subsidiaries in any manner, as currently conducted or as proposed to be conducted.

 

“ Target Stockholder ” means any Person who or that holds any Target Share.

 

“ Target Termination Fee ” means an amount in cash equal to $300,000.

“ Target Warrants ” means the Target PIPE Warrants and the Target Black Diamond Warrant.

 

“ Tax ” or “ Taxes ” means all forms of taxation or duties imposed, or required to be collected or withheld, including without limitation any United States federal, state or local, or non-United States, income, gross receipts, franchise, estimated, alternative minimum, add-on minimum, sales, use, transfer, registration, value added, excise, natural resources, severance, stamp, withholding, occupation, premium, windfall profit, environmental, customs, duties, real property, personal property, capital stock, net worth, intangibles, social security, unemployment, disability, payroll, license, employee or other tax or similar levy, of any kind whatsoever, together with any interest, penalties or additions to tax in respect of the foregoing and any transferee liability in respect of the foregoing payable by reason of contract, assumption, transferee liability, operation of Law, Section 1.1502-6(a) of the Treasury Regulations (or any predecessor or successor thereof or any analogous or similar provision under Law) or otherwise.

 

“ Tax Authority ” means any Governmental Entity having jurisdiction over the assessment, determination, collection or imposition of any Tax.

 

“ Tax Return ” means any return, declaration, report, claim for refund, information return or other document (including any related or supporting estimates, elections, schedules, statements or information) filed or required to be filed in connection with the determination, assessment or collection of any Tax or the administration of any Law relating to any Tax, and where permitted or required, combined or consolidated returns for any group of entities.

 

“ Trade Secrets ” means all information that derives economic value from not being generally known to other Persons, and any other information that is proprietary or confidential to Target or any of its Subsidiaries, including trade secrets, know-how, ideas, inventions, processes, documentation, information, data, information, customer lists, Software (in both object code and source code form), data, products, processes, technology, plans, drawings, designs, systems and specifications.

 

“ Treasury Regulations ” means the regulations issued by the U.S. Department of Treasury under the Code.

 

“ United States ” and “ U.S .” means the United States of America.

 

“USPTO” has the meaning set forth in Section 3.9(m).

 

“WARN” has the meaning set forth in Section 3.15.

 

1.2   References, Titles and Construction .   All references in this Agreement to Exhibits, Schedules, Articles, Sections and other subdivisions refer to the Exhibits, Schedules, Articles, Sections and other subdivisions of this Agreement unless expressly provided otherwise. All Exhibits and Schedules identified in this Agreement are incorporated herein by reference and made a part of this Agreement. Titles and section headings contained in this Agreement are inserted for convenience only and shall not affect in any way the meaning or interpretation of this Agreement. The words “this Agreement,” “herein,” “hereby,” “hereunder” and words of similar import refer to this Agreement as a whole and not to any particular subdivision unless expressly so limited. The word “or” is not exclusive, and “including” (and its various derivatives), means “including without limitation.” Pronouns in masculine, feminine and neuter gender shall be construed to include any other gender. Words in the singular form shall be construed to include the plural and words in the plural form shall be construed to include the singular, unless the context otherwise requires. A reference to a federal, state, local or non-U.S. statute or law shall be deemed also to refer to all rules and regulations promulgated thereunder, unless the context requires otherwise. The Parties have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the Parties and no presumption or burden of proof shall arise favoring or disfavoring a Party by virtue of the authorship of any of the provisions of this Agreement.

ARTICLE II

 

The Merger

 

2.1   Merger .   On and subject to the terms and conditions of this Agreement, Acquisition Sub will merge with and into Target at the Effective Time. Target shall be the corporation surviving the Merger (the “ Surviving Corporation ”).

 

2.2   Closing .   The closing of the transactions contemplated by this Agreement (the “ Closing ”) shall take place at the offices of Holme Roberts & Owen LLP, 1700 Lincoln Street, Suite 4100, Denver, Colorado commencing at 9:00 a.m. local time on the second Business Day following the satisfaction or waiver of all conditions to the obligations of the Parties to consummate the transactions contemplated hereby (other than conditions with respect to actions the respective Parties will take at the Closing itself) or such other date as the Parties may mutually determine (the “ Closing Date ”).

 

2.3   Actions at Closing .   At the Closing, (a) Target will deliver to Parent and Acquisition Sub the various certificates, instruments and documents referred to in Section 6.1, (b) Parent and Acquisition Sub will deliver to Target the various certificates, instruments and documents referred to in Section 6.2, (c) Target and Acquisition Sub will file with the Secretary of State of the State of Delaware a Certificate of Merger in the form attached hereto as Exhibit A (the “ Certificate of Merger ”), and (d) Parent will cause Surviving Corporation to deliver the Payment Fund to the Paying Agent in the manner provided below in Section 2.6.

 

2.4   Effect of Merger .

 

(a)  General .   The Merger shall become effective at the time (the “ Effective Time ”) Target and Acquisition Sub file the Certificate of Merger with the Secretary of State of the State of Delaware. The Merger shall have the effect set forth in the DGCL. Surviving Corporation may, at any time after the Effective Time, take any action (including executing and delivering any document) in the name and on behalf of either Target or Acquisition Sub in order to carry out and effectuate the transactions contemplated by this Agreement.

 

(b)  Certificate of Incorporation .   The certificate of incorporation of Target shall be the certificate of incorporation of Surviving Corporation.

 

(c)  Bylaws .   The bylaws of Surviving Corporation shall be amended and restated at and as of the Effective Time to conform to the bylaws attached hereto as Exhibit B .

 

(d)  Directors and Officers .   The directors of Acquisition Sub immediately before the Effective Time shall become the directors of Surviving Corporation at the Effective Time. The officers of Acquisition Sub immediately before the Effective Time shall become the initial officers of the Surviving Corporation at the Effective Time, each to hold office until the earlier of his or her resignation or removal.

 

(e)  Conversion of Target Shares .   At the Effective Time and by virtue of the Merger and without any action by any of the Parties or the holders of Target Shares, (i) each share of Target Common Stock issued and outstanding immediately before the Effective Time (other than any Dissenting Share, Parent-owned Share or Target Share held in the treasury of Target) shall be converted into the right to receive an amount equal to $0.38 in cash, without interest (the “ Common Stock Merger Consideration ”), (ii) each share of Target Series B Convertible Preferred Stock issued and outstanding immediately before the Effective Time (other than any Dissenting Share, Parent-owned Share or Target Share held in the treasury of Target) shall be converted into the right to receive an amount equal to $0.44 in cash, without interest (together with the Common Stock Merger Consideration, the “ Merger Consideration ”), (iii) each Dissenting Share shall be converted into the right to receive payment from Surviving Corporation with respect thereto in accordance with the provisions of the DGCL, (iv) each Parent-owned Share issued and outstanding immediately before the Effective Time and each Target Share held in the treasury of Target immediately before the Effective Time shall be cancelled, and (v) Target Shares issued and outstanding immediately before the Effective Time held of record by wholly-owned Subsidiaries of Target shall remain outstanding; provided, however, that the Merger Consideration shall be subject to equitable adjustment in the event of any stock split, stock dividend, reverse stock split or other change in the number of outstanding Target Shares (or securities convertible or exchangeable into or exercisable for Target Shares) between the date of this Agreement and the Effective Time. For the avoidance of doubt, any fractional share of Target Common Stock shall be entitled to the

same rights as whole shares of Target Common Stock with respect to conversion into Common Stock Merger Consideration, provided that a fractional share of Target Common Stock shall be converted into a pro rata amount of Common Stock Merger Consideration. No Target Share shall be deemed to be outstanding or to have any rights other than those set forth above in this Section 2.4(e) after the Effective Time.

 

(f)  Conversion of Acquisition Sub’s Capital Stock .   At the Effective Time, each share of Acquisition Sub’s common stock, $0.0001 par value per share, shall be converted into one share of Surviving Corporation’s common stock, $0.001 par value per share.

 

2.5   Treatment of Warrants, Options and Restricted Stock .

 

(a)  Treatment of Warrants .   Target shall use its reasonable best efforts to cause all of the outstanding Target PIPE Warrants to be terminated and cancelled at or before the Effective Time. In exchange for such cancellation, Target shall not pay any holder of a Target PIPE Warrant any amount in excess of the Black-Scholes valuation thereof and no consideration for the cancellation thereof shall be payable by Parent, Acquisition Sub, Target or the Surviving Corporation after the Effective Time. Each unexercised Target Black Diamond Warrant outstanding immediately prior to the Effective Time shall, in accordance with and subject to its terms, cease to represent a right to acquire Target Common Stock and, as of and following the Effective Time no consideration shall be payable by Parent, Acquisition Sub, Target or the Surviving Corporation therefor.

 

(b)  Cancellation of Options .   No outstanding Target Options shall be assumed, continued or substituted for by Parent. Target shall take all action necessary under the applicable Target Equity Plans to ensure that as of no later than immediately before the Effective Time, and contingent upon the effectiveness of the Merger, each then outstanding Target Option shall become immediately vested and exercisable in full. At the Effective Time, each then outstanding Target Option shall, by virtue of the Merger, be converted into and shall become a right to receive an amount in cash, without interest, with respect to each share subject thereto, equal to the excess, if any, of the Common Stock Merger Consideration over the per share exercise price of such Target Option (such amount being hereinafter referred to as the “ Option Proceeds ”), and each such Target Option shall terminate at the Effective Time. Surviving Corporation shall pay the Option Proceeds to the holders of Target Options promptly following the Effective Time. Prior to the Effective Time, Target shall provide all notices, obtain all necessary consents or releases from the holders of Target Options and shall take all other lawful action as may be necessary to provide for and give effect to the transactions contemplated by this Section 2.5(b).

