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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
Or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________
to _________________
COMMISSION FILE NUMBER: 0-22427
HESKA CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0192527
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
1613 PROSPECT PARKWAY 80525
FORT COLLINS, COLORADO
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE))
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:(970)493-7272
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.001 PAR VALUE
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of voting stock held by non-
affiliates of the Registrant was approximately $40,287,365 as of
March 26, 2002 based upon the closing price on the Nasdaq
National Market reported for such date. This calculation does
not reflect a determination that certain persons are affiliates
of the Registrant for any other purpose.
47,845,112 shares of the Registrant's Common Stock, $.001 par
value, were outstanding at March 26, 2002.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10 (as to directors), 11, 12 and 13 of Part III
incorporate by reference information from the Registrant's Proxy
Statement filed with the Securities and Exchange Commission in
connection with the solicitation of proxies for the Registrant's
2002 Annual Meeting of Stockholders.
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TABLE OF CONTENTS
Page
PART I 1
Item 1. Business. 1
Item 2. Properties. 12
Item 3. Legal Proceedings. 12
Item 4. Submission of Matters to a Vote of Security Holders. 13
PART II 14
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters. 14
Item 6. Selected Consolidated Financial Data. 14
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 16
Item 7A. Quantitative and Qualitative Disclosures about Market Risk. 34
Item 8. Financial Statements and Supplementary Data. 35
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure. 65
PART III 65
Item 10. Directors and Executive Officers of the Registrant. 65
Item 11. Executive Compensation. 66
Item 12. Security Ownership of Certain Beneficial Owners and
Management. 66
Item 13. Certain Relationships and Related Transactions. 66
PART IV 67
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K. 67
ALLERCEPT, AVERT, E.R.D.-SCREEN, E-SCREEN, HESKA, SOLO STEP, VET/ECG,
VET/E-Sig, VET/IV, and VET/OX are trademarks of Heska Corporation. This 10-K
also refers to trademarks and trade names of other organizations.
PART I
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended and Section 21E of the
Securities Exchange Act of 1934, as amended. Words such as "anticipates,"
"expects," "intends," "plans," "believes," "seeks," "estimates,"
variations of such words and similar expressions are intended to identify such
forward- looking statements. These statements are not guarantees of future
performance and are subject to certain risks, uncertainties and assumptions that
are difficult to predict. Therefore, actual results could differ materially
from those expressed or forecasted in any such forward-looking statements as a
result of certain factors, including those set forth in "Factors that May
Affect Results," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business" and elsewhere in this Form 10-K.
Although we believe that expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We expressly disclaim any obligation or
undertaking to release publicly any updates or revisions to any forward-looking
statements contained herein to reflect any change in our expectations with
regard thereto or any change in events, conditions, or circumstances on which
any such statement is based. These forward-looking statements apply only as of
the date of this Form 10-K.
ITEM 1. BUSINESS.
We discover, develop, manufacture and market companion animal health
products principally for dogs, cats and horses. We employ approximately 80
scientists, of whom over one quarter hold doctoral degrees, with expertise in
several disciplines including microbiology, immunology, genetics, biochemistry,
molecular biology, parasitology and veterinary medicine. This scientific
expertise is focused on the development of a broad range of pharmaceutical,
vaccine and diagnostic products for companion animals. We also sell veterinary
diagnostic and patient monitoring instruments and offer diagnostic services to
veterinarians in the United States and Europe principally for companion animals.
Our Diamond Animal Health subsidiary manufactures food animal vaccines as well
as other food animal products that are marketed and distributed by other animal
health companies. In addition, Diamond manufactures certain companion animal
health products for marketing and sale by Heska.
We currently market our products in the United States to veterinarians
through approximately 20 independent third-party distributors and through a
direct sales force, complemented by an internal telesales group. Nearly one-
half of our domestic distributors provide sales services for the full line of
our pharmaceutical, vaccine, diagnostic and instrumentation products. Late in
2001, we made a shift in our product distribution strategy and expect to rely on
independent distributors for a greater portion of our domestic sales. Outside
the United States, we rely primarily on third-party distributors and, for
certain of our products, have granted our corporate partners exclusive
distribution rights. See "Sales, Marketing and Distribution" below.
Our principal executive offices are located at 1613 Prospect Parkway, Fort
Collins, Colorado 80525 and our telephone number is (970) 493-7272. We were
incorporated in California in 1988, and we reincorporated in Delaware in 1997.
Our business is comprised of two reportable segments, Companion Animal
Health and Food Animal Health. Within the Companion Animal Health segment there
are two major product groups, which we define as pharmaceuticals, vaccines and
diagnostics (PVD) and veterinary diagnostic and patient monitoring instruments.
These products are sold through our operations in Fort Collins, Colorado and
Europe. Within the Food Animal Health segment, there is one major product
group, food animal vaccine and pharmaceutical products. We manufacture these
food animal products at our Diamond Animal Health subsidiary located in Des
Moines, Iowa.
COMPANION ANIMAL HEALTH PRODUCTS
We presently sell a variety of companion animal health products, among the
most significant of which are the following:
DIAGNOSTICS
Heartworm Diagnostic Products. Heartworm infections of dogs and cats are
caused by the parasite, Dirofilaria immitis. This parasitic worm is transmitted
in larval form to dogs and cats through the bite of an infected mosquito.
Larvae develop into adult worms that live in the pulmonary arteries and heart of
the host, where they can cause serious cardiovascular, pulmonary, liver and
kidney disease. Our canine and feline heartworm diagnostic tests use monoclonal
antibodies or a recombinant heartworm antigen, respectively, to detect heartworm
antigens or antibodies circulating in the blood of an infected animal. These
tests were introduced into the marketplace over the last several years.
We currently market and sell heartworm diagnostic products for both cats
and dogs. SOLO STEP FH for cats and SOLO STEP CH for dogs are available in both
point-of-care versions that can be used by veterinarians on site, as well as
tests that can be sent to our veterinary diagnostic laboratory at our Fort
Collins facility. In 2000, we introduced SOLO STEP CH Batch Test Strips, which
is a rapid and simple point-of-care antigen detection test for dogs that allows
veterinarians in larger practices to run multiple samples at the same time.
Novartis Agro K.K. (Novartis Animal Health K.K. Tokyo) has been appointed our
exclusive distributor of SOLO STEP CH and SOLO STEP FH in Japan. SOLO STEP CH
received regulatory approval from the Japanese Ministry of Agriculture, Forestry
and Fisheries, or MAFF, in September 2001 and was first sold in Japan in
November 2001.
Allergy Testing and Diagnostic Products. Allergy is common in companion
animals, and it is estimated to affect approximately 10% to 15% of dogs.
Clinical symptoms of allergy are variable, but are often manifested as
persistent and serious skin disease in dogs and cats. Clinical management of
allergic disease is problematic, as there are a large number of allergens that
may give rise to these conditions. Although skin testing is often regarded as
the most accurate diagnostic procedure, such tests can be painful, subjective
and inconvenient. The effectiveness of the immunotherapy that is prescribed to
treat allergic disease is inherently limited by inaccuracies in the diagnostic
process.
Heska markets two complementary in vitro tests for the detection of IgE,
the antibody involved in most allergic reactions:
* The ALLERCEPT E-Screen Test, introduced in 2001, is a rapid in-clinic
test that detects the presence of allergen-specific IgE, an antibody
associated with allergic disease. Dogs testing positive for allergen-
specific IgE are candidates for further evaluation using our ALLERCEPT
Definitive Allergen Panels to determine the specific allergens to
which the dog is allergic.
* The ALLERCEPT Definitive Allergen Panels, introduced in 1997, provide
the most accurate determination of the specific allergens to which a
dog is reacting. The panels use a highly specific recombinant version
of the natural IgE receptor to screen the serum of potentially allergic
animals for IgE directed against a panel of known allergens. A typical
test panel consists primarily of various pollen, grass, mold, insect
and mite allergens. The test results often serve as the basis for
prescription ALLERCEPT Allergy Treatment Sets.
Early Renal Disease. Renal disease is the second leading cause of death in
dogs and often goes undetected until it is too late. It is estimated that 70%
to 80% of kidney function is already destroyed before veterinarians can detect
renal disease using existing tests. Early detection is key to the introduction
of dietary or therapeutic regimens that could significantly slow the progression
of the disease and add quality years to a dog's life. Our E.R.D.-SCREEN Test,
introduced in March 2002, is a rapid in-clinic immunoassay that detects trace
amounts of albumin in urine. The persistent presence of albumin in urine is
believed to be associated with the early stages of renal disease.
VACCINES
Equine Influenza Vaccine. Equine influenza is a common viral disease of
horses and is similar to human influenza. This disease poses a significant risk
to the estimated six million horses in the United States. Infected horses have
severe respiratory disease and diminished performance for an extended period
following infection. We believe that approximately half of the six million
horses in the United States currently receive vaccination. Most competitive
equine influenza vaccines are administered as a component of a multi-purpose
vaccine, intended to provide protection against multiple infectious diseases.
Industry sources have estimated the total U.S. equine vaccine market at $50
million. We believe that other currently available vaccines for equine
influenza are of limited efficacy.
We have developed a unique vaccine for equine influenza, our Flu AVERT I.N.
vaccine, which we believe has improved efficacy and duration of immunity
compared to existing products. This product was approved by the United States
Department of Agriculture, or USDA, in November 1999 and was first sold to
veterinarians in December 1999. In February 2001, we granted Novartis Animal
Health Canada exclusive distribution rights for Flu AVERT I.N. vaccine in
Canada. The vaccine received regulatory approval from the Canadian Food
Inspection Agency, or CFIA, in August 200l and was first sold in Canada in
September 2001.
Allergy Treatment Sets. Veterinarians who use our ALLERCEPT Definitive
Allergen Panels often purchase ALLERCEPT Allergy Treatment Sets for those
animals with positive test results. These prescription immunotherapy treatment
sets are formulated specifically for each allergic animal and contain only the
allergens to which the animal has significant levels of IgE antibodies. The
prescription formulations are administered in a series of injections, with doses
increasing over several months, to ameliorate the allergic condition of the
animal. Immunotherapy is generally continued for an extended time. We offer
both canine and feline immunotherapy treatment products.
Feline Respiratory Disease Vaccine. In 1997, we introduced in the United
States HESKA Trivalent Intranasal/Intraocular Vaccine, a three-way modified live
vaccine to prevent disease caused by the three most common respiratory viruses
of cats: calicivirus, rhinotracheitis virus and panleukopenia virus. This
vaccine is administered without needle injection by dropping the liquid
preparation into the eyes and nostrils of cats. While there is one competitive
non-injectable two-way vaccine, all other competitive products are injectable
formulations. The use of injectable vaccines in cats has become controversial
due to the frequency of injection site-associated side effects. The most
serious of these side effects are injection site sarcomas, tumors which, if
untreated, are nearly always fatal. Our vaccine avoids injection site side
effects, and we believe it is very efficacious. We anticipate the introduction
of a second generation of this product in 2003.
PHARMACEUTICALS
Nutritional Supplements. In 1998, we developed and introduced in the
United States a novel fatty acid supplement, HESKA F.A. Granules. The source of
the fatty acids in this product, flaxseed oil, leads to high omega-3:omega-6
ratios of fatty acids. Diets high in omega-3 fatty acids are believed to lead
to lower levels of inflammatory mediators. The HESKA F.A. Granules include
vitamins and are formulated in a palatable flavor base that makes the product
convenient and easy to administer.
MEDICAL INSTRUMENTS
We offer a broad line of veterinary diagnostic, monitoring and other
instruments which are described below. We also market and sell consumable
supplies and reagents for these instruments. We entered this line of business
in March 1998, when we acquired Sensor Devices, Inc., a manufacturer and
marketer of patient monitoring and diagnostic instruments. Following that
acquisition, we completed the development of various other instruments and
entered into agreements for the distribution of additional instruments to
veterinarians.
Diagnostic Instruments. Our line of veterinary diagnostic instruments
includes the following:
* The i-STAT Portable Clinical Analyzer is a hand-held, portable
clinical analyzer that provides quick, easy analysis of blood gases
and other key analytes, such as sodium, potassium and glucose, with
whole blood.
* The HESKA Vet ABC-Diff Hematology Analyzer is an easy to use blood
analyzer that measures such key parameters as white blood cell count,
red blood cell count, platelet count and hemoglobin levels in animals.
* The SPOTCHEM EZ is a compact desktop system used to measure common
blood chemistry components that are vital to veterinary medical diagnosis.
It provides veterinarians with an easy-to-use, flexible and economical
in-clinic chemistry system.
Monitoring and Other Instruments. The use by veterinarians of the types of
patient monitoring products that are taken for granted in human medicine is
becoming the state of the art in companion animal health. Our line of
monitoring instruments includes:
* The VET/OX 4404 monitor and the VET/OX 4800 monitor, the centerpieces
of our monitoring instrument product line, are oxygen saturation monitors
designed for monitoring animals under anesthesia. Each monitor includes
a variety of additional parameters, such as pulse rate and strength, body
temperature, respiration and ECG.
* The VET/E-Sig probe is used for monitoring ECG, temperature and heart and
breath sounds of anesthetized dogs.
* The VET/IV 2.2 infusion pump is a compact, affordable IV pump that allows
veterinarians to easily provide regulated infusion of fluids, drugs or
nutritional products for their patients.
VETERINARY DIAGNOSTIC LABORATORY
We have a veterinary diagnostic laboratory at our Fort Collins facility.
This diagnostic laboratory currently offers our allergy diagnostics, canine and
feline heartworm diagnostics and flea bite allergy assays, in addition to other
diagnostic services including polymerase chain reaction (PCR) based tests for
certain infectious diseases. Our Fort Collins veterinary diagnostic laboratory
is currently staffed by medical technologists experienced in animal disease and
several additional technical staff.
We intend to continue to use our Fort Collins diagnostic laboratory both as
a stand-alone service center for our customers and as an adjunct to our product
development efforts. Many of the assays which we intend to develop in a point-
of-care format are initially validated and made available in the veterinary
diagnostic laboratory and will also remain available there after the
introduction of the analogous point-of-care test.
FOOD ANIMAL HEALTH PRODUCTS
In addition to manufacturing companion animal health products for marketing
and sale by Heska, Diamond Animal Health, our wholly-owned subsidiary, has
developed its own line of food animal vaccines that were licensed by the USDA in
the United States in 1998 and 1999. In 1998, Diamond entered into an agreement
with a food animal products distributor, Agri Laboratories, Ltd., or AGRILABS,
for the exclusive marketing and sale of these vaccines worldwide. AGRILABS
currently has an arrangement with Intervet International B.V., a division of
Akzo Nobel, for the exclusive distribution of these vaccines worldwide. Certain
annual contract minimums must be met by AGRILABS in order to maintain worldwide
exclusivity. The agreement expires in December 2004 and is automatically
renewed for additional one-year terms thereafter, unless either party gives
prior written notice that it does not wish to renew the agreement. We do not
currently intend to terminate this agreement and have not received any such
notice from AGRILABS. We are currently in negotiations with AGRILABS to modify
and extend this agreement. Diamond is the sole manufacturer of these products.
Diamond also manufactures biological and pharmaceutical products for a
number of other food animal health companies. This activity ranges from
providing complete turnkey services which include research, licensing,
production, labeling and packaging of products to providing any one of these
services as needed by their customers.
PRODUCT CREATION
We are committed to creating innovative products to address significant
unmet health needs of companion animals. We create products both through
internal research and development and through external collaborations. Internal
research is managed by multidisciplinary product-associated project teams that
consist of microbiologists, immunologists, geneticists, biochemists, molecular
biologists, parasitologists and veterinarians, as appropriate.
We are also committed to identifying external product opportunities and
creating business and technical collaborations that lead to the creation of
other products. We believe that our active participation in scientific networks
and our reputation for investing in research enhances our ability to acquire
external product opportunities.
In the past, we have collaborated with a number of third parties on the
development of various pharmaceutical, vaccine and diagnostic products. We have
collaborated with numerous university veterinary specialists and practicing
veterinarians to test products in development and to validate the utility of our
existing products in the marketplace. In addition, we have collaborated with
the following institutions and companies to develop critical components of our
products:
* Quidel Corporation, Genzyme Corporation and Diagnostic Chemicals, Ltd.
with respect to the development of certain of our rapid, in-clinic
diagnostics tests,
* Valentis, Inc. and National Jewish Medical and Research Center on the
development of an intratumor gene therapy for the treatment of solid
tumors in dogs, and
* Researchers at the University of Pittsburgh on the development of our
Flu Avert I.N. vaccine.
We have also collaborated with several third parties on the development of
our veterinary medical instrument product line, including:
* i-STAT Corporation, for the development of veterinary applications for
the i-STAT Portable Clinical Analyzer and the cartridges used with this
instrument,
* Arkray, Inc., for the development of veterinary applications for the
SPOTCHEM EZ clinical biochemistry analyzer and associated reagents, and
* scil GmbH, for the development of veterinary applications for the Heska
Vet ABC-Diff Hematology Analyzer and associated reagents.