 

(c)  Treatment of Restricted Stock .   At the Effective Time and by virtue of the Merger and without any action by any of the Parties or the holders of Target Restricted Stock, the restrictions on the Target Restricted Stock issued and outstanding immediately before the Effective Time shall lapse, and such Target Restricted Stock shall be treated in accordance with Section 2.4(e).

 

2.6   Procedure for Payment .

 

(a) Immediately after the Effective Time, (i) Parent will cause Surviving Corporation to furnish to Computershare Trust Company (the “ Paying Agent ”) an amount of cash (the “ Payment Fund ”) sufficient for the Paying Agent to make full payment of the Merger Consideration to the record holders of Target Shares issued and outstanding immediately before the Effective Time (other than any Dissenting Shares, Parent-owned Shares and Target Shares held in the treasury of Target) and (ii) Parent will cause the Paying Agent to mail a letter of transmittal (which shall be in customary form and shall provide instructions for its use) to each record holder of Target Shares issued and outstanding immediately before the Effective Time (other than any Dissenting Shares, Parent-owned Shares and Target Shares held in the treasury of Target) for the holder to use in surrendering the certificates that represented his, her or its Target Shares against payment of the Merger Consideration. Upon surrender of such Target Shares, together with such letter of transmittal, duly executed, and such other documents as may reasonably be required by the Paying Agent, the Paying Agent shall promptly pay to the holders thereof the aggregate Merger Consideration into which such Target Shares shall have been converted pursuant to Section 2.4(e). No interest will accrue or be paid to the holder of any outstanding Target Shares.

 

(b) Surviving Corporation may cause the Paying Agent to invest the cash included in the Payment Fund in one or more Permitted Investments, provided that the terms and conditions of the investments shall be such as to permit the Paying Agent to make prompt payment of the Merger Consideration as necessary. Surviving Corporation may

cause the Paying Agent to pay over to Surviving Corporation any net earnings with respect to the investments, and Surviving Corporation shall replace promptly any portion of the Payment Fund that the Paying Agent loses through the investments.

 

(c) Surviving Corporation may cause the Paying Agent to pay over to Surviving Corporation any portion of the Payment Fund (including any earnings thereon) remaining 180 days after the Effective Time, and thereafter all former stockholders shall be entitled to look to Surviving Corporation (subject to abandoned property, escheat, and other similar Laws) as general creditors thereof with respect to the cash payable upon surrender of their certificates. Any Merger Consideration remaining unclaimed as of a date which is immediately prior to such time as such amounts would otherwise escheat to or become property of any Governmental Entity shall, to the extent permitted by applicable Law, become the property of Surviving Corporation free and clear of any claims or interests of any Person previously entitled thereto.

 

(d) Surviving Corporation shall pay all charges and expenses of the Paying Agent.

 

(e) Notwithstanding anything in this Agreement to the contrary, Parent, Surviving Corporation and the Paying Agent shall be entitled to deduct and withhold from the consideration otherwise payable to any former holder of Target Shares or Target Options pursuant to this Agreement any amount as may be required to be deducted and withheld with respect to the making of such payment under applicable Tax Laws. To the extent that amounts are so properly withheld by Parent, Surviving Corporation or the Paying Agent, as the case may be, and are paid over to the appropriate Governmental Entity in accordance with applicable Law, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of the Target Shares or Target Options in respect of which such deduction and withholding was made by Parent, Surviving Corporation or the Paying Agent, as the case may be.

 

2.7   Closing of Transfer Records .   After the Effective Time, the stock transfer books of Target shall be closed and thereafter there shall be no further registration of transfers of Target Shares that were outstanding prior to the Effective Time.

 

ARTICLE III

 

Target’s Representations and Warranties

 

Target represents and warrants to Parent and Acquisition Sub that the statements contained in this ARTICLE III are correct and complete, except as set forth in (i) the disclosure schedule accompanying this Agreement (the “ Disclosure Schedule ”) or (ii) specific disclosures of events, facts or circumstances which have already occurred or already exist and are set forth in reasonable detail in the Target SEC Documents, but only to the extent it is reasonably apparent that any such disclosure set forth in the Target SEC Documents would qualify the representations and warranties contained herein and only to the extent that such disclosure is not deemed to modify any statement contained in this ARTICLE III that includes a specific reference to the Disclosure Schedule (unless the Disclosure Schedule includes a reference to the specific location of the disclosure set forth in the Target SEC Documents), and excluding (A) any exhibits to the Target SEC Documents, (B) any items included therein that are incorporated by reference to other filings or documents, (C) any risk factor disclosures or other predictive or forward-looking disclosures contained therein and (D) any Target SEC Documents that are filed after the date of this Agreement. The Disclosure Schedule will be arranged in paragraphs corresponding to the lettered and numbered paragraphs contained in this ARTICLE III.

 

3.1   Due Organization; Good Standing; Certificate of Incorporation and Bylaws .   Each of Target and its Subsidiaries is duly organized, validly existing and in good standing (with respect to jurisdictions that recognize the concept of good standing) under the Laws of the jurisdiction in which it is organized, and has all the corporate power and authority required to carry on its business as it is now being conducted and to own and use the properties owned and used by it. Each of Target and its Subsidiaries is duly qualified or licensed to do business in each jurisdiction in which the nature of the business conducted by it or the character of the properties owned or used by it makes such qualification or license necessary. Target has delivered or made available to Parent and Acquisition Sub a complete and correct copy of Target’s certificate of incorporation, as amended to date (the “ Target Certificate of Incorporation ”), and Target’s amended and restated bylaws, as currently in effect (the “ Target Bylaws ”). The Target

Certificate of Incorporation and the Target Bylaws are in full force and effect and no other Organizational Documents are applicable to or binding on Target. Target is not in violation of any provisions of the Target Certificate of Incorporation or the Target Bylaws.

 

3.2   Capitalization, Etc .

 

(a) The entire authorized capital stock of Target consists of 32,500,000 shares, divided into 30,000,000 shares of Target Common Stock and 2,500,000 shares of Target Preferred Stock. Of the Target Preferred Stock, 100,000 shares are designated as Target Series B Convertible Preferred Stock. As of June 25, 2009, there are (i) 10,455,821.72 shares of Target Common Stock issued and outstanding, (ii) 31,202 shares of Target Common Stock held in treasury, (iii) 100,000 shares of Target Series B Convertible Preferred Stock issued and outstanding, (iv) an aggregate of 404,809.07 shares of Target Common Stock issuable on the exercise of outstanding Target Options, with a weighted average exercise price of $10.58 per share, (v) an aggregate of 779,221 shares of Target Common Stock issuable on conversion of the Senior Notes, with a conversion price of $15.40 per share, (vi) an aggregate of 1,384,424 shares of Target Common Stock issuable on the exercise of Target Warrants, with a weighted average exercise price of $14.76 per share and (vii) an aggregate of 100,000 shares of Target Common Stock issuable on conversion of the Target Series B Convertible Preferred Stock. All of the issued and outstanding Target Shares have been duly authorized and are validly issued, fully paid and non-assessable. Target has delivered or made available to Parent and Acquisition Sub a complete and correct copy of the Target Equity Plans, which cover the Target Options and restricted stock awards granted by Target that are outstanding as of the date of this Agreement, and the forms of all Target Option agreements and restricted stock award agreements evidencing such Target Options and stock awards.

 

(b) All of the issued and outstanding shares of capital stock, membership interests or other similar equity interests, as applicable, of each of Target’s Subsidiaries are held of record or owned beneficially by one or more of Target and its Subsidiaries free and clear of all Liens, other than Permitted Liens, and have been duly authorized and are validly issued, fully paid and non-assessable. Section 3.2(b) of the Disclosure Schedule lists all Subsidiaries of Target, together with the jurisdiction of organization of each such Subsidiary. Except for the Subsidiaries listed in Section 3.2(b) of the Disclosure Schedule, neither Target nor any of its Subsidiaries owns or has any right to acquire, directly or indirectly, any outstanding capital stock, membership interests or other similar equity interests, as applicable, of any Entity.

 

(c) Except as set forth in Section 3.2(a) of the Disclosure Schedule, (i) there are no outstanding or authorized (A) shares of capital stock or other voting securities of Target, except for Target Common Stock issued pursuant to the exercise of Target Options in accordance with their terms, (B) securities of Target convertible into or exchangeable for shares of capital stock or voting securities of Target or any of its Subsidiaries or (C) options, warrants, purchase rights, subscription rights, conversion rights, exchange rights or other contracts or commitments that could require Target or any of its Subsidiaries to issue, sell or otherwise cause to become outstanding any capital stock of Target or any of its Subsidiaries and (ii) there are no outstanding obligations of Target or any of its Subsidiaries to repurchase, redeem or otherwise acquire any of such shares, securities, options, warrants, rights, contracts or commitments. There are no outstanding or authorized stock appreciation, phantom stock, profit participation or similar rights with respect to Target or any of its Subsidiaries. No Target Shares are held by any Subsidiary of Target.

 

3.3   Authority; Binding Nature of Agreement .   Target has all the power and authority required to execute and deliver this Agreement, to perform its obligations under this Agreement and, subject to obtaining the Requisite Stockholder Approval, to consummate the Merger. The board of directors of Target has unanimously (other than with respect to one director, who recused himself from the vote) (a) determined that the Merger is fair to, and in the best interests of, Target’s stockholders, (b) authorized and approved the execution, delivery and performance of this Agreement by Target, (c) declared that this Agreement is advisable and (d) resolved to recommend the Agreement and Merger to Target’s stockholders. This Agreement has been duly executed and delivered by Target and constitutes the legal, valid and binding obligation of Target, enforceable against Target in accordance with its terms. The Requisite Stockholder Approval is the only vote of the holders of any class or series of Target’s capital stock necessary to adopt this Agreement or approve the Merger.

3.4   Non-Contravention; Consents .   Neither the execution and delivery of this Agreement by Target, nor the consummation of the transactions contemplated hereunder by Target, does or will (a) violate or conflict with any of the provisions of the Organizational Documents of Target or any of its Subsidiaries, (b) violate any Law to which Target or any of its Subsidiaries is subject or (c) (i) materially conflict with, (ii) result in a material breach or default (or cause an event that with or without giving of notice or lapse of time or both would become a material breach or default) under, (iii) result in the termination of, (iv) accelerate the performance required by, (v) result in a right of termination or acceleration under any Target Material Contract (or result in the imposition of any Lien on any of its material assets). Except as may be required by the Securities Exchange Act or the DGCL and except as set forth in Section 3.4 of the Disclosure Schedule, neither Target nor any of its Subsidiaries is required to give any notice to, make any filing with or obtain any authorization, consent or approval from any Person in order for the Parties to consummate the transactions contemplated by this Agreement.

 

3.5   SEC Filings; Financial Statements .

 

(a) Target has timely filed (after giving effect to any extended time for filing under Rule 12b-25 under the Securities Exchange Act) all forms, reports, statements, certifications and other documents (including all exhibits, amendments and supplements thereto) required to be filed with or furnished to the SEC since July 31, 2007 (collectively the “ Target SEC Documents ”). Each of the Target SEC Documents, as amended before the date of this Agreement, complied in all material respects with the applicable requirements of the Securities Act or the Securities Exchange Act, as in effect when filed. None of the Target SEC Documents contained, when filed, or if amended before the date of this Agreement, as of the date of such amendment, any untrue statement of a material fact or omitted to state a material fact required to be stated in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. True and correct copies of all Target SEC Documents filed before the date of this Agreement have been delivered to Parent or are publicly available in the Electronic Data Gathering, Analysis and Retrieval (EDGAR) database of the SEC. None of Target’s Subsidiaries is required to file, or files, any form, report or other document with the SEC.

 

(b) Target is in compliance with, and has complied, in all material respects with the applicable provisions of the Sarbanes-Oxley Act of 2002 and the related rules and regulations promulgated under such Act or the Securities Exchange Act. The management of Target has (i) implemented disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act) to ensure that material information relating to Target and its Subsidiaries is made known to the management of Target by others within those Entities and (ii) disclosed, based on its most recent evaluation, to Target’s outside auditors and the audit committee of the board of directors of Target (A) all significant deficiencies and material weaknesses in the design or operation of internal controls (as defined in Rule 13a-15(f) of the Securities Exchange Act) that are reasonably likely to materially affect Target’s ability to record, process summarize and report financial data and (B) any fraud, whether or not material, that involves management or other employees who, in each case, have a significant role in Target’s internal controls.

 

(c) Since January 31, 2009, none of Target, Target’s board of directors of Target nor any committee of such board has received any oral or written notification of any (i) “significant deficiency” in the internal controls over financial reporting of Target, (ii) “material weakness” in the internal controls over financial reporting of Target or (iii) fraud, whether or not material, that involves management or other employees of Target or any of its Subsidiaries who have a significant role in the internal controls over financial reporting.

 

(d) Target has filed quarterly reports on Form 10-Q for the fiscal quarters ended as of January 31, 2009 (the “ Most Recent Fiscal Quarter End ”) and October 31, 2008 and an annual report on Form 10-K for the fiscal year ended July 31, 2008. The financial statements (including related notes and schedules) included in or incorporated by reference into these Target SEC Documents have been prepared in accordance with GAAP applied on a consistent basis (except as may be disclosed in the notes to such financial statements) throughout the periods and at the dates covered thereby and fairly present the financial position of Target and its Subsidiaries as of the respective dates thereof and the results of operations, stockholders’ equity and cash flows of Target and its Subsidiaries for the periods covered thereby; provided, however, that the financial statements included in the quarterly reports are subject to normal year-end adjustments.

 

(e) Neither Target nor any of its Subsidiaries has any liability (whether known or unknown, whether asserted or unasserted, whether absolute or contingent, whether accrued or unaccrued, whether liquidated or unliquidated,

and whether due or to become due), including any liability for Taxes, except for (i) liabilities set forth on the face of the balance sheet as of the Most Recent Fiscal Quarter End (rather than in any notes thereto) and (ii) liabilities that have arisen after the Most Recent Fiscal Quarter End in the Ordinary Course of Business (none of which results from, arises out of, relates to, is in the nature of, or was caused by any breach of contract, breach of warranty, tort, infringement or violation of a Law).

 

3.6   Absence of Certain Changes .

 

(a) Since the Most Recent Fiscal Quarter End, (i) there has not been any Material Adverse Change, (ii) Target and its Subsidiaries have conducted their business in the Ordinary Course of Business and (iii) neither Target nor any of its Subsidiaries has (A) suffered any material loss, damage or destruction to any of its assets or (B) except as expressly contemplated by this Agreement, taken any action that, if taken after the date hereof, would have constituted a breach of Section 5.5(b).

 

(b) Since the Most Recent Fiscal Quarter End, Target has maintained a positive Net Working Capital balance of at least $1,000,000 and has maintained a positive Available Free Cash balance of at least $1,000,000. The Parties agree that Net Working Capital, Current Assets, Current Liabilities and Available Free Cash shall be calculated using accounting principles, methodologies and practices consistent with GAAP as applied on a consistent basis with the principles, methodologies and practices used with respect to the Most Recent Balance Sheet. For purposes of this Agreement, “ Net Working Capital ” means the aggregate amount of Current Assets, minus the aggregate amount of Current Liabilities. For purposes of this Agreement, “ Current Assets ” means all current assets of Target and its Subsidiaries, including trade receivables (net of allowances), inventories (net), prepaid expenses, other current assets, cash and cash equivalents. For purposes of this Agreement, “ Current Liabilities ” means all current liabilities of Target and its Subsidiaries, including accounts payable and accrued liabilities, but excluding all other current liabilities (including deferred gain on sale leaseback, deferred revenue, short-term borrowings, current portion of long-term debt (including the Senior Notes) and current liabilities of discontinued operations). For purposes of this Agreement, “ Available Free Cash ” means the aggregate amount of all cash and cash equivalents of Target and its Subsidiaries.

 

3.7   Legal Proceedings; Orders .   There is no Legal Proceeding pending or, to the Knowledge of Target, threatened against Target or any of its Subsidiaries or any of its or their respective properties or rights or any of its or their respective officers or directors in their capacity as such, nor any internal investigations (other than investigations in the ordinary course of Target’s or any of its Subsidiaries’ compliance programs) being conducted by Target or any of its Subsidiaries nor have any acts of alleged misconduct by Target or any of its Subsidiaries been reported to Target or any of its Subsidiaries. Neither Target nor any of its Subsidiaries, nor any of its or their respective properties is subject to any order, judgment, injunction, ruling, charge or decree related to the conduct of the respective businesses of Target and its Subsidiaries. To the Knowledge of Target, no Person is challenging the right of Target or any Subsidiary to design, manufacture, license, offer or sell any Products.

 

3.8   Brokers; Schedule of Fees and Expenses .   Neither Target nor any of its Subsidiaries has any liability or obligation to pay any brokerage, finder’s or other similar fee or commission to any broker, finder, agent or investment banker with respect to the transactions contemplated by this Agreement. A good faith estimate, as the date of this Agreement, of all third party fees and expenses, including any fees that may be payable upon the consummation of the transactions contemplated by this Agreement, such as success fees and the like, of any accountant, broker, financial advisor, consultant, legal counsel or other person retained by Target in connection with this Agreement or the transactions contemplated hereby incurred or to be incurred or expected to be incurred by Target or any of its Subsidiaries with respect to this Agreement and the transactions contemplated by this Agreement is set forth on Section 3.8 of the Disclosure Schedule.

 

3.9   Intellectual Property .

 

(a) Each product developed, manufactured, marketed, distributed, performed, licensed, sold, rendered, provided, offered, performed or planned in writing by Target or any of its Subsidiaries (“ Product ”) since January 1, 2005 through Closing is set forth in Section 3.9(a) of the Disclosure Schedule.

 

(b) All Target Intellectual Property owned in whole or in part at any time by Target, and to the Knowledge of Target all other Target Intellectual Property, that is or at any time has been subject to an application or registration

for protection under the Laws of any jurisdiction throughout the world (whether now pending, existing, abandoned or expired) are set forth in Section 3.9(b) of the Disclosure Schedule, specifying as to all such Target Intellectual Property:

 

(i) the type of the Target Intellectual Property;

 

(ii) the owner of the Target Intellectual Property (and, in the case that Target or any of its Subsidiaries is not the owner, the nature of the rights held by Target or its Subsidiaries, as applicable);

 

(iii) the jurisdictions by or in which such Target Intellectual Property has been issued or registered or in which an application for such issuance or registration has been filed, including the respective registration or application numbers and dates of issuance, registration or filing; and

 

(iv) each Product to which the Target Intellectual Property relates.