Our product pipeline currently includes numerous products in various stages
of development. Products under development include several point-of-care
diagnostic products, vaccines and pharmaceutical products for allergy, cancer,
heartworm control, pain management and flea control. We currently have under
development the following products which we expect to introduce in 2002 and
2003:
* A screening test for the parasites, Giardia and Cryptosporidium;
* A second generation vaccine for feline respiratory disease;
* A diagnostic product to determine if cats remain protected against
common respiratory viral diseases; and
* A gene-based medicine that stimulates a dog's own immune system to
attack tumors.
The vast majority of all our research and development resources are
directed toward the development of new companion animal health products. We
incurred expenses of $13.6 million, $14.9 million and $17.0 million in the years
ended December 31, 2001, 2000, and 1999, respectively in support of our research
and development activities.
SALES, MARKETING AND DISTRIBUTION
We estimate that there are approximately 30,000 veterinarians in the United
States whose practices are devoted principally to small animal medicine. Those
veterinarians practice in approximately 20,000 clinics in the United States.
During the past year, we sold our products to approximately 14,000 such clinics
in the United States.
We currently market our products in the United States to veterinarians
through independent third- party distributors, a direct sales force, a telephone
sales force, trade shows and print advertising. Prior to 2001, our distribution
strategy relied upon the use of third-party sales agents who would market
Heska's products on consignment. During 2001, we modified our distribution
strategy and entered into distribution agreements with over 20 third-party
veterinary distributors. These distributors market our products utilizing their
direct sales forces. Nearly one-half of these domestic distributors carry the
full line of our pharmaceutical, vaccine, diagnostic and instrumentation
products. We believe that these relationships will provide for more complete
market penetration. Internationally, we market our products to veterinarians
primarily through third-party distributors and corporate partners.
Given the shift in our product distribution strategy, we expect that a
greater portion of our sales will come from distributors rather than our direct
sales force. An important factor in successfully implementing this strategy
will be to retain sufficient independent distributors to market and sell our
products. We believe that one of our largest competitors, IDEXX, prohibits its
distributors from selling competitors' products, including our SOLO STEP
heartworm diagnostic products and medical diagnostic instruments. To be
successful, we will need to continue to attract and retain sufficient
independent distributors and train the sales personnel of our distributors about
the Heska products.
We have granted third parties substantial marketing rights to certain of
our existing products as well as products under development. Our agreements
with our corporate marketing partners generally contain no minimum purchase
requirements in order for them to maintain their exclusive or co-exclusive
marketing rights. Currently, Novartis Agro K.K. markets and distributes SOLO
STEP CH in Japan, and Novartis Animal Health Canada, Inc. distributes our Flu
AVERT I.N. vaccine in Canada. In addition, we have entered into agreements with
Novartis, Nestle Purina Petcare Company and Eisai Inc. to market or co-market
certain of the products that we are currently developing.
MANUFACTURING
Our products are manufactured by our Fort Collins, Des Moines and Fribourg,
Switzerland facilities and/or by third-party manufacturers. Diamond's facility
is a USDA, Food and Drug Administration, or FDA, and Drug Enforcement Agency, or
DEA, licensed biological and pharmaceutical manufacturing facility in Des
Moines, Iowa. We expect that we will manufacture most or all of our biological
products at this facility, as well as most or all of our recombinant proteins
and other proprietary reagents for our diagnostic products. Heska AG
manufactures its allergy diagnostic products at its facility in Fribourg,
Switzerland. Quidel Corporation and Diamond manufacture our heartworm point-of-
care diagnostic products. Centaq, Inc. manufactures our immunotherapy treatment
products. Third parties manufacture our veterinary diagnostic and patient
monitoring instruments, including our various analyzers and veterinary sensors.
In addition to manufacturing certain of our proprietary products, Diamond
manufactures animal health vaccine products for marketing and sale by other
companies. Diamond currently has the capacity to manufacture more than 50
million doses of vaccine each year. Diamond's customers purchase products in
both bulk and finished format, and Diamond performs all phases of manufacturing,
including growth of the active bacterial and viral agents, sterile filling,
lyophilization and packaging. Diamond also offers support to its customers
through research services, regulatory compliance services, validation support
and distribution services.
COLLABORATIVE AGREEMENTS
Novartis. We have entered into several collaborative agreements with
various subsidiaries and/or divisions of Novartis AG.
* Screening and Development Agreement. We entered into this agreement
with Ciba-Geigy Limited, now known as Novartis AG, in April 1996.
Under the agreement the parties may undertake joint research and
development activities related to both companion animal and food
animal health. If the parties decide not to perform joint research
activities, then Novartis has the right to use our materials to
develop food animal or companion animal products. Novartis would pay
royalties on any such products developed by it. There are currently
no joint research programs underway and no products being sold that
were developed under this agreement. This Agreement is effective
until December 31, 2005.
* Marketing Agreements. In April 1996, we entered into marketing
agreements with Ciba-Geigy Limited (Novartis AG) and Ciba-Geigy
Corporation, now known as Novartis Animal Health US, Inc. Under
these agreements, these entities were granted various rights to
manufacture and market flea control vaccine or feline heartworm
control vaccine products developed by us for which USDA prelicensing
serials are completed on or before December 31, 2005. We have
co-exclusive rights to market these products under our own trade
names throughout the world, subject to certain other marketing rights,
and we share revenues on those sales. These agreements are in force
until December 2010 or for as long as Novartis is selling the products.
No products have yet been developed or commercialized under these
agreements.
* Right of First Refusal Agreements.
- In April 1996 we entered into an agreement with Ciba-Geigy
Limited (Novartis AG) under which we, prior to granting
licenses to any third party to products or technology
developed or acquired by us for either companion animal or
food animal applications, subject to certain other rights,
must first notify and offer Novartis such rights. This
agreement terminates in December 2005. To date, Novartis AG
is not developing or marketing any products offered to it
under this agreement, except for a Leishmania vaccine that
is currently in development at Novartis.
- In August 1998, we entered into an agreement with Novartis Agro
K.K. ("NAH-Japan") and Novartis Animal Health, Inc. ("NAH") under
which both entities, prior to granting licenses to any third party
to certain products or technology offered to NAH-Japan or NAH by
any third party or by any NAH affiliate for either companion animal
or food animal applications, must first notify and offer us such
rights. This agreement terminates in December 2005. To date,
Heska is not developing or marketing any products under this
agreement.
* Exclusive Distribution Agreements.
- In August 1998, we entered into an agreement with Novartis Agro K.K.
(Novartis Animal Health K.K. Tokyo) to be our exclusive distributor
for SOLO STEP CH and SOLO STEP FH heartworm diagnostic products and
our feline Bivalent/Trivalent Intranasal/Intraocular Vaccines in
Japan upon obtaining regulatory approval in Japan for such products,
at Novartis' expense. This right continues until December 2006.
There are no minimum purchase obligations contained in this
agreement. Sales of SOLO STEP CH began in November 2001.
- In February 2001, we entered into an agreement with Novartis Animal
Health Canada, Inc. to be our exclusive distributor for Flu AVERT,
I.N. our equine influenza vaccine in Canada until December 2006,
subject to Novartis meeting certain minimum purchase requirements.
Products are marketed under the HESKA brand name. Product sales
began in November 2001.
Nestle Purina PetCare Company. We have a strategic alliance with Nestle
Purina PetCare Company, formerly Ralston Purina Company. Nestle holds exclusive
rights to license our discoveries, know-how and technologies for innovative
diets for dogs and cats. The first product from this strategic alliance was
introduced under the Purina name in July 2000. A second related product was
introduced in 2001. These products are specialty diets for the nutritional
management of feline diabetes mellitus. We receive a royalty from Nestle on
sales of these products.
i-STAT Corporation. Under the terms of an Amended and Restated
Distribution Agreement dated as of February 1999, we have been granted exclusive
rights to market and sell the i-STAT portable blood analyzer and cartridges in
the U.S. and major international markets, including Europe. We also have a
right to market certain products developed by i-STAT. The term of this
agreement is currently until December 2002. It is automatically renewed
thereafter for additional 12 months terms unless either party gives at least
9 months prior written notice to the other that it does not wish to renew the
agreement.
Agri Laboratories, Ltd. In July 1998, our wholly owned subsidiary, Diamond
Animal Health, Inc. entered into a Bovine Vaccine Distribution Agreement. Under
the terms of this agreement, Diamond has agreed to manufacture and sell certain
bovine vaccines to AGRILABS for distribution worldwide, with certain exceptions.
Certain minimum purchase requirements apply to this agreement. This agreement
expires in December 2004 and is automatically renewed thereafter for additional
one year terms unless either party gives prior written notice to the other that
it does not wish to renew the agreement. We are currently in negotiations with
AGRILABS to modify and extend this agreement.
INTELLECTUAL PROPERTY
We believe that patents, trademarks, copyrights and other proprietary
rights are important to our business. We also rely upon trade secrets, know-
how, continuing technological innovations and licensing opportunities to develop
and maintain our competitive position.
We actively seek patent protection both in the United States and abroad.
As of December 31, 2001, we owned, co-owned or had rights to 138 issued U.S.
patents and 110 pending U.S. patent applications. Our issued U.S. patents
primarily relate to allergy, flea control, heartworm control, infectious disease
vaccines, nutrition, instrumentation, diagnostics or vaccine delivery
technologies. Our pending patent applications primarily relate to allergy, flea
control, heartworm control, infectious disease vaccines, diagnostics, nutrition,
cancer, vaccine delivery, immunomodulators or medical instrument technologies.
Applications corresponding to pending U.S. applications have been or will be
filed in other countries. Our patent portfolio also includes 132 issued patents
and 209 pending applications in various foreign countries.
We also have obtained exclusive and non-exclusive licenses for numerous
other patents held by academic institutions and biotechnology and pharmaceutical
companies. The proprietary technologies of Diamond and Heska AG are primarily
protected through trade secret protection of, for example, their manufacturing
processes.
The biotechnology and pharmaceutical industries have been characterized by
extensive litigation relating to patents and other intellectual property rights.
In 1998, Synbiotics Corporation filed a lawsuit against us alleging infringement
of a Synbiotics patent relating to heartworm diagnostic technology. See "Item
3. Legal Proceedings."
SEASONALITY
Certain portions of our business are subject to seasonality, including our
SOLO STEP heartworm diagnostic products, which are principally sold starting in
the fourth quarter and continuing through the second quarter of the year; our
Flu AVERT I.N. vaccine for equine influenza, which is principally sold in the
first and fourth quarters of the year; our veterinary medical instrument
products, sales of which are higher in the fourth quarter of the year; and our
food animal vaccine products, which are sold principally in the second half of
the year.
GOVERNMENT REGULATION
Most of the products that we develop are subject to extensive regulation by
governmental authorities in the United States, including the USDA and the FDA,
and by similar agencies in other countries. These regulations govern, among
other things, the development, testing, manufacturing, labeling, storage, pre-
market approval, advertising, promotion, sale and distribution of our products.
Satisfaction of these requirements can take several years and time needed to
satisfy them may vary substantially, based on the type, complexity and novelty
of the product. Any product that we develop must receive all relevant
regulatory approval or clearances, if required, before it may be marketed in a
particular country. The following summarizes the U.S. government agencies that
regulate animal health products:
* USDA. Vaccines and certain point-of-care diagnostics are considered
veterinary biologics and are therefore regulated by the Center for
Veterinary Biologics, or CVB, of the USDA. Industry data indicate
that it takes approximately four years and $1.0 million to license a
conventional vaccine for animals from basic research through licensing.
In contrast to vaccines, point-of-care diagnostics can typically be
licensed by the USDA in about a year, at considerably less cost.
However, vaccines or diagnostics that use innovative materials, such
as those resulting from recombinant DNA technology, usually require
additional time to license. The USDA licensing process involves the
submission of several data packages. These packages include information
on how the product will be manufactured, information on the efficacy
and safety of the product in laboratory animal studies and information
on performance of the product in field conditions.
* FDA. Pharmaceutical products, which generally include synthetic
compounds, are approved and monitored by the Center for Veterinary
Medicine of the FDA. Industry data indicate that developing a new
drug for animals requires approximately 11 years from commencement
of research to market introduction and costs approximately $5.5 million.
Of this time, approximately three years is spent in animal studies and
the regulatory review process. However, unlike human drugs, neither
preclinical studies nor a sequential phase system of studies are
required. Rather, for animal drugs, studies for safety and efficacy
may be conducted immediately in the species for which the drug is
intended. Thus, there is no required phased evaluation of drug
performance, and the Center for Veterinary Medicine will review data
at appropriate times in the drug development process. In addition,
the time and cost for developing companion animal drugs may be
significantly less than for drugs for food production animals, as
food safety issues relating to tissue residue levels are not
present.
* EPA. Products that are applied topically to animals or to premises
to control external parasites are regulated by the Environmental
Protection Agency, or EPA.
After we have received regulatory licensing or approval for our
pharmaceutical products, numerous regulatory requirements apply. Among the
conditions for certain regulatory approvals is the requirement that our
manufacturing facilities or those of our third-party manufacturers conform to
current Good Manufacturing Practices or other manufacturing regulations, which
include requirements relating to quality control and quality assurance as well
as maintenance of records and documentation. The USDA, FDA and foreign
regulatory authorities strictly enforce manufacturing regulatory requirements
through periodic inspections.
A number of our animal health products are not regulated. For example,
certain assays for use in a veterinary diagnostic laboratory, such as ALLERCEPT,
E-SCREEN and E.R.D.-SCREEN Urine Test, do not have to be licensed by either the
USDA or FDA. Similarly, none of our veterinary diagnostic and patient
monitoring instruments require regulatory approval to be marketed and sold.
Additionally, various botanically derived products, various nutritional products
and supportive care products are exempt from significant regulation as long as
they do not bear a therapeutic claim that represents the product as a drug.
We have pursued regulatory approval outside the United States based on
market demographics of foreign countries. For marketing outside the United
States, we are also subject to foreign regulatory requirements governing
regulatory licensing and approval for many of our products. The requirements
governing product licensing and approval vary widely from country to country.
Licensing and approval by comparable regulatory authorities of foreign countries
must be obtained before we can market products in those countries. The approval
process varies from country to country and the time required for such approvals
may differ substantially from that required in the United States. We cannot be
certain that approval of any of our products in one country will result in
approvals in any other country. To date, we or our distributors have sought
regulatory approval for certain of our products in Canada, which is governed by
the Canadian Food Inspection Agency, or CFIA, and in Japan, which is governed by
the Japanese Ministry of Agriculture, Forestry and Fisheries, or MAFF.
The status of regulatory approval for our major products and products in
development both in the United States and elsewhere is summarized below.
CURRENT MAJOR PRODUCTS COUNTRY REGULATED AGENCY STATUS
- ---------------------------------------- -------------- ----------------------- ---------- -----------
ALLERCEPT E-SCREEN Test United States No
EU No - in most countries
ALLERCEPT Definitive Allergen Panels Unites States No
EU No
E.R.D.-SCREEN Urine Test United States No
EU No - in most countries
Flu AVERT I.N. Vaccine United States Yes USDA Licensed
Canada Yes CFIA Licensed
HESKA F.A. Granules United States No
SOLO STEP CH United States Yes USDA Licensed
Canada Yes CFIA Pending
Japan Yes MAFF Licensed
SOLO STEP FH United States Yes USDA Licensed
SOLO STEP Batch Test Strips United States Yes USDA Licensed
Canada Yes CFIA Pending
Trivalent Intranasal/Intraocular Vaccine United States Yes USDA Licensed
Veterinary Medical Instrumentation United States No
EU No
PRODUCTS IN DEVELOPMENT COUNTRY REGULATED AGENCY STATUS
- ---------------------------------------- -------------- ---------------------- ----------- ------------
Feline ImmuCheck Assay United States Yes USDA Pending
EU No-in most countries
Canine Cancer Gene Therapy United States Yes USDA Pending
Giardia + Crypto-Screen Fecal Test United States Yes USDA Pending
EU No-in most countries
Trivalent Intranasal/Intraocular Vaccine- United States Yes USDA Pending
Second Generation
COMPETITION
The market in which we compete is intensely competitive. Our competitors
include independent animal health companies and major pharmaceutical companies
that have animal health divisions. Companies with a significant presence in the
animal health market, such as Wyeth (formerly American Home Products), Bayer AG,
IDEXX Laboratories, Inc., Intervet International B.V., Merial Ltd., Novartis AG,
Pfizer Inc., Pharmacia Corporation and Schering-Plough Corporation are marketing
or are developing products that compete with our products. These competitors
may have substantially greater financial, technical, research and other
resources and larger, more established marketing, sales, distribution and
service organizations than us. Moreover, such competitors may offer broader
product lines and have greater name recognition than we do. Novartis is our
marketing partner, but its agreement with us does not restrict its ability to
develop and market competing products. In addition, we believe that IDEXX
prohibits its distributors from selling competitors' products, including our
SOLO STEP heartworm diagnostic products and medical diagnostic instruments.
The food animal vaccines sold by Diamond to AGRILABS compete with similar
products offered by a number of other companies, some of which have
substantially greater financial, technical, research and other resources than
Diamond and may have more established marketing, sales, distribution and service
organizations than AGRILABS.
ENVIRONMENTAL REGULATION
In connection with our product development activities and manufacturing of
our biological, pharmaceutical and diagnostic products, we are subject to
federal, state and local laws, rules, regulations and policies governing the
use, generation, manufacture, storage, handling and disposal of certain
materials, biological specimens and wastes. Although we believe that we have
complied with these laws, regulations and policies in all material respects and
have not been required to take any significant action to correct any
noncompliance, we may be required to incur significant costs to comply with
environmental and health and safety regulations in the future. Although we
believe that our safety procedures for handling and disposing of such materials
comply with the standards prescribed by state and federal regulations, the risk
of accidental contamination or injury from these materials cannot be eliminated.