 

Other than the Target Intellectual Property set forth on Section 3.9(b) of the Disclosure Schedule, there are no other Intellectual Property material to or necessary for the conduct of the business of Target or any of its Subsidiaries as currently conducted and as proposed to be conducted that is or at any time has been subject to an application or registration for protection under the laws of any jurisdiction throughout the world (whether now pending, existing, abandoned or expired).

 

(c) In Section 3.9(c) of the Disclosure Schedule, Target has accurately identified and described each filing, payment, and action that must be made or taken on or before the date that is 120 days after the date of this Agreement in order to maintain any applications and registrations for all Target Intellectual Property owned by Target or any of its Subsidiaries. Target has provided to Parent complete and accurate copies of all applications, registrations, correspondence and other material documents filed, or to be filed, with the applicable Governmental Entity related to the Target Intellectual Property during such 120-day period. All registrations and applications for Target Intellectual Property owned by Target or any of its Subsidiaries are registered in the name of Target or one of its Subsidiaries, and Target or one of its Subsidiaries is in possession of all applications, registrations (and certificates of registration and letters patent), renewals, reissues, extensions and all other instruments evidencing ownership of the Target Intellectual Property.

 

(d) Target has provided Parent with accurate and complete copies of all License-In Contracts, all of which are set forth on Section 3.9(d) of the Disclosure Schedule. For each License-In Contract, Section 3.9(d) of the Disclosure Schedule further specifies the parties to, and the nature of the rights held by Target or any of its Subsidiaries in the Target Intellectual Property subject to, the License-In Contract. Each License-In Contract is binding against all parties to such License-In Contract, fully exercisable and enforceable by Target or its applicable Subsidiary, and in full force and effect. The License-In Contracts provide Target or its applicable Subsidiary with all rights, licenses, authorizations and other permissions to any Intellectual Property owned by any Person other than Target or its applicable Subsidiary necessary for the conduct the business of Target and its Subsidiaries in any manner, as currently conducted or as proposed to be conducted. The rights acquired under each License-In Contract will be fully exercisable and enforceable by Parent on and after the Closing to the same extent as by Target and its Subsidiaries prior to the Closing. Neither Target nor any of its Subsidiaries have any obligation to compensate or account to any Person an amount in excess of $10,000 for the use of any Intellectual Property.

 

(e) Target has provided Parent with accurate and complete copies of all License-Out Contracts, all of which are set forth on Section 3.9(e) of the Disclosure Schedule. For each License-Out Contract, Section 3.9(e) of the Disclosure Schedule further specifies the parties to, and the nature of the rights held by Target and its Subsidiaries in the Target Intellectual Property subject to, the License-Out Contract. Each License-Out Contract is binding against all parties to such License-Out Contract, fully exercisable and enforceable by Target or its applicable Subsidiary, and in full force and effect. Each License-Out Contract will be fully exercisable and enforceable by Parent on and after the Closing to the same extent as by Target or its applicable Subsidiary before the Closing.

 

(f) Except for the Licensed-In IP subject to a License-In Contract set forth on Section 3.9(d) of the Disclosure Schedule, (i) Target or one of its Subsidiaries is the sole and exclusive owner of all right, title and interest in and to the Target Intellectual Property free and clear of all Liens or other rights, licenses, equities or claims; (ii) all Target Intellectual Property (or portion thereof) are valid, fully enforceable, and in full force and effect, and following

Closing will remain, to the Knowledge of Target, valid, fully enforceable, and in full force and effect; and (iii) the Surviving Corporation will be the sole and exclusive owner free and clear of all Liens or other rights, licenses, equities or claims, of all right, title and interest in and to all of the Target Intellectual Property (or portion thereof) on and after the Closing, to the Knowledge of Target, without seeking the authorization, consent or approval of any Person and without payments to any Person other than as set forth in this Agreement.

 

(g) (i) Neither Target nor any of its Subsidiaries has received any notice of any claim or allegation of infringement, misappropriation or other violation from any Person with respect to the Target Intellectual Property; (ii) the Target Intellectual Property and the operation of the business of Target and its Subsidiaries as currently conducted and as proposed to be conducted are not currently infringing on, in conflict with, misappropriating, or otherwise violating any Intellectual Property of any Person and, to the Knowledge of Target, are not subject to any pending or threatened litigation or other adverse claim of infringement or misappropriation by any Person; (iii) except for as listed in Section 3.9(g) of the Disclosure Schedule, within the last 10 years, neither Target nor any of its Subsidiaries has threatened, initiated or contemplated any claim or allegation against any Person alleging that the Person infringes, misappropriates or otherwise violates any Target Intellectual Property; (iv) to the Knowledge of Target, no Person has infringed or otherwise misappropriated or is now infringing or misappropriating any Target Intellectual Property; (v) to the Knowledge of Target, all of the Target Intellectual Property is valid, subsisting and enforceable on the Closing; (vi) there have been no threats received by Target or any of its Subsidiaries alleging that any Target Intellectual Property is invalid or unenforceable; and (vii) to the Knowledge of Target, there has been no prior use of any Target Intellectual Property (or portion thereof) by any Person that would confer upon such Person superior rights in such Target Intellectual Property (or portion thereof). Each of Target and its Subsidiaries has taken reasonable steps to preserve and maintain records relating to the Target Intellectual Property.

 

(h) No interference, opposition, reissue, reexamination or other proceeding of any nature is or has been pending or threatened, in which the scope, validity or enforceability of any Target Intellectual Property is being, has been or could reasonably be expected to be contested or challenged.

 

(i) Each of Target and its Subsidiaries has used best efforts to protect and preserve the security, confidentiality and value of the Target Intellectual Property. Without limiting the foregoing, each of Target and its Subsidiaries has at all times enforced a policy requiring each of its employees, consultants and contractors, and any other Person involved in the creation or development of any Target Intellectual Property, to enter into a valid and enforceable non-disclosure and invention assignment agreement with Target or its applicable Subsidiary substantially in Target’s standard form, a copy of which is included as Section 3.9(i) of the Disclosure Schedule (“ Target Non-Disclosure and Invention Assignment Contract ”). All current and former employees, consultants and contractors of Target or any of its Subsidiaries, and any other Person involved in the creation or development of any Target Intellectual Property (or portion thereof), have executed a valid and enforceable Target Non-Disclosure and Invention Assignment Contract and a copy of each such Target Non-Disclosure and Invention Assignment Contract has been delivered to Parent. No Person other than Target and its Subsidiaries has any claim, right (whether or not currently exercisable) or interest to or in any Target Intellectual Property (or portion thereof). There has been no misappropriation of confidential information of Target or any of its Subsidiaries.

 

(j) Neither Target nor any of its Subsidiaries is utilizing in its business, nor will Surviving Corporation be required to utilize in the business of the Surviving Corporation after Closing: (i) any inventions of any employees of Target or any of its Subsidiaries made, or any Trade Secrets (including confidential information) of any Person to which such employees were exposed, prior to their employment by Target or any of its Subsidiaries; and (ii) any Trade Secrets (including confidential information) of another Person to which any independent contractors or consultants of Target or any of its Subsidiaries have been exposed.

 

(k) None of the Target Software: (i) contains, to the Knowledge of Target, any bug, defect or error (including any bug, defect or error relating to or resulting from the display, manipulation, processing, storage, transmission or use of date data) that materially and adversely affects the use, functionality or performance of such Target Software or any product or system containing or used in conjunction with such Target Software; or (ii) fails to comply with any applicable warranty or other contractual commitment relating to the use, functionality or performance of the Target Software or any product or system containing or used in conjunction with such Target Software. No Target Software is, in whole or in part, subject to the provisions of any open source, quasi-open source or any other

Contract obligating Target or any of its Subsidiaries to make source code available to third parties or to publish source code under any circumstances. No source code for any Target Software has been delivered, licensed or made available to any escrow agent or other Person who is not, as of the date of this Agreement an employee of Target or any of its Subsidiaries. Neither Target nor any of its Subsidiaries has any duty or obligation (whether present, contingent or otherwise) to deliver, license or make available the source code for any Target Software to any escrow agent or other Person who is not, as of the date of this Agreement, an employee of Target or one of its Subsidiaries.

 

(l) Neither Target nor any of its Subsidiaries has made any submission or suggestion to, or otherwise participated in, and is not subject to any Contract with, any standards bodies or other entities that could obligate Target or any of its Subsidiaries to grant licenses or rights with respect to or otherwise impair its control of Target Intellectual Property. No funding, facilities or personnel of any Governmental Entity or educational institution were used, directly or indirectly, to develop or create, in whole or in part, any of the Target Intellectual Property.

 

(m) Target and its Subsidiaries exercised reasonable diligence with respect to the filing, prosecution and maintenance of all Intellectual Property owned or exclusively licensed by Target or any of its Subsidiaries. For each patent or patent application owned by Target or any of its Subsidiaries, (i) all inventors have been properly identified and named; (ii) all inventors have executed an assignment of rights to Target or its applicable Subsidiary and, at Closing, Target or its applicable Subsidiary shall be the sole assignee; and (iii) to the Knowledge of Target, the United States Patent and Trademark Office (the “ USPTO ”) has been provided full disclosure, including prior art (in accordance with 37 C.F.R. § 1.56) and best mode at the time of filing (in accordance with 35 U.S.C. § 112). For each patent or patent application licensed by Target or any of its Subsidiaries, (1) to the Knowledge of Target, all inventors have been properly identified and named; (2) to the Knowledge of Target, the USPTO has been provided full disclosure, including prior art (in accordance with 37 C.F.R. § 1.56) and best mode at the time of filing (in accordance with 35 U.S.C. § 112); and (3) any royalties due to third parties have been fully set forth in Section 3.9(m) of the Disclosure Schedule.

 

(n) Any filing, registration, issuance, maintenance and renewal fees due in connection with the Target Intellectual Property (or portion thereof) have been paid on or before the final deadline for paying such fees and all documents, certificates and other material necessary to maintain such Target Intellectual Property (or portion thereof) have been filed on or before the final deadline for paying such fee with the relevant Governmental Entity. Target and its Subsidiaries have complied with any and all obligations pertaining to listing any relevant Patents included in the Target Intellectual Property in the FDA Orange Book and have also complied with any and all obligations under the Bayh-Dole Act. Except as set forth in Section 3.9(n) of the Disclosure Schedule, no Person has submitted and, to the Knowledge of Target, no Person has indicated any plan to submit, an Abbreviated New Drug Application that includes a certification as defined in 21 U.S.C. 355(j)(2)(A)(vii)(IV) citing any Patent listed in the FDA Orange Book for any Product.

 

3.10   Title to Assets; Real Property .

 

(a) One or more of Target and its Subsidiaries has good title to, or a valid leasehold interest in, the properties and assets used by them, located on their premises or reflected on the Most Recent Balance Sheet or acquired after the date thereof, free and clear of any Liens, other than Permitted Liens, except for property and assets disposed of in the Ordinary Course of Business since the Most Recent Fiscal Quarter End. One or more of Target and its Subsidiaries own or lease all buildings, machinery, equipment and other tangible assets necessary for the conduct of their business as presently conducted.

 

(b) Section 3.10(b) of the Disclosure Schedule contains a complete and accurate list of all of the existing leases, subleases, licenses or other agreements (collectively, the “ Real Property Leases ”) under which Target or any of its Subsidiaries uses or occupies or has the right to use or occupy, now or in the future, any real property (the “Leased Real Property ”). Target has delivered or otherwise made available to Parent true, correct and complete copies of all Real Property Leases (including all modifications and side agreements in connection therewith). Except as set forth in the Real Property Leases, neither Target nor any of its Subsidiaries have transferred or assigned any interest in any Real Property Lease, nor have they subleased or otherwise granted rights of use or occupancy of any of the premises described therein to any other Person. Section 3.10(b) of the Disclosure Schedule contains a complete and accurate list of all of the real property owned in fee by Target or its Subsidiaries (the “ Owned Real Property ”). Neither Target nor any of its Subsidiaries have subleased or otherwise granted rights of

use or occupancy to any other Person of any Owned Real Property. There are no outstanding agreements, options, rights of first offer or rights of first refusal on the part of any Person to purchase any Owned Real Property. The Leased Real Property, the Owned Real Property and the personal property owned or leased by Target or any of its Subsidiaries are in good operating condition and repair and free from any material defects, reasonable wear and tear excepted, and are suitable for the uses for which they are being used in all material respects.

 

3.11   Contracts .   Section 3.11 of the Disclosure Schedule contains a complete and accurate list of all Contracts to which Target or any of its Subsidiaries is a party or by which Target, any of its Subsidiaries or any of their respective assets is bound that (a) is a “material contract” (as defined in Item 601(b)(10) of Regulation S-K of the SEC), (b) restricts or limits in any way the ability of Target or any of its Subsidiaries to conduct business, including to compete in any geographic area or line of business, (c) is a partnership, joint venture, product development, research and development or other agreement involving an allocation or sharing of profits, losses, costs or liabilities, (d) is a Contract to allocate, share or otherwise indemnify for Taxes, (e) involves aggregate payments of more than $100,000 annually, (f) is between one or more of Target and its Subsidiaries and any director or officer of Target or any Person beneficially owning five percent or more of any class of the outstanding Target Shares, (g) is an employment or consulting Contract, (h) provides for benefits (including severance pay, accelerated vesting, bonuses and relocation expenses) to be provided to any employee, director or officer upon or in connection with a change in control of Target or any of its Subsidiaries, (i) provides for indemnification or a guaranty by Target or any of its Subsidiaries to any Person, (j) is a loan or credit agreement, indenture, mortgage, note, guaranty or other Contract evidencing indebtedness for money borrowed, (k) grants “most favored nation or customer” status that, following the Merger, would apply to Parent or its Affiliates (including Target and Target’s Subsidiaries), (l) prohibits or limits the right of Target or any of its Subsidiaries (or, after the Effective Time, Parent or its Affiliates) to make, develop, sell or distribute any Products or use, transfer, license, distribute or enforce any of the Target Intellectual Property, (m) would prevent or impair Target’s ability to consummate the Merger, (n) could require the disposition of any material assets or line of business of Target or any of its Subsidiaries (or, after the Effective Time, Parent or its Affiliates), (o) contains a put, call or similar right pursuant to which Target or any of its Subsidiaries (or, after the Effective Time, Parent or its Affiliates) could be required to purchase or sell, as applicable, any equity interests of any Person, (p) is a Real Property Lease, (q) is a Contract the term of which exceeds one year and is not terminable by Target or any of its Subsidiaries, as applicable, on notice of 60 days or less, (r) relates to the acquisition, sale or disposition of any material business unit or product line of Target or any of its Subsidiaries, (s) relates to the creation of a Lien on any asset of Target or any of its Subsidiaries, (t) is a commercial Contract with any Governmental Entity, (u) is a non-disclosure, confidentiality, standstill, non-solicitation, non-hire or similar agreement or (v) was not negotiated and entered into on an arm’s-length basis. The foregoing Contracts, together with the License-In Contracts, the License-Out Contracts and the Target Non-Disclosure and Invention Assignment Agreements, are collectively referred to herein as “ Target Material Contracts .” Neither Target nor any of its Subsidiaries is, or has received any notice or has any Knowledge that any other party is, in breach or default in any respect under any Target Material Contract, and there has not occurred any event that with the lapse of time, the giving of notice or both would constitute such breach or default. Each Target Material Contract is valid, binding and enforceable in accordance with its terms and is in full force and effect with respect to one or more of Target and its Subsidiaries, as applicable. Target has delivered or otherwise made available to Parent true, correct and complete copies (or in the case of oral Contracts, a true and correct written summary of the material terms) of each Target Material Contract, together with all amendments and supplements thereto.

 

3.12   Compliance with Laws .   Without limiting the generality of any other provision herein, each of Target and its Subsidiaries is currently in compliance, and since January 1, 2005 has complied, in all material respects with all Laws and Governmental Authorizations applicable to their business or respective assets, and, since January 1, 2005, no Legal Proceeding has been filed or commenced and no complaint, claim, demand or notice has been made against Target or any of its Subsidiaries alleging any failure to so comply.

 

3.13   Tax Matters .   Notwithstanding any information set forth in any Target SEC Document:

 

(a) All Tax Returns required to have been filed by Target and its Subsidiaries (i) have been filed on or before the applicable due date (as such due date may have been extended), and (ii) have been prepared in compliance with applicable Laws. All Taxes due and owing by Target and its Subsidiaries (whether or not

shown on any Tax Return) have been paid. Target is not and has never been a United States real property holding corporation within the meaning of section 897(c)(2) of the Code.

 

(b) The Most Recent Balance Sheet fully reflects all accrued liabilities of Target and its Subsidiaries for Taxes with respect to all periods through the time period on such Most Recent Balance Sheet in accordance with GAAP. Since June 1, 2006, neither the Target nor any of its Subsidiaries has incurred any liability for Taxes arising from extraordinary gains or losses, as that term is used in GAAP, outside the Ordinary Course of Business.

 

(c) Each of Target and its Subsidiaries have timely withheld and paid all Taxes required to have been withheld and paid in connection with any amounts paid or owing to any employee, independent contractor, creditor, stockholder or other third party.

 

(d) Neither the Target nor any of its Subsidiaries expects any Tax Authority to assess any additional Tax for any period in which Tax Returns have been filed. As of the date of this Agreement, (i) there are no examinations or audits of any Tax Return currently underway, (ii) no extension or waiver of the limitation period applicable to any Tax Return is in effect, (iii) no Legal Proceeding is pending or threatened, in writing, by any Tax Authority against Target or any of its Subsidiaries in respect of any material Tax, (iv) there are no unsatisfied liabilities for Taxes with respect to any written notice of deficiency or similar document received by Target or any of its Subsidiaries with respect to any Tax (other than liabilities for Taxes asserted under any such notice of deficiency or similar document which are being contested in good faith), and (v) there are no Liens for Taxes upon any of the assets of Target or any of its Subsidiaries. Target is not required to include any adjustment in taxable income for any Tax period ending after the Closing Date as a result of any change in method of accounting. Target has not been a member of any combined, consolidated or unitary group (other than the group of which Target is currently a member) for which it is currently or will be liable for Taxes under principles of Section 1.1502-6 of the Treasury Regulations.

 

(e) Neither Target nor any of its Subsidiaries has constituted either a “distributing corporation” or a “controlled corporation” in a distribution of stock intended to qualify for tax-free treatment under Section 355 of the Code (i) in the two years prior to the date of this Agreement or (ii) in a distribution which otherwise constitutes part of a “plan” or “series of related transactions” (within the meaning of Section 355(e) of the Code) that includes the Merger.

 

(f) Neither Target nor any of its Subsidiaries has engaged in a “reportable transaction,” as set forth in Section 1.6011-4(b) of the Treasury Regulations, including any “listed transaction” as defined in Section 1.6011-4(b)(2) of the Treasury Regulations.