In the event of such an accident, we could be held liable for any damages that
result and any such liability could exceed our resources.
EMPLOYEES
As of December 31, 2001, we and our subsidiaries employed 336 full-time
persons, of whom 107 were in manufacturing, quality control, shipping and
receiving, and materials management, 90 were in research, development,
intellectual property and regulatory affairs, 57 were in management, finance,
administration, legal, information systems, human resources and facilities
management, 67 were in sales, marketing and customer service and 15 were in the
diagnostic laboratories. We believe that our ability to attract and retain
skilled personnel is critical to our success. None of our employees is covered
by a collective bargaining agreement, and we believe our employee relations are
good.
ITEM 2. PROPERTIES.
Our principal administrative and research and development activities are
located in Fort Collins, Colorado. We currently lease an aggregate of
approximately 64,000 square feet of administrative and laboratory space in four
buildings located in Fort Collins under leases expiring through 2005, with
options to extend through 2010 for the larger facilities. We believe that our
present Fort Collins facilities are adequate for our current and planned
activities and that suitable additional or replacement facilities in the Fort
Collins area are readily available on commercially reasonable terms should such
facilities be needed in the future. Our principal manufacturing facility,
Diamond, located in Des Moines, Iowa, consists of 168,000 square feet of
buildings on 34 acres of land, which we own. We also own a 175-acre farm used
principally for research purposes located in Carlisle, Iowa. Our European
subsidiaries lease their facilities.
ITEM 3. LEGAL PROCEEDINGS.
In November 1998, Synbiotics Corporation filed a lawsuit against us in the
United States District Court for the Southern District of California in which it
alleges that we infringe a patent owned by Synbiotics relating to heartworm
diagnostic technology. We have obtained legal opinions from our outside patent
counsel that our heartworm diagnostic products do not infringe the Synbiotics
patent and that the patent is invalid. The opinions of non-infringement are
consistent with the results of our internal evaluations related to the one
remaining claim. In September 2000, the U.S. District Court hearing the case
granted our request for a partial summary judgment, holding two of the
Synbiotics patent claims to be invalid, leaving only the one remaining claim in
the lawsuit. The one remaining claim is currently scheduled for trial in 2002.
While we believe that we have valid defenses to Synbiotics' allegations
and intend to defend the action vigorously, there can be no assurance that an
adverse result or settlement would not have a material adverse effect on our
financial position, results of operations or cash flow.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of stockholders during the fourth
quarter of the year ended December 31, 2001.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
Our common stock is quoted on the Nasdaq National Market under the symbol
"HSKA." The following table sets forth the intraday high and low, prices for
our common stock as reported by the Nasdaq National Market, for the periods
indicated below.
HIGH LOW
-------------- -------------
2000
First Quarter $ 5.563 $ 2.063
Second Quarter 4.375 1.500
Third Quarter 4.469 1.750
Fourth Quarter 2.938 0.594
2001
First Quarter 1.563 0.656
Second Quarter 1.440 0.950
Third Quarter 1.310 0.500
Fourth Quarter 1.100 0.500
2002
First Quarter (through March 26) 1.470 1.019
On March 26, 2002, the last reported sale price of our common stock was
$1.10 per share. As of March 26, 2002, there were approximately 358 holders of
record of our common stock and approximately 4,658 beneficial stockholders. We
have never declared or paid cash dividends on our capital stock and do not
anticipate paying any cash dividends in the near future. In addition, we are
restricted from paying dividends, other then dividends payable solely in stock,
under the terms of our credit facility. We currently intend to retain future
earnings for the development of our business.
On December 18, 2001, we issued 7,792,768 shares of common stock for an
aggregate purchase price of approximately $5.7 million, net of issuance costs,
to accredited investors. The issuance of these shares was made in reliance on
the exemptions from registration set forth in Section 4(2) of the Securities Act
of 1933, as amended. We made no public solicitation in connection with the
issuance of the above-mentioned securities. We relied on representations from
the recipients of the securities that they purchased the securities for
investment only and not with a view to any distribution thereof and that they
were aware of our business affairs and financial condition and had sufficient
information to reach an informed and knowledgeable decision regarding their
purchase of the securities.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
The following statement of operations and balance sheet data have been
derived from our consolidated financial statements. The information set forth
below is not necessarily indicative of the results of future operations and
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and related Notes included as Items 7 and 8 in this Form 10-K.
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
----------------- ---------------- ----------------- ---------------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
Products, net:
Pharmaceuticals, vaccines
and diagnostics $ 16,704 $ 13,961 $ 12,716 $ 5,406 $ 2,587
Veterinary medical instruments 16,018 14,194 12,106 6,709 5,690
Food animal products 13,664 18,203 12,086 12,234 11,083
Sold businesses and other - 3,191 13,383 14,102 7,365
--------- --------- --------- --------- ---------
Total product revenues 46,386 49,549 50,291 38,451 26,725
Research, development and other 1,897 3,126 885 1,321 2,578
--------- --------- --------- --------- ---------
Total revenues 48,283 52,675 51,176 39,772 29,303
--------- --------- --------- --------- ---------
Cost of products sold 28,655 33,299 36,386 29,087 20,077
--------- --------- --------- --------- ---------
19,628 19,376 14,790 10,685 9,226
--------- --------- --------- --------- ---------
Operating expenses:
Selling and marketing 13,981 14,788 15,073 13,188 9,954
Research and development 13,565 14,929 17,042 25,126 20,343
General and administrative 7,882 9,457 11,231 11,939 13,192
Amortization of intangible assets
and deferred compensation 299 903 2,228 2,745 2,500
Purchased research and
development - - - - 2,399
Loss on sale of assets - 204 2,593 1,287 -
Restructuring expenses and other 2,023 435 1,210 2,356 -
--------- --------- --------- -------- ---------
Total operating expenses 37,750 40,716 49,377 56,641 48,388
--------- --------- --------- -------- ---------
Loss from operations (18,122) (21,340) (34,587) (45,956) (39,162)
--------- --------- --------- --------) ---------
Other income (expense) (569) (530) (1,249) 1,682 298
Net loss $ (18,691) $ (21,870) $ (35,836) $ 44,274) $ (38,864)
========= ========= ========= ======== =========
Basic net loss per share $ (0.48) $ (0.65) $ (1.31) $ (1.79)
========= ========= ========= ========
Unaudited pro forma basic net
loss per share(1) $ (2.42)
=========
Shares used to compute basic net
loss per share and Unaudited pro
forma basic net loss per share 38,919 33,782 27,290 24,693 16,042
DECEMBER 31,
--------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------------ ---------------- ----------------- ---------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and
marketable securities $ 5,710 $ 5,658 $ 23,981 $ 51,930 $ 28,752
Working capital 8,215 13,308 28,234 51,947 31,461
Total assets 37,757 39,160 71,168 98,054 69,020
Line of credit 5,737 - 917 1,749 667
Long-term obligations 3,131 3,819 5,346 11,367 10,754
Accumulated deficit (193,163) (174,472) (152,602) (116,766) (72,492)
Total stockholders' equity 17,166 25,100 45,439 67,114 43,850
(1) All shares of convertible preferred stock were automatically
converted to common stock upon closing of the Company's initial
public offering in July 1997. The Company has reflected the
conversion of convertible preferred stock into 11,289 shares of
common stock on a pro forma basis as if the shares had been
outstanding during 1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with "Selected Consolidated
Financial Data" and the Consolidated Financial Statements and related Notes
included in Items 6 and 8 of this Form 10-K.
This discussion contains forward-looking statements that involve risks and
uncertainties. Such statements, which include statements concerning future
revenue sources and concentration, gross margins, research and development
expenses, selling and marketing expenses, general and administrative expenses,
capital resources, additional financings or borrowings and additional losses,
are subject to risks and uncertainties, including, but not limited to, those
discussed below and elsewhere in this Form 10-K, particularly in "Factors that
May Affect Results," that could cause actual results to differ materially from
those projected. The forward-looking statements set forth in this Form 10-K are
as of April 1, 2002, and we undertake no duty to update this information.
CORPORATE OVERVIEW
We discover, develop, manufacture and market companion animal health
products, principally for dogs, cats and horses. We employ approximately 80
scientists, of whom over one quarter hold doctoral degrees, with expertise in
several disciplines including microbiology, immunology, genetics, biochemistry,
molecular biology, parasitology and veterinary medicine. This scientific
expertise is focused on the development of a broad range of pharmaceutical,
vaccine and diagnostic products for companion animals. We also sell veterinary
diagnostic and patient monitoring instruments and offer diagnostic services to
veterinarians in the United States and Europe, principally for companion
animals. In addition to manufacturing companion animal health products for
marketing and sale by Heska, our Diamond Animal Health subsidiary manufactures
food animal vaccines and other food animal products that are marketed and
distributed by other animal health companies.
OUR BUSINESS
We currently market our products in the United States to veterinarians
through approximately 20 independent third-party distributors and through a
direct sales force. Nearly one-half of these domestic distributors purchase the
full line of our pharmaceutical, vaccine, diagnostic and instrumentation
products. We have recently begun to rely on distributors for a greater portion
of our sales.
Our business is comprised of two reportable segments, Companion Animal
Health and Food Animal Health. Prior to June 30, 2000, we also had a third
reportable segment, Allergy Treatment, which represented the operations of a
subsidiary sold as of June 23, 2000. Within the Companion Animal Health segment
there are two major product groupings which we define as pharmaceuticals,
vaccines and diagnostics (PVD) and veterinary diagnostic and patient monitoring
instruments. These products are sold through our operations in Fort Collins,
Colorado and Europe. Within the Food Animal Health segment, there is one major
product grouping, food animal vaccine and pharmaceutical products. We
manufacture these food animal products at our Diamond Animal Health subsidiary,
located in Des Moines, Iowa.
Additionally, we generate non-product revenues from sponsored research and
development projects for third parties, licensing of technology and royalties.
We perform these sponsored research and development projects for both companion
animal and food animal purposes.
ACQUISITIONS AND DISPOSITIONS
In 1996, we expanded into a fully-integrated research, development,
manufacturing and marketing company by acquiring Diamond Animal Health, a
licensed pharmaceutical and biological manufacturing facility in Des Moines,
Iowa, accounted for as a purchase. We acquired Center Laboratories, an FDA and
USDA licensed manufacturer of allergy immunotherapy products located in New York
in 1997, accounted for as a purchase. Center was sold effective June 23, 2000.
Also in 1997, we expanded internationally with the acquisitions of Heska UK, a
veterinary diagnostic laboratory in England and Heska AG (formerly Centre
Medical des Grand'Places S.A.) in Switzerland, which manufactures and markets
allergy diagnostic products for use in veterinary and human medicine, primarily
in Europe, accounted for as a purchase. Heska UK was sold effective January 31,
2000. In 1998, we acquired Sensor Devices, Inc., a manufacturer and marketer of
patient monitoring devices located in Waukesha, Wisconsin, accounted for as a
pooling. These operations were consolidated with our existing operations in
Fort Collins, Colorado and Des Moines, Iowa as of December 31, 1999 and the
facility was closed.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are more fully described in Note 2 to
our consolidated financial statements. However, certain of our accounting
policies are particularly important to the understanding of our financial
position and results of operations and require the application of significant
judgment by our management; as a result they are subject to an inherent degree
of uncertainty. In applying those policies, our management uses its judgment to
determine the appropriate assumptions to be used in the determination of certain
estimates. Those estimates are based on our historical experience, terms of
existing contracts, our observance of trends in the industry, information
provided by our customers and information available from other outside sources,
as appropriate. Our significant accounting policies include:
* The Company generates its revenues through sale of products, licensing
of technology and sponsored research and development. Revenue is
accounted for in accordance with the guidelines provided by Staff
Accounting Bulletin 101 "Revenue Recognition in Financial Statements"
(SAB 101). The Company's policy is to recognize revenue when the
applicable revenue recognition criteria have been met, which generally
include the following:
- Persuasive evidence of an arrangement exists;
- Delivery has occurred or services rendered;
- Price is fixed or determinable; and
- Collectibility is reasonably assured.
Revenue from the sale of products is generally recognized
after both the goods are shipped to the customer and
acceptance has been received with an appropriate provision for
returns and allowances. The terms of the customer
arrangements generally pass title and risk of ownership to the
customer at the time of shipment. Certain customer
arrangements provide for acceptance provisions. Revenue for
these arrangements is not recognized until the acceptance has
been received or the acceptance period has lapsed.
In addition to its direct sales force, the Company utilizes
third-party distributors to sell its products. Distributors
purchase goods from the Company, take title to those goods and
resell them to their customers in the distributors'
territory.
License revenues under arrangements to sell product rights or
technology rights are recognized upon the sale and completion
by the Company of all obligations under the agreement.
Royalties are recognized as products are sold to customers.
The Company recognizes revenue from sponsored research and
development over the life of the contract as research
activities are performed. The revenue recognized is the
lesser of revenue earned under a percentage of completion
method based on total expected revenues or actual non-
refundable cash received to date under the agreement.
* Inventories. Inventories are stated at the lower of cost or market,
cost being determined on the first-in, first-out method. Inventories
are written down if the estimated net realizable value is less than the
recorded value.
* Foreign currency translation. The financial position and results of
operations of our foreign subsidiaries are measured using local currency
as the functional currency. Assets and liabilities of each foreign
subsidiary are translated at the rate of exchange in effect at the end
of the period. Revenues and expenses are translated at the average
exchange rate for the period. Foreign currency translation gains and
losses not impacting cash flows are credited to or charged against
other comprehensive income (loss). Foreign currency translation gains
and losses arising from cash transactions are credited to or charged
against current earnings.
RESULTS OF OPERATIONS
The following table summarizes our operations for our three most recent
fiscal years.
YEAR ENDED DECEMBER 31,
------------------------------------------------------------
2001 2000 1999
------------------- ------------------- ------------------
(IN THOUSANDS)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Products, net:
Pharmaceuticals, vaccines and diagnostics $ 16,704 $ 13,961 $ 12,716
Veterinary medical instruments 16,018 14,194 12,106
Food animal products 13,664 18,203 12,086
Sold businesses and other - 3,191 13,383
------------ ----------- ----------
Total product revenues 46,386 49,549 50,291
Research, development and other 1,897 3,126 885
------------ ----------- ----------
Total revenues 48,283 52,675 51,176
Cost of products sold 28,655 33,299 36,386
------------ ----------- ----------
19,628 19,376 14,790
------------ ----------- ----------
Operating expenses:
Selling and marketing 13,981 14,788 15,073
Research and development 13,565 14,929 17,042
General and administrative 7,882 9,457 11,231
Amortization of intangible assets and deferred compensation 299 903 2,228
Loss on sale of assets - 204 2,593
Restructuring expenses and other 2,023 435 1,210
----------- ----------- ----------
Total operating expenses 37,750 40,716 49,377
----------- ----------- ----------
Loss from operations (18,122) (21,340) (34,587)
Other income (expense) (569) (530) (1,249)
----------- ----------- ----------
Net loss $ (18,691) $ (21,870) $ (35,836)
=========== =========== ==========
Basic net loss per share $ (0.48) $ (0.65) $ (1.31)
=========== =========== ==========
REVENUES
Total revenues, which include product revenues, sponsored research and
development and other revenues, decreased 8% to $48.3 million in 2001 compared
to $52.7 million in 2000. The 2000 total revenues of $52.7 million increased 3%
compared to $51.2 million in 1999. The total reported revenue included
approximately $3.2 million in 2000 and $13.4 million in 1999 from businesses
sold and non-strategic product lines discontinued during those years. In 2000,
we recorded $1.3 million in non-recurring revenue related to the sale of the
worldwide rights to one of our products. Sales to one customer, AGRILABS,
represented 16% and 17% of total revenues in 2001 and 2000, respectively, and
sales to another customer, Bayer, represented 12% of total revenues in 1999. We
expect our total 2002 revenues to be higher than 2001 for all product groups as
we introduce our new canine early renal disease diagnostic and record full-year
revenues for products introduced in the prior year.
Product revenues decreased 6% to $46.4 million in 2001 compared to $49.5
million in 2000. Product revenues decreased 2% to $49.5 million in 2000
compared to $50.3 million in 1999.
Our PVD product group had increased revenues of 20% in 2001 and 10% in 2000
on a year-to-year basis. Both of these annual increases were driven primarily
by higher domestic sales of our heartworm diagnostic products and equine
influenza vaccine, as well as growth in our export sales of both products. We
introduced the equine influenza vaccine in 2000 and in 2001 we introduced our E-
SCREEN allergy product. In 2002, we introduced our E.R.D.-SCREEN Urine Test
canine renal product. We expect PVD product revenues to increase in 2002 due
primarily to this introduction.
Revenues from the Instruments product group increased 12% to $16.0 million
in 2001 and 17% to $14.2 million in 2000 over the respective prior year. The
2001 increase is primarily attributable to the introduction of our new blood
chemistry instrument and solid growth in consumables and reagents as more
instruments have been placed in service each year. During 2000 we experienced
significant growth in the sales of our portable analyzer and hematology
instrument and the related consumables and reagents. Instrument product
revenues in 2002 should continue to grow at a rate equal to or greater than 2001
due to a full year of sales for our blood chemistry instrument introduced in
2001 and increased sales for consumables and reagents with more instruments
placed in service.