 

(g) Neither Target nor any of its Subsidiaries have received a written notice from any Governmental Entity in any jurisdiction in which Target and its Subsidiaries do not currently pay Tax claiming that either Target or any of its Subsidiaries is subject to Tax in such jurisdiction.

 

(h) There is no agreement between Target or any of its Subsidiaries and any employee or independent contractor of Target or any of its Subsidiaries that will give rise to any material payment that would not be deductible pursuant to Section 280G or Section 162(m) of the Code. Neither Target nor any of its Subsidiaries is a party to any Tax indemnity agreement, Tax sharing agreement, Tax allocation agreement or similar Contract, except as contemplated under principles of Section 1.1502-6 of the Treasury Regulations.

 

(i) Zila Limited, a United Kingdom limited corporation, is and has at all times been properly treated as a disregarded entity for federal Tax purposes, and has properly filed an IRS Form 8832 to elect to be so treated as of the date of its formation.

 

3.14   Employee Benefit Plans .

 

(a) Target has provided or made available to Parent copies of all employee benefit plans, policies, practices, Contracts, agreements, programs or other arrangements providing for compensation, bonus, change of control, severance, termination pay, pension, retirement, disability, insurance, vacation, deferred compensation, stock or stock related awards, fringe benefits, welfare benefits or other remuneration maintained or contributed to by Target or any of its Subsidiaries or under which Target or any of its Subsidiaries or any ERISA Affiliate has or may have

any liability for the benefit of any current or former employee, independent contractor or director (the “ Target Benefit Plans ”).

 

(b) Each Target Benefit Plan that is intended to be qualified under Section 401(a) of the Code or any non-U.S. jurisdiction has received a favorable determination letter (or opinion letter, if applicable) from the U.S. Internal Revenue Service or applicable Governmental Entity stating that such Target Benefit Plan is so qualified. Each Target Benefit Plan has been operated in compliance with its terms and with all applicable Laws.

 

(c) All contributions, premiums and other payments required to be made with respect to any Target Benefit Plan have been timely made under applicable Laws, any applicable collective bargaining agreement and the terms of such Target Benefit Plan. No event has occurred and there currently exists no condition or set of circumstances in connection with which Target or any of its Subsidiaries could reasonably be expected to be subject to any material liability under the terms of any Target Benefit Plan, ERISA, the Code or codes of practice issued by any Governmental Entity, collective bargaining agreement or any other applicable Laws. Except as required by Laws, neither Target nor any of its Subsidiaries has any plan or commitment to amend or establish any new Target Benefit Plan or to increase any benefits under any Target Benefit Plan.

 

(d) There are no Legal Proceedings pending or threatened on behalf of or against any Target Benefit Plan, the assets of any trust under any Target Benefit Plan, or the plan sponsor, plan administrator or any fiduciary or any Target Benefit Plan with respect to the administration or operation of such plans, other than routine claims for benefits that have been or are being handled through an administrative claims procedure.

 

(e) None of Target, any of its Subsidiaries, or, to the Knowledge of Target, any of their respective directors, officers, employees or agents has, with respect to any Target Benefit Plan, engaged in or been a party to any non-exempt “prohibited transaction,” as such term is defined in Section 4975 of the Code or Section 406 of ERISA, which could reasonably be expected to result in the imposition of a material penalty assessed pursuant to Section 502(i) of ERISA or a material Tax imposed by Section 4975 of the Code, in each case applicable to Target, any of its Subsidiaries or any Target Benefit Plan or for which Target or any of its Subsidiaries has any indemnification obligation.

 

(f) No Target Benefit Plan is (1) a “defined benefit plan” (as defined in Section 414 of the Code), (2) a “multiemployer plan” (as defined in Section 3(37) of ERISA), (3) a “multiple employer plan” (as defined in Section 4063 or 4064 of ERISA) or (4) subject to Section 302 of ERISA, Section 412 of the Code or Title IV of ERISA.

 

(g) No Target Benefit Plan that is a “welfare benefit plan” within the meaning of Section 3(1) of ERISA provides benefits to former employees of Target or its ERISA Affiliates, other than pursuant to Section 4980B of the Code or any similar state, local or foreign law.

 

(h) Each non-qualified deferred compensation plan or arrangement subject to Section 409A of the Code has been operated and administered in good faith compliance with Section 409A of the Code from the period beginning after December 31, 2004 through the date hereof.

 

(i) Each Target Option or other similar right to acquire Target Common Stock or other equity interests of Target (i) has an exercise price that is not less than the fair market value of the underlying equity as of the date such Target Option or other similar right was granted in accordance with all governing documents and in compliance with all applicable Law, (ii) has no feature for the deferral of compensation other than the deferral of recognition of income until the later of exercise or disposition of such Target Option or other similar right, (iii) to the extent it was granted after December 31, 2004, was granted with respect to a class of stock of Target that is “service recipient stock” (within the meaning of applicable regulations and other guidance issued with respect to Section 409A of the Code), and (iv) has at all times been properly accounted for in accordance with GAAP in Target’s audited financial statements included in documents filed with the SEC and provided to Parent.

 

(j) No deduction for federal Tax purposes has been, nor is any such deduction expected by Target to be, disallowed for remuneration paid by Target or any of its Subsidiaries by reason of Section 162(m) of the Code, including by reason of the transactions contemplated by this Agreement.

(k) Except as required by applicable Laws or except as otherwise expressly permitted under this Agreement, no condition or term under any relevant Target Benefit Plan exists which would prevent Parent or the Surviving Corporation or any of its Subsidiaries from terminating or amending any Target Benefit Plan at any time for any reason without liability to Parent or the Surviving Corporation or any of its Subsidiaries (other than ordinary administration expenses or routine claims for accrued benefits).

 

(l) Except as expressly contemplated by this Agreement, the execution and delivery of this Agreement and the consummation of the Merger (i) will not materially increase the benefits payable by Target under any Target Benefit Plan and (ii) will not result in any acceleration of the time of payment or vesting of any material benefits payable by Target under any Target Benefit Plan.

 

3.15   Labor and Employment Matters .   Neither Target nor any of its Subsidiaries is a party to any collective bargaining agreement with any labor organization or other representative of any employees, nor is any such agreement presently being negotiated by Target or any of its Subsidiaries. To the Knowledge of Target, there are no union organizing activities concerning any employees of Target or any of its Subsidiaries. There are no unfair labor practice charges, grievances or complaints pending against Target or any of its Subsidiaries before the National Labor Relations Board or any other labor relations tribunal or authority, domestic or foreign. There are no strikes, work stoppages, slowdowns, lockouts, arbitrations or grievances, or other labor disputes pending or, to the Knowledge of Target, threatened in writing against or involving Target or any of its Subsidiaries. During the preceding two years, Target has not effectuated a “plant closing” (as defined in Worker Adjustment and Retraining Notification Act, “ WARN ”) or a “mass lay-off” (as defined in WARN), in either case affecting any site of employment or facility of Target or any of its Subsidiaries, except in accordance with WARN.

 

3.16   Environmental Matters .   Each of Target and its Subsidiaries has complied with all applicable Environmental Laws applicable to their business or respective assets. To the Knowledge of Target, no current or prior owner of any property leased or controlled by Target or any of its Subsidiaries has received any written notice from a Governmental Entity that such current or prior owner or Target or any of its Subsidiaries is materially violating any Environmental Law. There has been no release of any hazardous materials at or from the Facilities and there are otherwise no hazardous materials present in, on or under the Facilities or at any other locations where any hazardous materials were generated, manufactured, refined, transferred, stored, produced, imported, used, processed from or disposed of by Target or any of its Subsidiaries that would reasonably be expected to result in a material liability to Target or any of its Subsidiaries. Neither Target nor any of its Subsidiaries has disposed of, emitted, discharged, handled, stored, transported, used or released any hazardous materials, distributed, sold or otherwise placed on the market hazardous materials or any product containing hazardous materials, arranged for the disposal, discharge, storage or release of any hazardous materials, or exposed any employee or other individual to any hazardous materials, which would reasonably be expected to result in material liability or material corrective or remedial obligation under any Environmental Laws. Neither Target nor any of its Subsidiaries have entered into any Contract that may require any of them to guarantee, reimburse, pledge, defend, hold harmless or indemnify any other party with respect to liabilities arising out of Environmental Laws or hazardous materials related activities of Target or any of its Subsidiaries or any other Person. To the Knowledge of Target, there is no fact or circumstance that could involve Target or any of its Subsidiaries in any material environmental litigation or impose upon Target or any of its Subsidiaries any material environmental liability. Target has delivered or made available to Parent all material records any of Target and its Subsidiaries have concerning their respective hazardous materials activities and all environmental audits and environmental assessments of the Facilities conducted at the request of, or otherwise in the possession of, Target or any of its Subsidiaries.

 

3.17   Insurance .   Target and its Subsidiaries have all material policies of insurance covering Target, its Subsidiaries or any of their respective employees, properties or assets, including policies of property, fire, workers’ compensation, products liability, directors’ and officers’ liability and other casualty and liability insurance, that is in a form and amount that, to the Knowledge of Target, is customarily carried by persons conducting business similar to that of Target and its Subsidiaries and which Target believes is adequate for the operation of its business. All such insurance policies are in full force and effect and there is no existing default or event which, with the giving of notice or lapse of time or both, would constitute a default, by any insured thereunder. Since December 1, 2006, neither Target nor any of its Subsidiaries has received any written communication notifying Target or any of its Subsidiaries of any (a) cancellation or invalidation of any material insurance policy held by Target or any of its Subsidiaries

(except with respect to policies that have been replaced with similar policies), (b) refusal of any coverage or rejection of any material claim under any material insurance policy held by Target or any of its Subsidiaries or (c) material adjustment in the amount of the premiums payable with respect to any insurance policy held by Target or any of its Subsidiaries. There is no pending claim by Target under any insurance policy held by Target or any of its Subsidiaries.