Diamond Animal Health reported 25% lower revenues in 2001 declining to
$13.6 million versus the prior year revenues of $18.2 million due to reduced
orders from a significant vaccine customer. Revenues at Diamond increased 51%
in 2000 over the 1999 total of $12.1 million due to increases in contract
vaccine manufacturing for food animals. We expect higher sales at Diamond in
2002 with growth primarily in our bovine vaccine products.
Revenues from sponsored research and development and other decreased 39% to
$1.9 million in 2001 from $3.1 million in 2000. Included in the total for 2000
is $1.3 million of revenue from the sale of our worldwide rights to the
PERIOceutic Gel product. Revenues from sponsored research and development and
other increased 244% to $3.1 million in 2000 from $900,000 in 1999 due to the
sale of the product rights and an increase in the number of funded research
projects. Our revenues from sponsored research and development are anticipated
to be significantly lower in 2002 due to fewer large research projects for third
parties.
COST OF PRODUCTS SOLD
Cost of products sold totaled $28.7 million in 2001 compared to $33.3
million in 2000, and the resulting gross profit from product sales for 2001
increased to $17.7 million from $16.3 million in 2000. Our gross margin
percentage on products sold was 38% in 2001, compared to 33% in 2000. During
2001, our gross margin improved as our product mix included a higher percentage
of our proprietary PVD products with higher gross margins. Also during fiscal
2000 we sold businesses and eliminated various product lines that did not meet
gross profit expectations.
Cost of goods sold totaled $33.3 million in 2000 compared to $36.4 million
in 1999, and the resulting gross profit from product sales for 2000 increased to
$16.3 million from $13.9 million in 1999. Our gross margin percentage was 33%
in 2000, compared to 28% in 1999. During 2000, our gross margin improved as our
product mix included a higher percentage of proprietary products with higher
gross margins. Also during fiscal 2000 and late in fiscal 1999, we sold
businesses and eliminated various product lines that did not meet gross profit
expectations.
We expect our gross margin percentage to continue to increase in 2002 as we
sell more higher-margin PVD products plus reagents and consumables related to
the increased number of instruments in use in the marketplace. We also expect
to benefit from an improved cost structure at Diamond. This expected gross
margin percentage increase will be at a slower pace than prior years because, in
part, it will be somewhat offset by the recent change in our distribution
strategy which incorporates a larger reliance on third-party distributors for
the sale of our products.
OPERATING EXPENSES
Selling and marketing expenses decreased over 5% to $14.0 million in 2001
as compared to $14.8 million in 2000, due to the sale of certain businesses.
Selling and marketing expenses consist primarily of salaries, commissions and
benefits for sales and marketing personnel, commissions paid to contract sales
personnel and expenses of product advertising and promotion. We expect lower
selling and marketing expenses in 2002 as we rely more heavily on third-party
distributors rather than our own direct sales force to generate sales of our
products to veterinarians. Selling and marketing expenses remained relatively
flat with $14.8 million in 2000 as compared to $15.1 million in 1999, due to the
sale of certain businesses offset by the introduction and marketing costs for
new products.
Research and development expenses decreased nearly 9% to $13.6 million in
2001 from $14.9 million in 2000 and $17.0 million in 1999. The decreases are
due to a greater focus on companion animal product opportunities and tight cost
control. We expect a similar decrease in these expenses in 2002 for the same
reasons.
General and administrative expenses decreased 17% to $7.9 million in 2001
from $9.5 million in 2000 and $11.2 million in 1999. The year-over-year
decreases are due to the sale of certain businesses and tight cost control at
all operations. We expect general and administrative expenses to continue to
decrease in 2002 with continued tight cost control.
The amortization of goodwill and other intangibles resulted in a non-cash
charge to operations of $270,000, $255,000 and $1.6 million in 2001, 2000 and
1999, respectively. The decrease after 1999 is due to the sale of Heska UK and
the write-down of goodwill and certain intangible assets in 1999. The
amortization of deferred compensation resulted in a non-cash charge to
operations in 2001 of approximately $29,000 compared to $648,000 and $629,000 in
2000 and 1999, respectively. The 2000 and 1999 amortization of deferred
compensation represents current period costs associated with options issued to
employees during 1996 and 1997 in which the deemed value of the common stock for
accounting purposes on the date of grant exceeded the exercise price of the
options. The compensation costs were recognized over the service period and the
related deferred compensation was fully amortized as of December 31, 2000. We
have adopted SFAS 142 and therefore, will no longer be amortizing the goodwill
associated with our purchase of CMG. During fiscal 2001, we recognized $210,000
of amortization related to this goodwill.
The loss on sale of assets in 2000 reflects the write-down to net book
value of certain assets held for sale, offset by the gain on the sale of Center
of approximately $151,000.
We recorded a restructuring charge of approximately $1.5 million in the
fourth quarter of 2001 related to the change in our distribution strategy and to
the consolidation of our European operations into one facility. We also
recognized approximately $500,000 of non-recurring expenses resulting from
management's decision to not pursue a strategic transaction after extensive
evaluation.
During the first quarter of 2000, we recorded a $435,000 restructuring
charge related to the rationalization of our business operations at Diamond.
Diamond reduced the size of its workforce and vacated a warehouse and
distribution facility no longer needed when we decided to discontinue
manufacturing of certain low margin human healthcare products.
OTHER
Interest income decreased to $324,000 in 2001 as compared to $1.0 million
in 2000 and $1.6 million in 1999 as we continued to fund our operations with
available cash. Interest income is expected to continue to decrease in the
future as we continue to use cash to fund our business operations. Interest
expense decreased to $587,000 in 2001 from $1.2 million in 2000 and $1.9 million
as we reduced our debt and capital leases from $17.1 million at the beginning of
1999 to less than $8.7 million at the end of fiscal 2001.
Other expense decreased to $306,000 from $361,000 in 2000 and nearly $1.0
million in 1999. The higher losses in 1999 were primarily due to losses
realized on the sale of certain long-term interest-bearing government securities
during that year.
NET LOSS
Our net loss decreased to $18.7 million in 2001 compared to $21.9 million
in 2000 and $35.8 million in 1999. The improvement is the result of
significantly higher gross margin percentages on product sales from year-to-
year, a $11.6 million reduction in operating expenses including certain
unprofitable businesses that were sold and tight cost control in all areas of
our business. We are expecting a net loss in 2002 substantially lower than the
net loss in 2001 as we anticipate revenue growth in each of our primary product
groups, slightly higher gross profit margins on product sales and continued
disciplined management of our operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
We have incurred negative cash flow from operations since inception in
1988. For the year ended December 31, 2001, we had total revenues of $48.3
million and a net loss of $18.7 million. Our negative operating cash flows have
been funded primarily through the sale of common stock and borrowings. At
December 31, 2001, we had cash and cash equivalents of $5.7 million.
We recently amended our credit agreement with our lender to obtain a waiver
of certain covenants under our revolving line of credit as of December 31, 2001,
set the financial covenants for 2002 and extend the maturity date of the loans
an additional year to May 31, 2003. If our lender imposes loan covenants or
other credit requirements that would prevent us from accessing the full amount
of our line of credit, we would need to raise additional capital to fund any
shortfall from our borrowings expected to be available under the revolving line
of credit. We anticipate that any additional capital would be raised through
one or more of the following:
* obtaining new loans secured by unencumbered assets;
* sale of various products or marketing rights;
* licensing of technology;
* sale of various assets; and
* sale of additional equity or debt securities.
At December 31, 2001, we had outstanding obligations for long-term debt and
capital leases totaling $2.9 million primarily related to two term loans with
Wells Fargo Business Credit. One of these two term loans is secured by real
estate at Diamond and had an outstanding balance at December 31, 2001 of
$1.8 million due in monthly installments of $17,658 plus interest, with a
balloon payment of approximately $1.5 million due on May 31, 2003. The other
term loan is secured by machinery and equipment at Diamond and had an
outstanding balance at December 31, 2001 of approximately $688,000 payable in
installments of $18,667 plus interest, with a balloon payment of approximately
$370,000 due on May 31, 2003. Both loans have a stated interest rate of prime
plus 1.25%. In addition, Diamond has promissory notes to the Iowa Department of
Economic Development and the City of Des Moines with outstanding balances at
year-end of $41,000 and $54,000, respectively, due in annual and monthly
installments through June 2004 and May 2004, respectively. Both promissory
notes have a stated interest rate of 3.0% and an imputed interest rate of 9.5%.
The notes are secured by first security interests in essentially all of
Diamond's assets and both lenders have subordinated their first security
interest to Wells Fargo. We also had $240,000 of equipment financing which was
paid in full in January 2002. Our capital lease obligations totaled $161,000 at
year-end 2001.
We also have a $10.0 million asset-based revolving line of credit with
Wells Fargo Business Credit. Available borrowings under this line of credit are
based upon percentages of our eligible domestic accounts receivable and domestic
inventories. Interest is charged at a stated rate of prime plus 1% and is
payable monthly. Our ability to borrow under this facility varies based upon
available cash, eligible accounts receivable and eligible inventory. On March
13, 2002, we negotiated our covenants for 2002 and obtained a waiver of certain
financial covenants at December 31, 2001. The line of credit has a maturity
date of May 31, 2003. At December 31, 2001, our outstanding borrowings under
the line of credit were $5.7 million and we had remaining available borrowing
capacity of $2.2 million.
Net cash used in operating activities was $14.1 million in 2001, compared
to $15.9 million in 2000. Accounts payable and accrued liabilities increased by
$2.9 million in 2001 related to the $2.0 million of restructuring expense and
other, as well as increases in accrued commissions, royalties and incentive
compensation. Accounts receivable increased by $2.0 million compared to the
fourth quarter of 2000 due to the 29% increase in revenues during the fourth
quarter of 2001. Net cash used in operating activities in 1999 was $33.2
million compared to $14.1 million in 2001. This significant decrease when
compared to the current year is primarily due to a $17.1 million decrease in the
net loss over the past two fiscal years.
Net cash flows from investing activities provided us with $1.9 million
during 2001, compared to $25.2 million and $20.3 million of cash provided in
2000 and 1999, respectively. The cash provided in 2001 resulted from the sale
of our marketable securities offset by capital expenditures for the year. The
cash provided in 2000 resulted primarily from the sale of $20.0 million of
marketable securities and the sale of Center Laboratories for approximately $6.0
million. This cash was used to fund our fiscal 2000 operations and debt
repayments. The cash provided in 1999 was from proceeds from the sale of
marketable securities offset by the purchase of marketable securities and
capital expenditures. This cash was used to fund operations in 1999 and debt
repayments. Expenditures for property and equipment totaled $840,000,
$1.2 million and $3.3 million in 2001, 2000 and 1999, respectively. We
currently expect to spend approximately $500,000 in 2002 for capital equipment,
including expenditures to upgrade certain manufacturing operations to improve
efficiencies and to assure ongoing compliance with regulatory requirements. We
also expect to begin a major renovation of the roof at our Diamond manufacturing
facility with an estimated cost of $1.0-$1.5 million. We expect to finance
these expenditures through available cash, equipment leases and secured debt
facilities.
Net cash flows from financing activities provided $14.8 million in cash in
2001, used $7.6 million in 2000 and provided $8.4 million in 1999. Our primary
sources of cash from financing activities in 2001 were two private placements of
our common stock in February and December with net proceeds of approximately
$11.0 million and borrowings under our credit facility of $5.7 million. We
repaid debt and capital lease obligations totaling $2.0 million in 2001. Our
primary use of cash in 2000 was the repayment of debt and capital lease
obligations totaling nearly $8.5 million. The primary source of cash in 1999
was the public offering of common stock in December which provided us with net
proceeds of approximately $13.3 million. We also borrowed an additional
$971,000 under our available credit facilities. We used cash to repay
$6.5 million of debt and capital lease obligations.
Our primary short-term needs for capital, which are subject to change, are
for our continuing research and development efforts, our sales, marketing and
administrative activities, working capital associated with increased product
sales and capital expenditures relating to developing and expanding our
manufacturing operations. Our future liquidity and capital requirements will
depend on numerous factors, including the extent to which our present and future
products gain market acceptance, the extent to which products or technologies
under research or development are successfully developed, the timing of
regulatory actions regarding our products, the costs and timing of expansion of
sales, marketing and manufacturing activities, the cost, timing and business
management of current and potential acquisitions and contingent liabilities
associated with such acquisitions, the procurement and enforcement of patents
important to our business and the results of competition.
Our financial plan for 2002 indicates that our cash on hand, together with
up to $9.1 million of borrowings expected to be available under our revolving
line of credit, should be sufficient to fund our operations through 2002 and
into 2003. However, our actual results may differ from this plan, and we may
need to raise additional capital in the future. If necessary, we expect to
raise these additional funds through one or more of the following: (1)
obtaining new loans secured by unencumbered assets; (2) sale of various products
or marketing rights; (3) licensing of technology; (4) sale of various assets;
and (5) sale of additional equity or debt securities. If we cannot raise the
additional funds through these options on acceptable terms or with the necessary
timing, management could also reduce discretionary spending to decrease our cash
burn rate and extend the currently available cash and cash equivalents, and
available borrowings. See "Factors that May Affect Results."
A summary of our contractual obligations at December 31, 2001 is shown
below.
PAYMENTS DUE BY PERIOD
-------------------------------------------------------------------------------------
TOTAL LESS THAN 1-3 4-5 AFTER
--------------- 1 YEAR YEARS YEARS 5 YEARS
--------------- --------------- --------------- ---------------
CONTRACTUAL OBLIGATIONS
Long-Term Debt $ 2,763 $ 711 $ 2,052 $ - $ -
Capital Lease Obligations 161 104 57 - -
Line of Credit 5,737 - 5,737 - -
Operating Leases 2,580 887 1,607 86 -
Unconditional Purchase 2,392 91 1,655 646 -
Obligations
Other Long-Term Obligations 125 - - - 125
---------- ---------- ---------- ---------- ---------
Total Contractual Cash $ 13,758 $ 1,793 $ 11,108 $ 732 $ 125
Obligations ========== ========== ========== ========== =========
NET OPERATING LOSS CARRYFORWARDS
As of December 31, 2001, we had a net operating loss carryforward, or NOL,
of approximately $164.5 million and approximately $2.7 million of research and
development tax credits available to offset future federal income taxes. The
NOL and tax credit carryforwards, which are subject to alternative minimum tax
limitations and to examination by the tax authorities, expire from 2003 to 2021.
Our acquisition of Diamond resulted in a "change of ownership" under the
provisions of Section 382 of the Internal Revenue Code of 1986, as amended. As
such, we will be limited in the amount of NOL's incurred prior to the merger
that we may utilize to offset future taxable income. This limitation will total
approximately $4.7 million per year for periods subsequent to the Diamond
acquisition. Similar limitations also apply to utilization of research and
development tax credits to offset taxes payable. We believe that this
limitation may affect the eventual utilization of our total NOL carryforwards.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets." These statements prohibit pooling-of-interests accounting
for transactions initiated after June 30, 2001, require the use of the purchase
method of accounting for all combinations after June 30, 2001, and establish a
new accounting standard for goodwill acquired in a business combination. These
continue to require recognition of goodwill as an asset, but do not permit
amortization of goodwill as previously required by APB Opinion No. 17,
"Intangible Assets." Furthermore, certain intangible assets that are not
separable from goodwill will also not be amortized. However, goodwill and other
intangible assets will be subject to periodic (at least annual) tests for
impairment, and recognition of impairment losses in the future could be required
based on a new methodology for measuring impairments prescribed by these
pronouncements. The revised standards include transition rules and requirements
for identification, valuation and recognition of a much broader list of
intangibles as part of business combinations than prior practice, most of which
will continue to be amortized. The potential prospective impact of these
pronouncements on the Company's financial statements may significantly affect
the results of future periodic tests for impairment. The amount and timing of
non-cash charges related to intangibles acquired in business combinations will
change from prior practice. The Company recorded $211,000 of amortization
expense during the year ended December 31, 2001 relating to goodwill that will
not be amortized beginning January 1, 2002. Furthermore, the Company will be
required to conduct an annual impairment test of its goodwill. The Company has
not yet quantified the impact, if any, that this impairment test will have on
the results of its operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement establishes accounting standards for
recognition and measurement of a liability for an asset retirement obligation
and the associated asset retirement cost. It requires an entity to recognize
the fair value of a liability for an asset retirement obligation in the period
in which it is incurred if a reasonable estimate can be made. The Company is
required to adopt this statement in its fiscal year 2003. The Company does not
believe that this statement will materially impact its results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement supersedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of" and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." This statement applies to recognized long-
lived assets of an entity to be held and used, or to be disposed of. This
statement does not apply to goodwill, intangible assets not being amortized,
financial instruments, and deferred tax assets. This statement requires an
impairment loss to be recorded for assets to be held and used when the carrying
amount of a long-lived asset is not recoverable and exceeds its fair value. An
asset that is classified as held for sale shall be recorded at the lower of its
carrying amount or fair value less cost to sell. The Company is required to
adopt this statement for the first quarter of 2002. The Company does not
believe that this statement will materially impact its results of operations.
FACTORS THAT MAY AFFECT RESULTS
Our future operating results may vary substantially from period to period
due to a number of factors, many of which are beyond our control. The following
discussion highlights these factors and the possible impact of these factors on
future results of operations. If any of the following factors actually occur,
our business, financial condition or results of operations could be harmed. In
that case, the price of our common stock could decline, and you could experience
losses on your investment.
WE ANTICIPATE FUTURE LOSSES AND MAY NOT BE ABLE TO ACHIEVE PROFITABILITY IN
THE FUTURE.
We have incurred net losses since our inception in 1988 and, as of December
31, 2001, we had an accumulated deficit of $193.2 million. We anticipate that
we will continue to incur additional operating losses in the near term. These
losses have resulted principally from expenses incurred in our research and
development programs and from sales and marketing and general and administrative
expenses. Even if we achieve profitability, we may not be able to sustain or
increase profitability on a quarterly or annual basis. If we cannot achieve or
sustain profitability, we may not be able to fund our expected cash needs or
continue our operations.
WE ARE NOT GENERATING POSITIVE CASH FLOW AND MAY NEED ADDITIONAL CAPITAL IN
THE FUTURE AND ANY REQUIRED CAPITAL MAY NOT BE AVAILABLE ON ACCEPTABLE TERMS OR
AT ALL.
We have incurred negative cash flow from operations since inception in
1988. For the year ended December 31, 2001, we had total revenues of $48.3
million and a net loss of $18.7 million. Our financial plan for 2002 indicates
that our cash on hand, together with up to $9.1 million of borrowings expected
to be available under our revolving line of credit should be sufficient to fund
our operations through 2002 and into 2003. However, our actual results may
differ from this plan, and we may need to raise additional capital in the
future.
We recently amended our credit agreement with our lender to obtain a waiver
of certain covenants under our revolving line of credit as of December 31, 2001,
set the financial covenants for 2002 and extend the maturity date of the loans
an additional year to May 31, 2003. If our lender imposes loan covenants or
other credit requirements that would prevent us from accessing the full amount
of our line of credit, we would need to raise additional capital to fund any
shortfall from our borrowings expected to be available under the revolving line
of credit. We anticipate that any additional capital would be raised through
one or more of the following:
* obtaining new loans secured by unencumbered assets;
* sale of various products or marketing rights;
* licensing of technology;
* sale of various assets; and
* sale of additional equity or debt securities.
Additional capital may not be available on acceptable terms, if at all.
The public markets may remain unreceptive to equity financings, and we may not
be able to obtain additional private equity financing. Furthermore, amounts we
expect to be available under our existing revolving credit facility may not be
available, and other lenders could refuse to provide us with additional debt
financing. Furthermore, any additional equity financing would likely be
dilutive to stockholders, and additional debt financing, if available, may
include restrictive covenants which may limit our currently planned operations
and strategies. If adequate funds are not available, we may be required to
curtail our operations significantly and reduce discretionary spending to extend
the currently available cash resources, or to obtain funds by entering into
collaborative agreements or other arrangements on unfavorable terms, all of
which would likely have a material adverse effect on our business, financial
condition and our ability to continue as a going concern.
WE MUST MAINTAIN VARIOUS FINANCIAL AND OTHER COVENANTS UNDER OUR REVOLVING
LINE OF CREDIT AGREEMENT.
Under our revolving line of credit agreement with Wells Fargo Business
Credit, we are required to comply with various financial and non-financial
covenants, and we have made various representations and warranties. Among the
financial covenants are requirements for monthly minimum book net worth, minimum
quarterly net income and minimum cash balances or liquidity levels. We have
obtained modifications and a waiver of these covenants in the past.
Failure to comply with any of the covenants, representations or warranties
could result in our being in default under the loan and could cause all
outstanding amounts to become immediately due and payable or impact our ability
to borrow under the agreement. All amounts due under the credit facility mature
on May 31, 2003. We intend to rely on available borrowings under the credit
agreement to fund our operations through 2002 and into 2003. If we are unable
to borrow funds under this agreement, we will need to raise additional capital
to fund our cash needs and continue our operations.
WE HAVE LIMITED RESOURCES TO DEVOTE TO PRODUCT DEVELOPMENT AND
COMMERCIALIZATION. IF WE ARE NOT ABLE TO DEVOTE ADEQUATE RESOURCES TO PRODUCT
DEVELOPMENT AND COMMERCIALIZATION, WE MAY NOT BE ABLE TO DEVELOP OUR PRODUCTS.
Our strategy is to develop a broad range of products addressing companion
animal healthcare. We believe that our revenue growth and profitability, if
any, will substantially depend upon our ability to:
* improve market acceptance of our current products;
* complete development of new products; and
* successfully introduce and commercialize new products.
We have introduced some of our products only recently and many of our
products are still under development. Among our recently introduced products
are SOLO STEP CH Batch Test Strips for testing heartworm infection in dogs,
E.R.D.-SCREEN Urine Test for detecting albumin in canine urine, ALLERCEPT E-
SCREEN Test for assessing allergies in dogs, and SPOTCHEMT EZ, a compact system
for measuring animal blood chemistry. We currently have under development or in
preliminary clinical trials a number of products, including a gene based therapy
for canine cancer. Because we have limited resources to devote to product
development and commercialization, any delay in the development of one product
or reallocation of resources to product development efforts that prove
unsuccessful may delay or jeopardize the development of our other product
candidates. If we fail to develop new products and bring them to market, our
ability to generate revenues will decrease.
In addition, our products may not achieve satisfactory market acceptance,
and we may not successfully commercialize them on a timely basis, or at all. If
our products do not achieve a significant level of market acceptance, demand for
our products will not develop as expected and it is unlikely that we ever will
become profitable.
WE MUST OBTAIN AND MAINTAIN COSTLY REGULATORY APPROVALS IN ORDER TO MARKET
OUR PRODUCTS.
Many of the products we develop and market are subject to extensive
regulation by one or more of the USDA, the FDA, the EPA and foreign regulatory
authorities. These regulations govern, among other things, the development,
testing, manufacturing, labeling, storage, pre-market approval, advertising,
promotion, sale and distribution of our products. Satisfaction of these
requirements can take several years and time needed to satisfy them may vary
substantially, based on the type, complexity and novelty of the product.
Our Flu AVERT I.N. Vaccine, SOLO STEP CH, SOLO STEP FH and SOLO STEP Batch
Test Strips each have received regulatory approval in the United States by the
USDA. In addition, the Flu AVERT I.N. Vaccine has been approved in Canada by
the CFIA. SOLO STEP CH and SOLO STEP Batch Test Strips are pending approval by
the CFIA. SOLO STEP CH has also been approved by the Japanese Ministry of
Agriculture, Forestry and Fisheries. In addition, our Trivalent
Intranasal/Intraocular Vaccine has also received United States regulatory
approval. U.S. regulatory approval by the USDA is currently pending for our
Feline ImmuCheck Assay, Canine Cancer Gene Therapy, Giardia + Crypto-Screen
Fecal Test and Trivalent Intranasal/Intraocular Vaccine - Second Generation
products.
The effect of government regulation may be to delay or to prevent marketing
of our products for a considerable period of time and to impose costly
procedures upon our activities. We have experienced in the past, and may
experience in the future, difficulties that could delay or prevent us from
obtaining the regulatory approval or license necessary to introduce or market
our products. For example, the Flu AVERT I.N. vaccine for equine influenza was
not approved until six months after the date on which we expected approval.
This delay caused us to miss the initial primary selling season for equine
influenza vaccines, and we believe it delayed the initial market acceptance of
this product. Regulatory approval of our products may also impose limitations
on the indicated or intended uses for which our products may be marketed.
Among the conditions for certain regulatory approvals is the requirement
that our manufacturing facilities or those of our third party manufacturers
conform to current Good Manufacturing Practices or other manufacturing
regulations, which include requirements relating to quality control and quality
assurance as well as maintenance of records and documentation. The USDA, FDA
and foreign regulatory authorities strictly enforce manufacturing regulatory
requirements through periodic inspections. If any regulatory authority
determines that our manufacturing facilities or those of our third party
manufacturers do not conform to appropriate manufacturing requirements, we or
the manufacturers of our products may be subject to sanctions, including warning
letters, product recalls or seizures, injunctions, refusal to permit products to
be imported into or exported out of the United States, refusals of regulatory
authorities to grant approval or to allow us to enter into government supply
contracts, withdrawals of previously approved marketing applications, civil
fines and criminal prosecutions.
FACTORS BEYOND OUR CONTROL MAY CAUSE OUR OPERATING RESULTS TO FLUCTUATE, AND
SINCE MANY OF OUR EXPENSES ARE FIXED, THIS FLUCTUATION COULD CAUSE OUR STOCK
PRICE TO DECLINE.
We believe that our future operating results will fluctuate on a quarterly
basis due to a variety of factors, including:
* results from Diamond;
* the introduction of new products by us or by our competitors;
* our recent change in distribution strategy;
* market acceptance of our current or new products;
* regulatory and other delays in product development;
* product recalls;
* competition and pricing pressures from competitive products;
* manufacturing delays;
* shipment problems;
* product seasonality; and
* changes in the mix of products sold.
We have high operating expenses for personnel, new product development and
marketing. Many of these expenses are fixed in the short term. If any of the
factors listed above cause our revenues to decline, our operating results could
be substantially harmed.
Our operating results in some quarters may not meet the expectations of
stock market analysts and investors. In that case, our stock price probably
would decline.
OUR LARGEST CUSTOMER ACCOUNTED FOR OVER 15% OF OUR REVENUES FOR THE PREVIOUS
TWO YEARS, AND THE LOSS OF THAT CUSTOMER OR OTHER CUSTOMERS COULD HARM OUR
OPERATING RESULTS.
We currently derive a substantial portion of our revenues from sales by our
subsidiary, Diamond, which manufactures several of our products and products for
other companies in the animal health industry. Revenues from one contract
between Diamond and Agri Laboratories, Ltd., comprised approximately 16% of our
total revenues in 2001 and 17% of our total revenues in 2000. That contract
expires in 2004 and is automatically renewed unless either party does not wish
to renew. We are currently in negotiations with Agri Laboratories to modify and
extend this agreement, but there is no assurance we will be successful. If Agri
Laboratories does not continue to purchase from Diamond and if we fail to
replace the lost revenue with revenues from other customers, our business could
be substantially harmed. In addition, sales from our next three largest
customers accounted for an aggregate of approximately 12% of our revenues in
2001. If we are unable to maintain our relationships with one or more of these
customers, our sales may decline.
WE OPERATE IN A HIGHLY COMPETITIVE INDUSTRY, WHICH COULD RENDER OUR PRODUCTS
OBSOLETE OR SUBSTANTIALLY LIMIT THE VOLUME OF PRODUCTS THAT WE SELL. THIS WOULD
LIMIT OUR ABILITY TO COMPETE AND ACHIEVE PROFITABILITY.
We compete with independent animal health companies and major
pharmaceutical companies that have animal health divisions. Companies with a
significant presence in the animal health market, such as Wyeth, Bayer, IDEXX,
Intervet, Merial, Novartis, Pfizer, Pharmacia and Schering Plough, have
developed or are developing products that compete with our products or would
compete with them if developed. These competitors may have substantially
greater financial, technical, research and other resources and larger, better-
established marketing, sales, distribution and service organizations than us.
In addition, we believe that IDEXX prohibits its distributors from selling
competitors' products, including our SOLO STEP heartworm diagnostic products
and medical diagnostic instruments. Our competitors frequently offer broader
product lines and have greater name recognition than we do. Our competitors may
develop or market technologies or products that are more effective or
commercially attractive than our current or future products or that would render
our technologies and products obsolete. Further, additional competition could
come from new entrants to the animal healthcare market. Moreover, we may not
have the financial resources, technical expertise or marketing, distribution or
support capabilities to compete successfully. If we fail to compete
successfully, our ability to achieve profitability will be limited.
WE MAY BE UNABLE TO SUCCESSFULLY MARKET AND DISTRIBUTE OUR PRODUCTS AND HAVE
RECENTLY MODIFIED OUR DISTRIBUTION STRATEGY.
The market for companion animal healthcare products is highly fragmented,
with discount stores and specialty pet stores accounting for a substantial
percentage of sales of certain products. Because our proprietary products are
available only by prescription and our medical instruments require technical
training, we sell our companion animal health products only to veterinarians.
Therefore, we may fail to reach a substantial segment of the potential market.
We currently market our products in the United States to veterinarians
through approximately 20 independent third party distributors and through a
direct sales force. Nearly one-half of these domestic distributors carry the
full line of our pharmaceutical, vaccine, diagnostic and instrumentation
products. We have recently begun to rely on distributors for a greater portion
of our sales and therefore need to increase our training efforts directed at the
sales personnel of our distributors. To be successful, we will have to continue
to develop and train our direct sales force as well as sales personnel of our
distributors and rely on other arrangements with third parties to market,
distribute and sell our products. In addition, most of our distributor
agreements can be terminated on 60 days' notice and IDEXX, our largest
competitor, prohibits its distributors from selling competitors' products,
including ours. For example, one of our largest distributors recently informed
us that they would no longer carry our heartworm diagnostic products or our
chemistry or hematology instruments because they wish to carry products from one
of our competitors.
We may not successfully develop and maintain marketing, distribution or
sales capabilities, and we may not be able to make arrangements with third
parties to perform these activities on satisfactory terms. If our marketing and
distribution strategy is unsuccessful, our ability to sell our products will be
negatively impacted and our revenues will decrease. Furthermore, the recent
change in our distribution strategy and our expected increase in sales from
distributors and decrease in direct sales may have a negative impact on our
gross margins.
WE HAVE GRANTED THIRD PARTIES SUBSTANTIAL MARKETING RIGHTS TO CERTAIN OF OUR
EXISTING PRODUCTS AS WELL AS PRODUCTS UNDER DEVELOPMENT. IF THE THIRD PARTIES
ARE NOT SUCCESSFUL IN MARKETING OUR PRODUCTS OUR SALES MAY NOT INCREASE.
Our agreements with our corporate marketing partners generally contain no
minimum purchase requirements in order for them to maintain their exclusive or
co-exclusive marketing rights. Currently, Novartis Agro K.K. markets and
distributes SOLO STEP CH in Japan, and Novartis Animal Health Canada, Inc.
distributes our FLU AVERT I.N. vaccine in Canada. In addition, we have entered
into agreements with Novartis and Eisai Inc. to market or co-market certain of
the products that we are currently developing. Also, Nestle Purina Petcare has
exclusive rights to license our technology for nutritional applications for dogs
and cats. One or more of these marketing partners may not devote sufficient
resources to marketing our products. Furthermore, there is nothing to prevent
these partners from pursuing alternative technologies or products that may
compete with our products. In the future, third party marketing assistance may
not be available on reasonable terms, if at all. If any of these events occur,
we may not be able to commercialize our products and our sales will decline.
WE MAY FACE COSTLY INTELLECTUAL PROPERTY DISPUTES.
Our ability to compete effectively will depend in part on our ability to
develop and maintain proprietary aspects of our technology and either to operate
without infringing the proprietary rights of others or to obtain rights to
technology owned by third parties. We have United States and foreign-issued
patents and are currently prosecuting patent applications in the United States
and with various foreign countries. Our pending patent applications may not
result in the issuance of any patents or any issued patents that will offer
protection against competitors with similar technology. Patents we receive may
be challenged, invalidated or circumvented in the future or the rights created
by those patents may not provide a competitive advantage. We also rely on trade
secrets, technical know-how and continuing invention to develop and maintain our
competitive position. Others may independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to our trade
secrets.
The biotechnology and pharmaceutical industries have been characterized by
extensive litigation relating to patents and other intellectual property rights.
In 1998, Synbiotics Corporation filed a lawsuit against us alleging infringement
of a Synbiotics patent relating to heartworm diagnostic technology, and this
litigation remains ongoing. We may become subject to additional patent
infringement claims and litigation in the United States or other countries or
interference proceedings conducted in the United States Patent and Trademark
Office, or USPTO, to determine the priority of inventions. The defense and
prosecution of intellectual property suits, USPTO interference proceedings, and
related legal and administrative proceedings are costly, time-consuming and
distracting. We may also need to pursue litigation to enforce any patents
issued to us or our collaborative partners, to protect trade secrets or know-how
owned by us or our collaborative partners, or to determine the enforceability,
scope and validity of the proprietary rights of others. Any litigation or
interference proceeding will result in substantial expense to us and significant
diversion of the efforts of our technical and management personnel. Any adverse
determination in litigation or interference proceedings could subject us to
significant liabilities to third parties. Further, as a result of litigation or
other proceedings, we may be required to seek licenses from third parties which
may not be available on commercially reasonable terms, if at all.
OUR TECHNOLOGY AND THAT OF OUR COLLABORATORS MAY BECOME THE SUBJECT OF LEGAL
ACTION.