 

3.18   Regulatory Compliance .

 

(a) Each Product that is subject to the jurisdiction of the Federal Food, Drug, and Cosmetic Act of 1938, as amended (the “ FDCA ”), the Public Health Service Act, as amended (the “ PHSA ”), the Controlled Substances Act, as amended (the “ CSA ”), and the regulations promulgated thereunder or similar Laws in any foreign jurisdiction, is being developed, manufactured, stored, tested, marketed, promoted and/or distributed in compliance with all applicable requirements under FDCA, the PHSA, the CSA and the regulations promulgated thereunder or similar Laws in any foreign jurisdiction.

 

(b) All manufacturing operations relating to any Product or conducted by, or on behalf of, Target or any of its Subsidiaries have been and are being, to the extent required by applicable Laws, conducted in compliance with the Federal Food and Drug Administration (the “ FDA ”) regulations for current Good Manufacturing Practice, including but not limited to 21 C.F.R. Parts 210, 211, and 820, and applicable guidance documents, as amended from time to time, and all applicable similar requirements in other jurisdictions.

 

(c) All pre-clinical and clinical studies relating to Products conducted by or on behalf of Target and any of its Subsidiaries have been, or are being, conducted in compliance with the requirements of the FDA’s Good Laboratory Practice regulations and FDA’s guidance on Good Clinical Practice and the conduct of clinical trials , as set forth in regulations under 21 C.F.R. Parts 50, 54, 56, 58, 312, 812 and applicable FDA guidance documents, as amended from time to time, the Animal Welfare Act, and all applicable similar requirements in other jurisdictions, and all requirements relating to protection of human subjects and, to the extent it would not reasonably be expected to result in a material liability to Target, the provisions governing the privacy of patient medical records under the Health Insurance Portability and Accountability Act of 1996 and the implementing regulations of the United States Department of Health and Human Services. Target has not received any notice that the FDA or any state or federal government authority or institutional review board has initiated, or threatened to initiate, any clinical hold or other action to suspend any clinical trial or suspend or terminate any Investigational New Drug Application or Investigational Device Exemption Application sponsored by or on behalf of Target or otherwise restrict the preclinical research on or clinical study of any Products.

 

(d) All applications, notifications, submissions, information, claims, reports and statistics, and other data and conclusions derived therefrom, utilized as the basis for or submitted in connection with any and all requests for marketing authorization from the FDA or other Governmental Entity relating to Target or any of its Subsidiaries, and its respective business and Products, when submitted to the FDA or other Governmental Entity, were true, complete and correct in all material respects as of the date of submission and any necessary or required updates, changes, corrections or modification to such applications, submissions, information and data have been or are in the process of being submitted to the FDA or other Governmental Entity.

 

(e) No Product has been voluntarily recalled, suspended or discontinued by Target or any of its Subsidiaries at the request of the FDA or any other Governmental Entity, nor has Target or any of its Subsidiaries received any notice from the FDA or any other Governmental Entity that it is not in compliance with applicable requirements under FDCA, the PHSA, the CSA and the regulations promulgated thereunder or similar Laws in any foreign jurisdiction, including verbal notice or notice in the form of inspectional observations in a Form FDA-483, warning letter or any other writing; nor has Target or any of its Subsidiaries received any notice from the FDA or any other Governmental Entity that it has commenced, or threatened to initiate, any action to withdraw approval, place sales or marketing restrictions on or request the recall of any Product, or that it has commenced or threatened to initiate any action to enjoin or place restrictions on the production of any Product.

 

(f) No officer, employee or agent of Target or any of its Subsidiaries has made an untrue statement of a material fact or fraudulent statement to the FDA or any other Governmental Entity, failed to disclose a material fact required to be disclosed to the FDA or any other Governmental Entity, or committed an act, made a statement or

failed to make a statement that, at the time such disclosure was made, would reasonably be expected to provide a basis for the FDA or any other Governmental Entity to invoke its policy respecting “Fraud, Untrue Statements of Material Facts, Bribery, and Illegal Gratuities,” set forth in 56 Fed. Reg. 46191 (September 10, 1991) or any similar policy. Neither Target nor any of its Subsidiaries has employed or used in any capacity the services of any individual or entity debarred under 21 U.S.C. § 335a(a) or any similar Laws in connection with a Product, and neither Target nor any of its Subsidiaries, nor any of their respective directors, officers, agents or employees, has engaged in any conduct that has resulted, or would reasonably be expected to result, in debarment under 21 U.S.C. § 335a(a) or any similar Laws.

 

(g) Neither Target nor any of its Subsidiaries, nor any of their respective directors, officers, agents or employees, has engaged in any conduct that has resulted or would reasonably be expected to result in any material violation of the Federal Antikickback Statute (42 U.S.C. § 1320a-7(b)), the civil False Claims Act (31 U.S.C. § 3729 et seq.), the Anti-Inducement Law (42 U.S.C. § 1320a-7a(a)(5)), the administrative False Claims Law (42 U.S.C. § 1320a-7b(a)), the Health Insurance Portability and Accountability Act of 1996 (42 U.S.C. § 1320d et seq.), the exclusion laws (42 U.S.C. § 1320a-7), the FDCA (21 U.S.C. §§ 301 et seq.), the Medicare Program (Title XVIII of the Social Security Act), the Medicaid Program (Title XIX of the Social Security Act), the regulations promulgated pursuant to such Laws, and any other similar Law or guidance, including the collection and reporting requirements, and the processing of any applicable rebate, chargeback or adjustment owed by Target or any of its Subsidiaries, under applicable rules and regulations relating to the Medicaid Drug Rebate Program (42 U.S.C. § 1396r-8) and any state supplemental rebate program, Medicare average sales price reporting (42 U.S.C. § 1395w-3a), the PHSA (42 U.S.C. § 256b), the VA Federal Supply Schedule (38 U.S.C. § 8126) or under any state pharmaceutical assistance program or U.S. Department of Veterans Affairs agreement, and any successor government programs (collectively, “ Health Care Laws ”). None of Target or any of its Subsidiaries has received any written notification, correspondence or any other written communication from any Governmental Entity, including, without limitation, the FDA, the Centers for Medicare and Medicaid Services and the Department of Health and Human Services Office of Inspector General, of potential or actual material non-compliance by, or liability of, Target or any of its Subsidiaries, under any Health Care Laws.

 

(h) Target, its Subsidiaries and their respective employees are in compliance with the Foreign Corrupt Practices Act of 1977, as amended, any rules or regulations thereunder and any other United States or foreign anti-corruption or anti-bribery Laws.

 

(i) Target and its Subsidiaries are in compliance in all respects with the U.S. export laws and regulations, including, but not limited to, the International Traffic in Arms Regulations, the FDA, if applicable, and the Export Administration Regulations, and including but not limited to compliance with all regulations, orders and licensing requirements relating to the exportation or reexportation of goods or technology to any sanctioned country. Neither Target nor its Subsidiaries have since January 1, 2005, nor are they are currently, transacting business with any Person identified as a Specifically Designated National or Blocked Person by the Office of Foreign Assets Control of the U.S. Department of Treasury or listed on either the Denied Person list or Entity List of the Bureau of Industry and Security of the U.S. Department of Commerce.

 

3.19   Product Warranties .   There are no material claims pending or, to the Knowledge of Target, being threatened against Target or any of its Subsidiaries with respect to any warranties provided by Target or any of its Subsidiaries with respect to any Product.

 

3.20   Transactions with Affiliates .   Since the date of Target’s last proxy statement filed with the SEC, no event has occurred that would be required to be reported by Target pursuant to Item 404 of Regulation S-K promulgated by the SEC.

 

3.21   State Anti-Takeover Statutes .   The board of directors of Target has taken or will take all action necessary to render Section 203 of the DGCL, and any other similar applicable state anti-takeover law or regulation, inapplicable to this Agreement, the transaction support agreements and the transactions contemplated hereby and thereby.

ARTICLE IV

 

Parent’s and Acquisition Sub’s Representations and Warranties

 

Each of Parent and Acquisition Sub jointly and severally represents and warrants to Target that the statements contained in this ARTICLE IV are correct and complete as of the date of this Agreement and will be correct and complete as of the Effective Time (as though made then and as though the Effective Time were substituted for the date of this Agreement throughout this ARTICLE IV), except as set forth in the Disclosure Schedule. The Disclosure Schedule will be arranged in paragraphs corresponding to the numbered and lettered paragraphs contained in this ARTICLE IV.

 

4.1   Due Organization and Good Standing .   Each of Parent and Acquisition Sub is duly organized, validly existing and in good standing (with respect to jurisdictions that recognize the concept of good standing) under the Laws of the jurisdiction in which it is organized, and has all the corporate power and authority required to carry on its business as it is now being conducted and to own and use the properties owned and used by it. Parent owns all of the outstanding capital stock of Acquisition Sub free and clear of all Liens, other than Permitted Liens.

 

4.2   Authority; Binding Nature of Agreement .   Each of Parent and Acquisition Sub has all the power and authority required to execute and deliver this Agreement, to perform its obligations under this Agreement and to consummate the Merger. The board of directors of Parent and the board of directors of Acquisition Sub have authorized and approved the execution, delivery and performance of this Agreement by Parent and Acquisition Sub, as applicable. This Agreement has been duly executed and delivered by Parent and Acquisition Sub and constitutes the legal, valid and binding obligation of Parent and Acquisition Sub, enforceable against Parent and Acquisition Sub in accordance with its terms.

 

4.3   Non-Contravention; Consents .   Neither the execution and delivery of this Agreement by Parent or Acquisition Sub, nor the consummation of the transactions contemplated hereunder by Parent or Acquisition Sub, does or will (a) violate or conflict with any of the provisions of the Organizational Documents of Parent or Acquisition Sub, (b) violate any Law to which Parent or Acquisition Sub is subject or (c) (i) materially conflict with, (ii) result in a material breach or default (or cause an event that with or without giving of notice or lapse of time or both would become a material breach or default) under, (iii) result in the termination of, (iv) accelerate the performance required by or (v) result in a right of termination or acceleration under any Contract to which Parent or Acquisition Sub is a party or by which it is bound or to which any of its assets is subject (or result in the imposition of any Lien on any of its material assets). Except as may be required by the Securities Exchange Act or the DGCL, neither Parent nor Acquisition Sub is required to give any notice to, make any filing with or obtain any authorization, consent or approval from any Person in order for the Parties to consummate the transactions contemplated by this Agreement.

 

4.4   Brokers .   Neither Parent nor Acquisition Sub has any liability or obligation to pay any brokerage, finder’s or other similar fee or commission to any broker, finder, agent or investment banker with respect to the transactions contemplated by this Agreement.

 

4.5   Definitive Proxy Materials .   None of the information that Parent or Acquisition Sub will supply specifically for use in the Definitive Proxy Materials will contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.

 

4.6   Not an Interested Stockholder .   Neither Parent nor Acquisition Sub is nor at any time during the past three years has been an “interested stockholder” (as such term is defined in Section 203 of the DGCL) of Target or any of its Subsidiaries (other than as contemplated by this Agreement).

 

4.7   Funds .   Parent has, or at the Effective Time will have, available cash resources in an amount sufficient to enable Acquisition Sub to furnish the Paying Agent with the Merger Consideration pursuant to Section 2.6.

 

4.8   No Other Representations or Warranties .   Parent and Acquisition Sub acknowledge that: (a) except for the representations and warranties of Target set forth in ARTICLE III, Parent and Acquisition Sub are not relying and have not relied on any representations or warranties whatsoever regarding the subject matter of this Agreement, express or implied; (b) the representations and warranties of Target set forth in ARTICLE III constitute the sole and

exclusive representations and warranties to Parent and Acquisition Sub in connection with the transactions contemplated by this Agreement; and (c) no other representation or warranty, of any kind or nature, express or implied, has been made by Target, or by any current or former officer, director, employee, shareholder, affiliate or advisor of Target; provided, however , that, notwithstanding the foregoing, nothing in this Section 4.8 shall relieve any Person of liability for fraud or intentional misrepresentation.

 

ARTICLE V

 

Covenants

 

The Parties agree as follows with respect to the period from and after the execution of this Agreement:

 

5.1   General .  Each of the Parties will use its reasonable best efforts to take all actions and to do all things reasonably necessary, proper or advisable in order to consummate and make effective the transactions contemplated by this Agreement (including satisfaction, but not waiver, of the Closing conditions set forth in ARTICLE VI).

 

5.2   Notices and Consents .  Target will give any required notices (and will cause each of its Subsidiaries to give any notices) to third parties, and will use its reasonable best efforts to obtain (and will cause each of its Subsidiaries to use its reasonable best efforts to obtain) any third-party consents set forth in Section 3.4 of the Disclosure Schedule.

 

5.3   Press Releases .  No later than the first Business Day following execution of this Agreement, Parent and Target shall issue a joint press release announcing this Agreement and the contemplated merger, which press release shall be reasonably acceptable to both Parent and Target. Except as set forth above, no Party shall issue any press release or make any public announcement relating to the subject matter of this Agreement without the prior written approval of the other Parties; provided, however, that any Party may make any public disclosure it believes in good faith is required by applicable Law or any listing or trading agreement concerning its publicly traded securities (in which case the disclosing Party will use its reasonable best efforts to advise the other Party with reasonable advance notice prior to making the disclosure).

 

5.4   Regulatory Matters and Stockholder Approval .  Each of the Parties will (and Target will cause each of its Subsidiaries to) give any notices to, make any filings with, and use its reasonable best efforts to obtain any authorizations, consents and approvals of any Governmental Entity in connection with the matters referred to in Section 3.4 and Section 4.3. Without limiting the generality of the foregoing:

 

(a)  Proxy Materials Under Securities Exchange Act .   As soon as reasonably practicable following the date of this Agreement (but in no event later than 15 days after the date of this Agreement), Target will prepare and file with the SEC preliminary proxy materials under the Securities Exchange Act relating to the Special Meeting. Target will use its reasonable best efforts to respond to the comments of the SEC thereon and will make any further filings (including amendments and supplements) in connection therewith that may be necessary, proper, or advisable. Target will not file the preliminary proxy statement with the SEC, or any further filings with respect thereto, without first providing Parent a reasonable opportunity to review and comment on them (which comments shall be reasonably considered by Target). Target shall, as soon as reasonably practicable, notify Parent of the receipt of any comments from the SEC with respect to the preliminary proxy statement and provide Parent with copies of any written correspondence between Target and the SEC with respect to the preliminary proxy statement. Parent will provide Target with whatever information and assistance in connection with the foregoing filings that Target may reasonably request.

 

(b)  Special Meeting of Stockholders .   Target will call a special meeting of its stockholders (the “ Special Meeting ”) to be held as soon as practicable (but in no event later than August 14, 2009, assuming that the SEC provides no comments on the preliminary proxy statement, or August 28, 2009 if the SEC provides comments on the preliminary proxy statement) in order that the stockholders of Target may consider and vote upon the adoption of this Agreement and the approval of the Merger in accordance with the DGCL. Target will mail the Definitive Proxy Materials to its stockholders as soon as practicable. The Definitive Proxy Materials will contain the affirmative recommendation of the board of directors of Target in favor of the adoption of this

Agreement and the approval of the Merger; provided, however, that no director or officer of Target shall be required to violate any fiduciary duty or other requirement imposed by Law in connection therewith.

 

5.5   Operation of Business .

 

(a)  Affirmative Covenants .   Target shall, and shall cause each of its Subsidiaries to, (i) carry on its business in the Ordinary Course of Business in compliance in all respects with all applicable Laws, (ii) take all actions and do all things necessary, proper or advisable in order to pay all its obligations (including debts and Taxes) when due and payable, (iii) promptly notify Parent of its receipt of any notice of default or breach with respect to any Target Material Contract, including the Senior Notes, (iv) use its reasonable best efforts, consistent with past practices and policies, to (A) preserve intact its present business organization, (B) keep available the services of its present officers and key employees, (C) preserve its assets and properties and (D) preserve its relationships with customers, suppliers, distributors, licensors, licensees and others with which it has significant business dealings and (v) take all actions necessary, proper or advisable to ensure the representations or warranties of Target in ARTICLE III are true and correct at all times from the date hereof through the Effective Time.

 

(b)  Negative Covenants .   Target shall not, and shall not permit any of its Subsidiaries to, engage in any practice, take any action or enter into any transaction, in each case, outside the Ordinary Course of Business. Without limiting the generality of the foregoing, except as otherwise contemplated by this Agreement or set forth in Schedule 5.5(b) attached hereto, Target shall not, and shall not permit any of its Subsidiaries to (without the prior written consent of Parent):

 

(i) authorize or effect any change in its Organizational Documents,

 

(ii) grant any options, warrants or other rights to purchase or obtain any of its stock or issue, sell or otherwise dispose of any of its capital stock (except upon the conversion or exercise of Target Options, Target Warrants, Target Series B Convertible Preferred Stock, Senior Notes and other rights outstanding on the date hereof and in accordance with their respective terms in effect on the date hereof),

 

(iii) except with respect to dividends due and payable pursuant to the terms of the Target Series B Convertible Preferred Stock, declare, set aside or pay any dividend or distribution with respect to its capital stock (whether in cash or in kind), or redeem, repurchase or otherwise acquire any of its capital stock (except upon the conversion or exercise of Target Options, Target Warrants, Target Series B Convertible Preferred Stock, Senior Notes and other rights outstanding on the date hereof and in accordance with their respective terms in effect on the date hereof),

 

(iv) issue any note, bond or other debt security or create, incur, assume or guarantee any indebtedness for borrowed money or capitalized lease obligation outside the Ordinary Course of Business,

 

(v) impose any Lien, other than any Permitted Lien, upon any of its assets outside the Ordinary Course of Business,

 

(vi) make any capital investment in, make any loan to or acquire the securities or assets of any other Person, if doing so would be outside the Ordinary Course of Business or would involve amounts in excess of $100,000,

 

(vii) enter into, adopt or amend (including acceleration or vesting of) any bonus, profit sharing, compensation, severance, termination, change of control, option, restricted stock, stock appreciation right, phantom stock, performance units, stock equivalent, share purchase agreement, pension, retirement, deferred compensation, employment, severance or other employee benefit agreement trust, plan, fund, policy or other arrangement of Target or any of its Subsidiaries related to the compensation, benefit or welfare of any current or former director, independent contractor, officer or employee in any manner, or increase in any manner the compensation or fringe benefits of any current or former director, independent contractor, officer or employee of Target or any of its Subsidiaries or pay any bonus, remuneration, or benefit to any current or former director, independent contractor, officer or employee not required by any plan or arrangement as in effect as of the date of this Agreement,