We license technology from a number of third parties, including Quidel
Corporation, Genzyme Corporation, Diagnostic Chemicals, Ltd., Valentis, Inc.,
Corixa Corporation, Roche, New England Biolabs, Inc. and Hybritech Inc., as well
as a number of research institutions and universities. The majority of these
license agreements impose due diligence or milestone obligations on us, and in
some cases impose minimum royalty and/or sales obligations on us, in order for
us to maintain our rights under these agreements. Our products may incorporate
technologies that are the subject of patents issued to, and patent applications
filed by, others. As is typical in our industry, from time to time we and our
collaborators have received, and may in the future receive, notices from third
parties claiming infringement and invitations to take licenses under third party
patents. It is our policy that when we receive such notices, we conduct
investigations of the claims they assert. With respect to the notices we have
received to date, we believe, after due investigation, that we have meritorious
defenses to the infringement claims asserted. Any legal action against us or
our collaborators may require us or our collaborators to obtain one or more
licenses in order to market or manufacture affected products or services.
However, we or our collaborators may not be able to obtain licenses for
technology patented by others on commercially reasonable terms, we may not be
able to develop alternative approaches if unable to obtain licenses, or current
and future licenses may not be adequate for the operation of our businesses.
Failure to obtain necessary licenses or to identify and implement alternative
approaches could prevent us and our collaborators from commercializing our
products under development and could substantially harm our business.
WE HAVE LIMITED MANUFACTURING EXPERIENCE AND CAPACITY AND RELY SUBSTANTIALLY
ON THIRD-PARTY MANUFACTURERS. THE LOSS OF ANY THIRD-PARTY MANUFACTURERS COULD
LIMIT OUR ABILITY TO LAUNCH OUR PRODUCTS IN A TIMELY MANNER, OR AT ALL.
To be successful, we must manufacture, or contract for the manufacture of,
our current and future products in compliance with regulatory requirements, in
sufficient quantities and on a timely basis, while maintaining product quality
and acceptable manufacturing costs. In order to increase our manufacturing
capacity, we acquired Diamond in April 1996.
We currently rely on third parties to manufacture those products we do not
manufacture at our Diamond facility. We currently have supply agreements with
Quidel Corporation for various manufacturing services relating to our point-of-
care diagnostic tests, with Centaq, Inc. for the manufacture of our own allergy
immunotherapy treatment products and with various manufacturers for the supply
of our veterinary diagnostic and patient monitoring instruments. Our
manufacturing strategy presents the following risks:
* Delays in the scale-up to quantities needed for product development
could delay regulatory submissions and commercialization of our products
in development;
* Our manufacturing facilities and those of some of our third-party
manufacturers are subject to ongoing periodic unannounced inspection by
regulatory authorities, including the FDA, USDA and other federal and state
agencies for compliance with strictly enforced Good Manufacturing Practices
regulations and similar foreign standards, and we do not have control over
our third party manufacturers' compliance with these regulations and
standards;
* If we need to change to other commercial manufacturing contractors for
certain of our products, additional regulatory licenses or approvals must
be obtained for these contractors prior to our use. This would require
new testing and compliance inspections. Any new manufacturer would have
to be educated in, or develop substantially equivalent processes necessary
for the production of our products;
* If market demand for our products increases suddenly, our current
manufacturers might not be able to fulfill our commercial needs, which
would require us to seek new manufacturing arrangements and may result in
substantial delays in meeting market demand; and
* We may not have intellectual property rights, or may have to share
intellectual property rights, to any improvements in the manufacturing
processes or new manufacturing processes for our products.
Any of these factors could delay commercialization of our products under
development, interfere with current sales, entail higher costs and result in our
being unable to effectively sell our products.
Our agreements with various suppliers of the veterinary medical instruments
require us to meet minimum annual sales levels to maintain our position as the
exclusive distributor of these instruments. We may not meet these minimum sales
levels in the future, and maintain exclusivity over the distribution and sale of
these products. If we are not the exclusive distributor of these products,
competition may increase.
WE DEPEND ON PARTNERS IN OUR RESEARCH AND DEVELOPMENT ACTIVITIES. IF OUR
CURRENT PARTNERSHIPS AND COLLABORATIONS ARE NOT SUCCESSFUL, WE MAY NOT BE ABLE
TO DEVELOP OUR TECHNOLOGIES OR PRODUCTS.
For several of our proposed products, we are dependent on collaborative
partners to successfully and timely perform research and development activities
on our behalf. For example, we jointly developed several point-of-care
diagnostic products with Quidel Corporation, and Quidel manufactures these
products. We license DNA delivery and manufacturing technology from Valentis
Inc. and distribute chemistry analyzers for Arkray, Inc. We also have worked
with i-STAT Corporation to develop portable clinical analyzers for dogs and
Diagnostic Chemicals, Ltd. to develop the E.R.D.-SCREEN Urine Test, and we are
working with 3-Dimensional Pharmaceuticals, Inc. to develop pharmaceutical
products. One or more of our collaborative partners may not complete research
and development activities on our behalf in a timely fashion, or at all. If our
collaborative partners fail to complete research and development activities, or
fail to complete them in a timely fashion, our ability to develop technologies
and products will be impacted negatively and our revenues will decline.
WE DEPEND ON KEY PERSONNEL FOR OUR FUTURE SUCCESS. IF WE LOSE OUR KEY
PERSONNEL OR ARE UNABLE TO ATTRACT AND RETAIN ADDITIONAL PERSONNEL, WE MAY BE
UNABLE TO ACHIEVE OUR GOALS.
Our future success is substantially dependent on the efforts of our senior
management and scientific team, particularly Dr. Robert B. Grieve, our Chairman
and Chief Executive Officer. The loss of the services of members of our senior
management or scientific staff may significantly delay or prevent the
achievement of product development and other business objectives. Because of
the specialized scientific nature of our business, we depend substantially on
our ability to attract and retain qualified scientific and technical personnel.
There is intense competition among major pharmaceutical and chemical companies,
specialized biotechnology firms and universities and other research institutions
for qualified personnel in the areas of our activities. Although we have an
employment agreement with Dr. Grieve, he is an at-will employee, which means
that either party may terminate his employment at any time without prior notice.
If we lose the services of, or fail to recruit, key scientific and technical
personnel, the growth of our business could be substantially impaired. We do
not maintain key person life insurance for any of our key personnel.
WE MAY FACE PRODUCT RETURNS AND PRODUCT LIABILITY LITIGATION AND THE EXTENT
OF OUR INSURANCE COVERAGE IS LIMITED. IF WE BECOME SUBJECT TO PRODUCT LIABILITY
CLAIMS RESULTING FROM DEFECTS IN OUR PRODUCTS, WE MAY FAIL TO ACHIEVE MARKET
ACCEPTANCE OF OUR PRODUCTS AND OUR SALES COULD DECLINE.
The testing, manufacturing and marketing of our current products as well as
those currently under development entail an inherent risk of product liability
claims and associated adverse publicity. Following the introduction of a
product, adverse side effects may be discovered. Adverse publicity regarding
such effects could affect sales of our other products for an indeterminate time
period. To date, we have not experienced any material product liability claims,
but any claim arising in the future could substantially harm our business.
Potential product liability claims may exceed the amount of our insurance
coverage or may be excluded from coverage under the terms of the policy. We may
not be able to continue to obtain adequate insurance at a reasonable cost, if at
all. In the event that we are held liable for a claim against which we are not
indemnified or for damages exceeding the $10 million limit of our insurance
coverage or which results in significant adverse publicity against us, we may
lose revenue and fail to achieve market acceptance.
WE MAY BE HELD LIABLE FOR THE RELEASE OF HAZARDOUS MATERIALS, WHICH COULD
RESULT IN EXTENSIVE CLEAN UP COSTS OR OTHERWISE HARM OUR BUSINESS.
Our products and development programs involve the controlled use of
hazardous and biohazardous materials, including chemicals, infectious disease
agents and various radioactive compounds. Although we believe that our safety
procedures for handling and disposing of such materials comply with the
standards prescribed by applicable local, state and federal regulations, we
cannot eliminate the risk of accidental contamination or injury from these
materials. In the event of such an accident, we could be held liable for any
fines, penalties, remediation costs or other damages that result. Our liability
for the release of hazardous materials could exceed our resources, which could
lead to a shutdown of our operations. In addition, we may incur substantial
costs to comply with environmental regulations as we expand our manufacturing
capacity.
WE EXPECT TO EXPERIENCE VOLATILITY IN OUR STOCK PRICE, WHICH MAY AFFECT OUR
ABILITY TO RAISE CAPITAL IN THE FUTURE OR MAKE IT DIFFICULT FOR INVESTORS TO
SELL THEIR SHARES.
The securities markets have experienced significant price and volume
fluctuations and the market prices of securities of many public biotechnology
companies have in the past been, and can in the future be expected to be,
especially volatile. For example, in the last twelve months our closing stock
price has ranged from a low of $0.50 to a high of $1.50. Fluctuations in the
trading price or liquidity of our common stock may adversely affect our ability
to raise capital through future equity financings. Factors that may have a
significant impact on the market price and marketability of our common stock
include:
* announcements of technological innovations or new products by us or by
our competitors;
* our quarterly operating results;
* releases of reports by securities analysts;
* developments or disputes concerning patents or proprietary rights;
* regulatory developments;
* developments in our relationships with collaborative partners;
* changes in regulatory policies;
* litigation;
* economic and other external factors; and
* general market conditions.
In the past, following periods of volatility in the market price of a
company's securities, securities class action litigation has often been
instituted. If a securities class action suit is filed against us, we would
incur substantial legal fees and our management's attention and resources would
be diverted from operating our business in order to respond to the litigation.
IF WE FAIL TO MEET NASDAQ NATIONAL MARKET LISTING REQUIREMENTS, OUR COMMON
STOCK MAY BE DELISTED AND BECOME ILLIQUID.
Our common stock is currently listed on the Nasdaq National Market. Nasdaq
has requirements we must meet in order to remain listed on the Nasdaq National
Market. If we continue to experience losses from our operations or we are
unable to raise additional funds as needed, we might not be able to maintain the
standards for continued quotation on the Nasdaq National Market, including a
minimum bid price requirement of $1.00. During the year ended December 31,
2001, our minimum bid price at times fell below $1.00, and on March 26, 2002,
was $1.06. If the minimum bid price of our common stock were to drop below
$1.00 and remain below $1.00 for 30 consecutive trading days, or if we were
unable to continue to meet Nasdaq's standards for any other reason, our common
stock could be delisted from the Nasdaq National Market.
If as a result of the application of these listing requirements, our common
stock were delisted from the Nasdaq National Market, our stock would become
harder to buy and sell. Further, our stock could be subject to what are known
as the "penny stock" rules. The penny stock rules place additional
requirements on broker-dealers who sell or make a market in such securities.
Consequently, if we were removed from the Nasdaq National Market, the ability or
willingness of broker-dealers to sell or make a market in our common stock might
decline. As a result, the ability for investors to resell shares of our common
stock could be adversely affected.
THE REGISTRATION OF SHARES FROM OUR RECENT PRIVATE PLACEMENT WILL INCREASE
THE NUMBER OF SHARES AVAILABLE FOR RESALE IN THE PUBLIC MARKET.
We recently filed a registration statement on Form S-3 with the SEC to
register the shares sold in a private offering in December 2001. The sale into
the public market of the common stock sold in the offering could adversely
affect the market price of our common stock. Most of our shares of common stock
outstanding are eligible for immediate and unrestricted sale in the public
market at any time. Once the registration statement on Form S-3 is declared
effective, the 7,792,768 shares of common stock covered by the Form S-3 will be
eligible for immediate and unrestricted resale into the public market. The
presence of these additional shares of common stock in the public market may
further depress our stock price.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risk represents the risk of loss that may impact the financial
position, results of operations or cash flows due to adverse changes in
financial and commodity market prices and rates. We are exposed to market risk
in the areas of changes in United States and foreign interest rates and changes
in foreign currency exchange rates as measured against the United States dollar.
These exposures are directly related to our normal operating and funding
activities. During 2001, we entered into a series of forward contracts for the
purchase of Japanese yen to be used for the purchase of inventory. As of
December 31, 2001, all of these forward contracts had been settled.
INTEREST RATE RISK
The interest payable on certain of our lines of credit and other borrowings
is variable based on the United States prime rate and, therefore, is affected by
changes in market interest rates. At December 31, 2001, approximately $8.2
million was outstanding on these lines of credit and other borrowings with a
weighted average interest rate of 5.82%. We manage interest rate risk by
investing excess funds principally in cash equivalents or marketable securities,
which bear interest rates that reflect current market yields. We completed an
interest rate risk sensitivity analysis of these borrowings based on an assumed
1% increase in interest rates. If market rates increase by 1% during the fiscal
year ended December 31, 2002, we would experience an increase in interest
expense of approximately $82,000 based on our outstanding balances as of
December 31, 2001.
FOREIGN CURRENCY RISK
At December 31, 2001, we had a wholly-owned subsidiary located in
Switzerland. Sales from these operations are denominated in Swiss Francs or
Euros, thereby creating exposures to changes in exchange rates. The changes in
the Swiss/U.S. exchange rate or Euro/U.S. exchange rate may positively or
negatively affect our sales, gross margins and retained earnings. We completed
a foreign currency exchange risk sensitivity analysis on an assumed 1% increase
in foreign currency exchange rates. If foreign currency exchange rates
increase/decrease by 1% during the fiscal year ended December 31, 2002, we would
experience an increase/decrease in our foreign currency gain/loss of
approximately $100,000 based on the investment in foreign subsidiaries as of and
for the fiscal year ended December 31, 2001.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
HESKA CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
---------
Report of Independent Public Accountants 36
Consolidated Balance Sheets as of December 31, 2001 and 37
2000
Consolidated Statements of Operations and Comprehensive 38
Loss for years ended December 31, 2001, 2000, and 1999
Consolidated Statements of Shareholders' Equity for the 39
years ended December 31, 2001,2000, and 1999
Consolidated Statements of Cash Flows for the years 40
ended December 31, 2001, 2000, and 1999
Notes to Consolidated Financial Statements 41
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Heska Corporation:
We have audited the accompanying consolidated balance sheets of Heska
Corporation (a Delaware corporation) and subsidiaries as of December 31, 2001
and 2000, and the related consolidated statements of operations and
comprehensive loss, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Heska Corporation and
subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2001, in conformity with accounting principles generally accepted
in the United States.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule of valuation and qualifying
accounts is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial statements. This
schedule has been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/S/ ARTHUR ANDERSEN LLP
Denver, Colorado,
February 1, 2002 except with respect
to the matter discussed in Note 15, as
to which the date is March 13, 2002.
HESKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
DECEMBER 31,
------------------------------------------
2001 2000
-------------------- --------------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,710 $ 3,176
Marketable securities - 2,482
Accounts receivable, net of allowance
for doubtful accounts of $501 and
$431, respectively 10,313 8,433
Inventories 8,589 8,716
Other current assets 1,063 742
---------------- ---------------
Total current assets 25,675 23,549
Property and equipment, net 10,118 12,901
Intangible assets, net 1,400 1,457
Other assets 564 1,253
---------------- ---------------
Total assets $ 37,757 $ 39,160
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 4,263 $ 3,370
Accrued liabilities 6,302 4,258
Deferred revenue 343 467
Line of credit 5,737 -
Current portion of capital lease
obligations 104 584
Current portion of long-term debt 711 1,562
---------------- ---------------
Total current liabilities 17,460 10,241
Capital lease obligations, net of current
portion 57 138
Long-term debt, net of current portion 2,052 2,670
Deferred revenue and other long-term 1,022 1,011
liabilities ---------------- ---------------
Total liabilities 20,591 14,060
---------------- ---------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.001 par value, 25,000,000
shares authorized; none issued or
outstanding - -
Common stock, $.001 par value, 75,000,000
shares authorized; 47,842,198 and
34,072,640 shares issued and outstanding,
respectively 48 34
Additional paid-in capital 211,589 199,789
Deferred compensation (681) -
Accumulated other comprehensive loss (627) (251)
Accumulated deficit (193,163) (174,472)
--------------- --------------
Total stockholders' equity 17,166 25,100
---------------- --------------
Total liabilities and stockholders' equity $ 37,757 $ 39,160
=============== ==============
See accompanying notes to consolidated financial statements
HESKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except per share amounts)
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
2001 2000 1999
------------------ ------------------- --------------------
Revenues:
Products, net of sales returns and allowance $ 46,386 $ 49,549 $ 50,291
Research, development and other 1,897 3,126 885
------------------ ----------------- --------------------
Total revenues 48,283 52,675 51,176
Cost of products sold 28,655 33,299 36,386
------------------ ------------------ --------------------
19,628 19,376 14,790
------------------ ------------------ --------------------
Operating expenses:
Selling and marketing 13,981 14,788 15,073
Research and development 13,565 14,929 17,042
General and administrative 7,882 9,457 11,231
Amortization of intangible assets and
deferred compensation 299 903 2,228
Loss on sale of assets - 204 2,593
Restructuring expenses and other 2,023 435 1,210
----------------- ------------------ --------------------
Total operating expenses 37,750 40,716 49,377
Loss from operations (18,122) (21,340) (34,587)
Other income (expense):
Interest income 324 986 1,611
Interest expense (587) 1,155) (1,857)
Other, net (306) (361) (1,003)
----------------- ------------------ --------------------
Net loss $ (18,691) $ (21,870) $ (35,836)
----------------- ------------------ --------------------
Other comprehensive income (loss):
Foreign currency translation adjustments (133) (121) (88)
Changes in unrealized gain (loss) on
marketable securities 45 246 (376)
Minimum pension liability adjustments (175) - -
Changes in unrealized gain (loss) on
forward contracts 24 - -
------------------ ------------------ --------------------
Other comprehensive income (loss) (239) 125 (464)
------------------ ------------------ --------------------
Comprehensive loss $ (18,930) $ (21,745) $ (36,300)
================== ================== ====================
Basic and diluted net loss per share $ (0.48) $ (0.65) $ (1.31)
================== ================== ====================
Shares used to compute basic and diluted net
loss per share 38,919 33,782 27,290
================== ================== ====================
See accompanying notes to consolidated financial statements
HESKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
COMMON STOCK ADDITIONAL
----------------------------------- PAID-IN DEFERRED
SHARES AMOUNT CAPITAL COMPENSATION
----------------- ----------------- ------------------ ------------------
Balances, December 31, 1998 26,458 $ 26 $ 185,163 $ (1,277)
Issuance of common stock for services 17 - 116 -
Cashless exercise of warrants to purchase
common stock 5 - - -
Issuance of common stock upon the Company's
follow-on public offering, net of $128 of
expenses 6,500 7 13,282 -
Issuance of common stock related to options,
ESPP and other 457 - 595 -
Amortization of deferred compensation - - - 629
Interest on stock subscription receivable - - - -
Payments received on stock subscription
receivable - - - -
Foreign currency translation adjustments - - - -
Unrealized loss on marketable securities - - - -
Net loss - - - -
------------ ------------- ---------------- ----------------
Balances, December 31, 1999 33,437 33 199,156 (648)
Issuance of common stock related to options,
ESPP and other 636 1 633 -
Amortization of deferred compensation - - - 648
Interest/payments on stock subscription
receivable - - - -
Foreign currency translation adjustments - - - -
Unrealized gain on marketable securities - - - -
Net loss - - - -
------------ ------------- --------------- ----------------
Balances, December 31, 2000 34,073 34 199,789 -
Issuance of common stock from private
placements, net of $823 of costs 12,366 13 10,880 -
Issuance of common stock related to options,
ESPP 358 - 211 -
Issuance of restricted stock (Note 8) 1,045 1 709 (710)
Deferred compensation recognized - - - 29
Foreign currency translation adjustments - - - -
Minimum pension liability - - - -
Unrealized gain/loss on forward contracts - - - -
Net loss - - - -
------------ ------------- --------------- ----------------
Balances, December 31, 2001 47,842 $ 48 $ 211,589 $ (681)
============ ============= =============== ================
ACCUMULATED
STOCK OTHER TOTAL
SUBSCRIPTION COMPREHENSIVE ACCUMULATED STOCKHOLDERS
RECEIVABLE INCOME DEFICIT EQUITY
------------------ ------------------ ------------------ --------------
Balances, December 31, 1998 $ (120) $ 88 $ (116,766) $ 67,114
Issuance of common stock for services - - - 116
Cashless exercise of warrants to purchase common - - - -
stock - - - -
Issuance of common stock upon the Company's follow-
on public offering, net of $128 of expenses - - - 13,289
Issuance of common stock related to options, ESPP
and other - - - 595
Amortization of deferred compensation - - - 629
Interest on stock subscription receivable (7) - - (7)
Payments received on stock subscription receivable 3 - - 3
Foreign currency translation adjustments - (88) - (88)
Unrealized loss on marketable securities - (376) - (376)
Net loss - - (35,836) (35,836)
------------ ------------- -------------- ------------
Balances, December 31, 1999 (124) (376) (152,602) 45,439
Issuance of common stock related to options, ESPP
and other - - - 634
Amortization of deferred compensation - - - 648
Interest/payments on stock subscription receivable 124 - - 124
Foreign currency translation adjustments - (121) - (121)
Unrealized gain on marketable securities - 246 - 246
Net loss - - (21,870) (21,870)
------------- -------------- -------------- ------------
Balances, December 31, 2000 - (251) (174,472) 25,100
Issuance of common stock from private placements,
net of $823 of costs - - - -
Issuance of common stock related to options, ESPP - - - 11,814
Issuance of restricted stock (Note 8) - - - (710)
Deferred compensation recognized - - - 29
Foreign currency translation adjustments - (177) - (177)
Minimum pension liability - (175) - (175)
Unrealized gain/loss on forward contracts - (24) - (24)
Net loss - - (18,691) (18,691)
------------- -------------- -------------- ------------
Balances, December 31, 2001 $ - $ (627) $ (193,163) $ 17,166
============= ============== ============== ============
See accompanying notes to consolidated financial statements
HESKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
2001 2000 1999
---------------------- ---------------------- ----------------------
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss $ (18,691) $ (21,870) $ (35,836)
Adjustments to reconcile net loss to cash used
in operating activities:
Depreciation and amortization 3,425 4,066 3,864
Amortization of intangible assets and
deferred compensation 299 903 2,228
Loss on disposition of assets - 445 2,215
Changes in operating assets and liabilities:
Accounts receivable, net (1,880) 155 (2,993)
Inventories 127 2,380 (1,760)
Other current assets (321) 18 (293)
Other long-term assets 689 (229) (1,092)
Accounts payable 893 (2,551) (614)
Accrued liabilities 2,044 449 498
Deferred revenue and other long-term
liabilities (643) 348 592
----------- ----------- -----------
Net cash used in operating activities (14,058) (15,886) (33,191)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash withdrawn from restricted cash account - - 238
Purchase of marketable securities - - (21,229)
Proceeds from sale of marketable securities 2,500 20,000 44,300
Proceeds from sale of subsidiary - 6,000 -
Proceeds from disposition of property and
equipment 196 406 262
Purchases of property and equipment (839) (1,207) (3,296)
----------- ----------- -----------
Net cash provided by investing
activities 1,857 25,199 20,275
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 11,133 634 13,884
Proceeds from stock subscription receivable - 124 3
Proceeds from borrowings 5,737 136 971
Repayments of debt and capital lease obligations (2,039) (8,484) (6,464)
----------- ----------- -----------
Net cash provided by (used in)
financing activities 14,831 (7,590) 8,394
----------- ----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (96) (46) 100
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,534 1,677 (4,422)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,176 1,499 5,921
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 5,710 $ 3,176 $ 1,499
=========== =========== ===========
See accompanying notes to consolidated financial statements
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.ORGANIZATION AND BUSINESS
Heska Corporation ("Heska" or the "Company") is primarily focused on
the discovery, development, manufacturing and marketing of companion animal
health products and delivery of diagnostic services to veterinarians. The
Company currently conducts its operations through two segments. Through its
Companion Animal Health segment, the Company sells pharmaceutical, vaccine and
diagnostic products and veterinary diagnostic and patient monitoring
instruments, offers diagnostic services, and performs a variety of research and
development activities. The operations of this segment are carried out through
the Company's facilities in Fort Collins, Colorado, its wholly owned Swiss
subsidiary, Heska AG. Through its Animal Health segment, the Company
manufactures food animal vaccine and pharmaceutical products that are marketed
and distributed by third parties. The operations of this segment are carried
out through the Company's wholly owned subsidiary Diamond Animal Health, Inc.
("Diamond"), located in Des Moines, Iowa. Until June 2000, the Company
operated through a third segment, Allergy Treatment. This segment operated
through the then wholly owned subsidiary Center Laboratories, Inc., a
manufacturer of allergy immunotherapy products ("Center").
From the Company's inception in 1988 until early 1996, the Company's
operating activities related primarily to research and development activities,
entering into collaborative agreements, raising capital and recruiting
personnel. Prior to 1996, the Company had not received any revenue from the
sale of products. During 1996, Heska grew from being primarily a research and
development concern to a fully-integrated research, development, manufacturing
and marketing company. The Company accomplished this by acquiring Diamond, a
licensed pharmaceutical and biological manufacturing facility, hiring key
employees and support staff, establishing marketing and sales operations to
support new Heska products, and designing and implementing more sophisticated
operating and information systems. The Company also expanded the scope and
level of its scientific and business development activities, increasing the
opportunities for new products. In 1997, the Company introduced additional
products and expanded in the United States through the acquisition of Center, a
Food and Drug Administration ("FDA") and United States Department of
Agriculture ("USDA") licensed manufacturer of allergy immunotherapy products
located in Port Washington, New York, and internationally through the
acquisitions of Heska UK Limited ("Heska UK", formerly Bloxham Laboratories
Limited), a veterinary diagnostic laboratory in Teignmouth, England and Heska AG
(formerly Centre Medical des Grand'Places S.A.) in Fribourg, Switzerland, which
manufactures and markets allergy diagnostic products for use in veterinary and
human medicine, primarily in Europe. Each of the Company's acquisitions during
this period was accounted for under the purchase method of accounting and
accordingly, the Company's financial statements reflect the operations of these
businesses only for the periods subsequent to the respective acquisitions. In
July 1997, the Company established a new subsidiary, Heska AG, located near
Basel, Switzerland, for the purpose of managing its European operations.
During the first quarter of 1998 the Company acquired Heska Waukesha
(formerly Sensor Devices, Inc.), a manufacturer and marketer of patient
monitoring devices used in both animal health and human applications.
During 1999 and 2000, the Company restructured and refocused its business.
The operations of Heska Waukesha were combined with existing operations in Fort
Collins, Colorado and Des Moines, Iowa during the fourth quarter of 1999. The
Heska Waukesha facility was closed in December 1999. In March 2000, the Company
sold Heska UK. The Company recorded a loss on disposition of approximately
$1.0 million during 1999 for this sale. In June 2000, the Company sold Center.
The Company recognized a gain on the sale of approximately $151,000.
The Company has incurred net losses since its inception and anticipates
that it will continue to incur additional net losses in the near term as it
introduces new products, expands its sales and marketing capabilities and
continues its research and development activities. Cumulative net losses from
inception of the Company in 1988 through December 31, 2001 have totaled $193.2
million. During the year ended December 31, 2001, the Company incurred a loss
of approximately $18.7 million and used cash of approximately $14.1 million for
operations.
The Company's primary short-term needs for capital, which are subject to
change, are for its continuing research and development efforts, its sales,
marketing and administrative activities, working capital associated with
increased product sales and capital expenditures relating to developing and
expanding its manufacturing operations. The Company's ability to achieve
profitable operations will depend primarily upon its ability to successfully
market its products, commercialize products that are currently under development
and develop new products. Most of the Company's products are subject to long
development and regulatory approval cycles and there can be no guarantee that
the Company will successfully develop, manufacture or market these products.
There can also be no guarantee that the Company will attain profitability or, if
achieved, will remain profitable on a quarterly or annual basis in the future.
Until the Company attains positive cash flow, the Company may continue to
finance operations with additional equity and debt financing. There can be no
guarantee that such financing will be available when required or will be
obtained under favorable terms.
Our financial plan for 2002 indicates that our available cash and cash
equivalents, together with cash from operations, available borrowings and
borrowings we expect to be available under our revolving line of credit facility
should be sufficient to satisfy our projected cash requirements through 2002 and
into 2003. However, our actual results may differ from this plan and, we may
need to raise additional funds at or before such time. If necessary, we expect
to raise these additional funds through one or more of the following: (1)
obtaining new loans secured by unencumbered assets; (2) sale of various products
or marketing rights; (3) licensing of technology; (4) sale of various assets;
and (5) sale of additional equity or debt securities. If we cannot raise the
additional funds through these options on acceptable terms or with the necessary
timing, management could also reduce discretionary spending to decrease our cash
burn rate and extend the currently available cash and cash equivalents, and
available borrowings.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company and of its wholly-owned subsidiaries since their respective dates of
acquisitions. All material intercompany transactions and balances have been
eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents are stated at cost, which approximates market,
and include short-term highly liquid investments with original maturities of
less than three months. Included in these amounts were Japanese yen with a
value in U.S. dollars of approximately $366,000 which were held in an interest-
bearing multi-currency account of a non-U.S. bank. The Company values its
Japanese yen at the spot market rate as of the balance sheet date. These yen
resulted from settlement of forward contracts entered into for purchases of
inventory throughout fiscal 2001. Changes in the fair value of the yen are
recorded in current earnings. The Company recognized a loss from devaluation of
the yen of approximately $48,000 during the fiscal year ended December 31, 2001.
The Company had no Japanese yen at December 31, 2000.
Marketable Securities and Restricted Investments
The Company classifies its marketable securities as "available-for-sale"
and, accordingly, carries such securities at aggregate fair value. Unrealized
gains or losses, if material, are included as a component of accumulated other
comprehensive income.
At December 31, 2001, the Company had no marketable securities on its
balance sheet. At December 31, 2000, these securities, consisting entirely of
U.S. government agency obligations, had an aggregate amortized cost, using
specific identification, of $2.8 million, with a maximum maturity of
approximately three years. The fair market value of marketable securities at
December 31, 2000 was approximately $2.5 million. Marketable securities at
December 31, 2000 included approximately $281,000 of restricted investments held
as collateral for capital leases (See Note 4) and $2.5 million of short-term
marketable securities, respectively. The Company realized losses on the sale of
certain marketable securities of $22,000 and $111,000 in 2001 and 2000,
respectively. These amounts were previously included in other comprehensive
income as unrealized losses on marketable securities.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a
concentration of credit risk consist of cash and cash equivalents, marketable
securities and accounts receivable. The Company maintains the majority of its
cash, cash equivalents and marketable securities with financial institutions
that management believes are creditworthy in the form of demand deposits, U.S.
government agency obligations and U.S. corporate commercial paper. The Company
has no significant off-balance sheet concentrations of credit risk such as
foreign exchange contracts, options contracts or other foreign hedging
arrangements. Its accounts receivable balances are due primarily from domestic
veterinary clinics and individual veterinarians, and both domestic and
international corporations.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash and cash equivalents,
short-term trade receivables and payables, notes receivable, capital lease
obligations and notes payable. The carrying values of cash and cash equivalents
and short-term trade receivables and payables approximate fair value. The fair
value of notes payable is estimated based on current rates available for similar
debt with similar maturities and collateral, and at December 31, 2001,
approximates the carrying value.
Inventories
Inventories are stated at the lower of cost or market using the first-in,
first-out method. If the cost of inventories exceeds fair market value,
provisions are made to reduce the carrying value to fair market value.
Inventories, net of provisions, consist of the following (in thousands):
DECEMBER 31,
-------------------------------
2001 2000
-------------- --------------
Raw materials $ 2,549 $ 2,219
Work in process 3,223 2,904
Finished goods 2,817 3,593
--------- ---------
$ 8,589 $ 8,716
========= =========
Derivative Instruments and Hedging Activities
The Company utilizes derivative financial instruments to reduce financial
market risks. These instruments may be used to hedge foreign currency, interest
rate and certain equity market exposures of underlying assets, liabilities and
other obligations. The Company does not use derivative financial instruments
for speculative or trading purposes. The Company accounts for its derivative
instruments in accordance with the Statement of Financial Accounting Standards
("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No. 138. This standard requires that all
derivative instruments be recorded on the balance sheet at fair value and
establishes criteria for designation and effectiveness of hedging relationships.
The Company's accounting policies for these instruments are based on whether
they meet the Company's criteria for designation as hedging transactions. The
criteria the Company uses for designating an instrument as a hedge includes the
instrument's effectiveness in risk reduction and one-to-one matching of
derivative instruments to underlying transactions. Gains and losses on currency
forward contracts, and options that are designated and effective as hedges of
anticipated transactions, for which a firm commitment has been attained, are
deferred and recognized in income in the same period that the underlying
transactions are settled. Gains and losses on currency forward contracts,
options and swaps that are designated and effective as hedges of existing
transactions are recognized in income in the same period as losses and gains on
the underlying transactions are recognized and generally offset. Gains and
losses on any instruments not meeting the above criteria are recognized in
income in the current period. If an underlying hedged transaction is terminated
earlier than initially anticipated the offsetting gain or loss on the related
derivative instrument would be recognized in each period until the instrument
matures, is terminated or is sold. See Note 11.
Property, Equipment and Intangible Assets
Property and equipment are recorded at cost and depreciated on a straight-
line or declining balance basis over the estimated useful lives of the related
assets.
Leasehold improvements are amortized over the applicable lease period or
their estimated useful lives, whichever is shorter. Maintenance and repairs are
charged to expense when incurred, and major renewals and improvements are
capitalized.
Intangible assets primarily consist of various assets arising from business
combinations and are amortized using the straight-line method over the period of
expected benefit.
The Company periodically reviews the appropriateness of the remaining life
of its property, equipment and intangible assets considering whether any events
have occurred or conditions have developed which may indicate that the remaining
life requires adjustment. After reviewing the appropriateness of the remaining
life and the pattern of usage of these assets, the Company then assesses their
overall recoverability by determining if the net book value can be recovered
through undiscounted future operating cash flows. Absent any unfavorable
findings, the Company continues to amortize and depreciate its property,
equipment and intangible assets based on the existing estimated life. During
2000, the Company's review of property, equipment and intangible assets
determined that a write-down to fair market value of $355,000 for equipment was
needed. In 1999, the Company's review of property, equipment and intangible
assets determined that a write-down to fair market value of $1.0 million for
equipment and $372,000 for intangible assets was needed. These amounts were
recorded as part of the loss on sale of assets in the accompanying statement of
operations.
Property and equipment consist of the following (in thousands):
DECEMBER 31,
--------------------------------------------------
ESTIMATED
USEFUL LIFE 2001 2000
----------------- ------------------------ ------------------------
Land N/A $ 377 $ 377
Building 10 to 20 years 2,677 2,677
Machinery and equipment 3 to 15 years 19,220 19,426
Leasehold improvements 7 to 15 years 4,435 4,066
---------- ----------
26,709 26,546
Less accumulated depreciation and amortization (16,591) (13,645)
---------- ----------
$ 10,118 12,901
========== ==========
Depreciation and amortization expense for property and equipment was $3.4
million, $4.1 million and $3.9 million for the years ended December 31, 2001,
2000 and 1999, respectively.
Intangible assets consist of the following (in thousands):
DECEMBER 31,
ESTIMATED -------------------------------------------------
USEFUL LIFE 2001 2000
----------------- ----------------------- ------------------------
Customer lists, market presence and goodwill 7 years $ 1,705 $ 1,705
Other intangible assets 2 to 15 years 1,079 793
------------ ------------
2,784 2,498
Less accumulated amortization (1,384) (1,041)
------------ ------------
$ 1,400 $ 1,457
============ ============
Amortization expense for intangible assets was $270,000, $255,000 and $1.6
million for the years ended December 31, 2001, 2000 and 1999, respectively.
Revenue Recognition
The Company generates its revenues through sale of products, licensing of
technology, and sponsored research and development. Revenue is accounted for in
accordance with the guidelines provided by Staff Accounting Bulletin 101
"Revenue Recognition in Financial Statements" (SAB 101). The Company's
policy is to recognize revenue when the applicable revenue recognition criteria
have been met, which generally include the following:
* Persuasive evidence of an arrangement exists;
* Delivery has occurred or services rendered;
* Price is fixed or determinable; and
* Collectibility is reasonably assured.
Revenue from the sale of products is generally recognized after both the
goods are shipped to the customer and acceptance has been received with an
appropriate provision for returns and allowances. The terms of the customer
arrangements generally pass title and risk of ownership to the customer at the
time of shipment. Certain customer arrangements provide for acceptance
provisions. Revenue for these arrangements is not recognized until the
acceptance has been received or the acceptance period has lapsed.
In addition to its direct sales force, the Company utilizes third party
distributors to sell its products. Distributors purchase goods from the
Company, take title to those goods and resell them to their customers in the
distributors' territory.
License revenue under arrangements to sell product or technology rights is
recognized upon the sale and completion by the Company of all obligations under
the agreement. Royalties are recognized as products are sold to customers.
The Company recognizes revenue from sponsored research and development over
the life of the contract as research activities are performed. The revenue
recognized is the lesser of revenue earned under a percentage of completion
method based on total expected revenues or actual non-refundable cash received
to date under the agreement.
Cost of Products Sold
Royalties payable in connection with certain licensing agreements (See Note
12) are reflected in cost of products sold as incurred.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expenses
were $747,000, $1,508,000 and $790,000 for the years ended December 31, 2001,
2000 and 1999, respectively.
Restructuring Expenses and Other
Income Taxes
The Company records a current provision for income taxes based on estimated
amounts payable refundable on tax returns filed or to be filed each year.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in operations in the period that includes the
enactment date. The overall change in deferred tax assets and liabilities for
the period measures the deferred tax expense or benefit for the period. The
measurement of deferred tax assets may be reduced by a valuation allowance based
on judgmental assessment of available evidence if deemed more likely than not
that some or all of the deferred tax assets will not be realized.
Basic and Diluted Net Loss Per Share
Basic net loss per common share is computed using the weighted average
number of common shares outstanding during the period. Diluted net loss per
share is computed using the sum of the weighted average number of shares of
common stock outstanding and, if not anti-dilutive, the effect of outstanding
common stock equivalents (such as stock options and warrants) determined using
the treasury stock method. Since inception, due to the Company's net losses,
all potentially dilative securities are anti-dilutive and as a result, basic and
net loss per share is the same as diluted net loss per share for all periods
presented. At December 31, 2001 and 2000, securities that have been excluded
from diluted net loss per share because they would be anti-dilutive are
outstanding options to purchase 3,901,860 and 3,964,668 shares, respectively, of
the Company's common stock and warrants to purchase zero and 1,165,000 shares,
respectively, of the Company's common stock.
Comprehensive Loss
Comprehensive loss includes net loss adjusted for the results of certain
stockholders' equity changes not reflected in the Consolidated Statements of
Operations. Such changes include foreign currency items, unrealized gains and
losses on certain investments in marketable securities, unrealized gains and
losses on derivative instruments and minimum pension liability adjustments.
Foreign Currency Translation
The functional currency of the Company's international subsidiaries is the
Swiss Franc ("CHF"). Assets and liabilities of the Company's international
subsidiaries are translated using the exchange rate in effect at the balance
sheet date. Revenue and expense accounts are translated using an average of
exchange rates in effect during the period. Cumulative translation gains and
losses, if material, are shown in the consolidated balance sheets as a separate
component of stockholders' equity. Exchange gains and losses arising from
transactions denominated in foreign currencies (i.e., transaction gains and
losses) are recognized as a component of other income (expense) in the current
operations.
Reclassifications
Certain prior year amounts have been reclassified to conform with the 2001
financial statement presentation.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other
Intangible Assets." These statements prohibit pooling-of-interests accounting
for transactions initiated after June 30, 2001, require the use of the purchase
method of accounting for all combinations after June 30, 2001, and establish a
new accounting standard for goodwill acquired in a business combination. These
continue to require recognition of goodwill as an asset, but do not permit
amortization of goodwill as previously required by APB Opinion No. 17,
"Intangible Assets." Furthermore, certain intangible assets that are not
separable from goodwill will also not be amortized. However, goodwill and other
intangible assets will be subject to periodic (at least annual) tests for
impairment, and recognition of impairment losses in the future could be required
based on a new methodology for measuring impairments prescribed by these
pronouncements. The revised standards include transition rules and requirements
for identification, valuation and recognition of a much broader list of
intangibles as part of business combinations than prior practice, most of which
will continue to be amortized. The potential prospective impact of these
pronouncements on the Company's financial statements may significantly affect
the results of future periodic tests for impairment. The amount and timing of
non-cash charges related to intangibles acquired in business combinations will
change from prior practice. The Company recorded $211,000 of amortization
expense during the year ended December 31, 2001 relating to goodwill that will
not be amortized beginning January 1, 2002. Furthermore, the Company will be
required to conduct an annual impairment test of its goodwill. The Company has
not yet quantified the impact, if any, that this impairment test will have on
the results of its operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement establishes accounting standards for
recognition and measurement of a liability for an asset retirement obligation
and the associated asset retirement cost. It requires an entity to recognize
the fair value of a liability for an asset retirement obligation in the period
in which it is incurred if a reasonable estimate can be made. The Company is
required to adopt this statement in its fiscal year 2003. The Company does not
believe that this statement will materially impact its financial position or
results of its operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement supersedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed of" and the accounting and reporting provisions of APB
Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." This statement applies to recognized long-
lived assets of an entity to be held and used, or to be disposed of. This
statement does not apply to goodwill, intangible assets not being amortized,
financial instruments, and deferred tax assets. This statement requires an
impairment loss to be recorded for assets to be held and used when the carrying
amount of a long-lived asset is not recoverable and exceeds its fair value. An
asset that is classified as held for sale shall be recorded at the lower of its
carrying amount or fair value less cost to sell. The Company is required to
adopt this statement for the first quarter of 2002. The Company does not
believe that this statement will materially impact its results of operations.
3.CAPITAL LEASE OBLIGATIONS
The Company has entered into certain capital lease agreements for
laboratory equipment, office equipment, machinery and equipment, and computer
equipment and software. For the years ended December 31, 2001 and 2000, the
Company had capitalized machinery and equipment under capital leases with a
gross value of approximately $560,000 and $2.5 million and net book value of
approximately $242,000 and $740,000, respectively. The capitalized cost of the
equipment under capital leases is included in the accompanying balance sheets
under the respective asset classes. Under the terms of the Company's lease
agreements, the Company is required to make monthly payments of principal and
interest through the year 2004, at interest rates ranging from 4.05% to 20.00%
per annum. The equipment under the capital leases serves as security for the
leases.
The future annual minimum required payments under capital lease obligations
as of December 31, 2001 were as follows (in thousands):
YEAR ENDING DECEMBER 31,
------------------------
2002 $ 116
2003 46
2004 10
----------
Total future minimum lease payments 172
Less amount representing interest (11)
----------
Present value of future minimum lease
payments 161
Less current portion (104)
----------
Total long-term capital lease obligations $ 57
==========
4.RESTRUCTURING EXPENSES
In the fourth quarter of 2001, the Company recorded a $1.5 million
restructuring charge related to a strategic change in its distribution model and
the consolidation of its European operations into one facility. This expense
related to personnel severance costs, costs to adjust the Company's products to
align with the new distribution model and the cost to close a leased facility in
Europe.
During the first quarter of fiscal 2000, the Company initiated a cost
reduction and restructuring plan at its Diamond subsidiary. The restructuring
resulted from the rationalization of Diamond's business including a reduction
in the size of its workforce and the Company's decision to vacate a leased
warehouse and distribution facility no longer needed after the Company's
decision to discontinue contract manufacturing of certain low margin human
healthcare products. The charge to operations of approximately $435,000 related
primarily to personnel severance costs for 12 individuals and the costs
associated with closing the leased facility, terminating the lease and
abandoning certain leasehold improvements. The facility was closed in April
2000.
In August 1999, the Company announced plans to consolidate its Heska
Waukesha operations with existing operations in Fort Collins, Colorado and Des
Moines, Iowa. This consolidation was based on the Company's determination that
significant operating efficiencies could be achieved through the combined
operations. The Company recognized a charge to operations of approximately $1.2
million for this consolidation. These expenses related primarily to personnel
severance costs for 40 individuals and the costs associated with facilities
being closed and excess equipment, primarily at the Company's Waukesha,
Wisconsin location. This facility was closed in December 1999.
Shown below is a reconciliation of restructuring costs for the year ended
December 31, 2001 (in thousands):
ADDITIONS FOR THE PAYMENTS/CHARGES
BALANCE AT FISCAL YEAR ENDED THROUGH BALANCE AT
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2000 2001 2001 2001
---------------- ---------------- ---------------- ----------------
Severance pay, benefits and relocation
expenses $ - $ 378 $ - $ 378
Noncancellable leased facility closure
costs 176 50 176 50
Products and other - 1,100 - 1,100
--------- --------- --------- ---------
Total $ 176 $ 1,528 $ 176 $ 1,528
========= ========= ========= =========
The balance of $1.5 million and $176,000 is included in accrued liabilities
in the accompanying consolidated balance sheets as of December 31, 2001 and
2000, respectively.
5.LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
DECEMBER 31,
----------------------------------------------
2001 2000
---------------------- ----------------------
Equipment financing with final payment due in January 2002, stated
interest rates between 2.7% and 17.9%, secured by certain equipment
and fixtures $ 240 $ 1,218
Promissory note to the Iowa Department of Economic Development
("IDED"), due in annual installments through June 2004, with a
stated interest rate of 3.0% and a 9.5% imputed interest rate, net 41 54
Promissory note to the City of Des Moines, due in monthly
installments through May 2004, with a stated interest rate of 3%
and a 9.5% imputed interest rate, net 54 75
Real estate mortgage loan with a commercial bank, due in monthly
installments through September 2003, with a stated interest rate of
prime plus 1.25% at December 31, 2001 and 2000 (6.0% and 10.75%,
respectively) 1,740 1,973
Term loan with a commercial bank, secured by machinery and
equipment, due in monthly installments through December 2004, with
a stated interest rate of prime plus 1.25% at December 31, 2001 and
2000 (6.0% and 10.75%, respectively) 688 912
----------- ------------
2,763 4,232
Less installments due within one year (711) ( 1,562)
----------- ------------
$ 2,052 $ 2,670
============ ============
The Company has a credit facility with Wells Fargo Business Credit, Inc.,
an affiliate of Wells Fargo Bank. The credit facility includes a $10.0 million
asset-based revolving line of credit with a stated interest rate of prime plus
1%. Under the agreement, the Company is required to comply with certain
financial and non-financial covenants. Among the financial covenants are
requirements for monthly minimum book net worth, quarterly minimum net income
and minimum cash balances or liquidity levels. The amount available for
borrowings under this agreement will be determined based on the borrowing base
as defined by the credit agreement. As of December 31, 2001 approximately $2.2
million was available for additional borrowings under the line of credit
agreement. The Company was in violation of certain of the financial covenants
at December 31, 2001. On March 13, 2002, the Company obtained a waiver of these
financial covenants from the bank and also executed an amendment to the credit
agreement which extended the maturity date to May 31, 2003. See Note 15.
Amounts due under the Company's equipment term loan, real estate mortgage
loan and revolving credit facility are payable to a commercial bank and are
secured by a first security interest in essentially all of the Company's
assets.
The IDED and City of Des Moines promissory notes are secured by a first
security interest in essentially all assets of Diamond except assets acquired
through capital leases and are included as cross-collateralized obligations by
the respective lenders. The IDED has subordinated all of its security interest
in these assets to a commercial bank providing credit to the Company. The City
of Des Moines has subordinated up to $15 million of its security interest in
these assets to the same commercial bank. These notes were assumed as a result
of the 1996 Diamond acquisition.
Maturities of long-term debt as of December 31, 2001 were as follows (in
thousands):
YEAR ENDING DECEMBER 31,
------------------------
2002 $ 711
2003 2,028
2004 24
Thereafter -
------------
$ 2,763
============
6. ACCRUED PENSION LIABILITY
Diamond has a noncontributory defined benefit pension plan covering all
employees who have met the eligibility requirements. The plan provides monthly
benefits based on years of service which are subject to certain reductions if
the employee retires before reaching age 65. Diamond's funding policy is to
make the minimum annual contribution that is required by applicable regulations.
Effective October 1992, Diamond froze the plan, restricting new participants and
benefits for future service.
The following table sets forth the plan's funded status and amounts
recognized in the accompanying balance sheets (in thousands):
DECEMBER 31,
-------------------------------------------------
2001 2000
---------------------- -----------------------
Change in benefit obligation:
Benefit obligation, beginning $ 1,127 $ 1,171
Service cost - -
Interest cost 77 80
Actuarial loss 5 (39)
Benefits paid (67) (85)
----------- -----------
Benefit obligation, ending 1,142 1,127
----------- -----------
Change in plan assets:
Fair value of plan assets, beginning 954 971
Actual return on plan assets 129 68
Employer contribution - -
Benefits paid (67) (85)
----------- -----------
Fair value of plan assets, ending 1,016 954
----------- -----------
Funded status (125) (173)
Unrecognized net actuarial loss 175 234
----------- -----------
Prepaid benefit cost $ 50 $ 61
----------- -----------
Additional minimum liability disclosures:
Accrued benefit liability $ (125) $ (173)
=========== ===========
Components of net periodic benefit costs:
Service cost $ - $ -
Interest cost 77 80
Expected return on plan assets (72) (73)
Recognized net actuarial loss 6 7
----------- -----------
Net periodic benefit cost $ 11 $ 14
=========== ===========
Assumptions used by Diamond in the determination of the pension plan
information consisted of the following:
DECEMBER 31,
---------------------------
2001 2000
------------- ------------
Discount rate 7.00% 7.00%
Expected long-term rate of return on plan assets 7.75% 7.75%
7.INCOME TAXES
As of December 31, 2001 the Company had approximately $164.5 million of net
operating loss ("NOL") carryforwards for income tax purposes and approximately
$2.7 million of research and development tax credits available to offset future
federal income tax, subject to limitations for alternative minimum tax. The NOL
and credit carryforwards are subject to examination by the tax authorities and
expire in various years from 2003 through 2020. In addition, the Company's NOL
and tax credit carryforwards available for use in any given year may be limited
upon the occurrence of certain events, including significant changes in
ownership interest. The acquisition of Diamond in April 1996 resulted in such a
change of ownership and the Company estimates that the resulting NOL
carryforward limitation will be approximately $4.7 million per year for periods
subsequent to April 19, 1996. The Company believes that this limitation may
affect the eventual utilization of its total NOL carryforwards.
The Company's NOL's represent a previously unrecognized tax benefit.
Recognition of these benefits requires future taxable income, the attainment of
which is uncertain, and therefore, a valuation allowance has been established
for the entire tax benefit and no benefit for income taxes has been recognized
in the accompanying consolidated statements of operations.
The components of net loss were as follows (in thousands):
YEAR ENDED DECEMBER 31,
----------------------------------------
2001 2000
------------------ -------------------
Domestic $ (17,816) $ (20,642)
Foreign (875) (1,228)
------------- ------------
$ (18,691) $ (21,870)
============= ============
Temporary differences that give rise to the components of deferred tax
assets are as follows (in thousands):
DECEMBER 31,
-----------------------------------------------
2001 2000
--------------------- ----------------------
Current deferred tax assets (liabilities):
Inventory $ 142 $ 268
Accrued compensation 134 121
Restructuring reserve 574 254
Other 205 182
---------- -----------
1,055 825
Valuation allowance (1,055) (825)
---------- -----------
Total current deferred tax assets (liabilities) - -
---------- -----------
Noncurrent deferred tax assets (liabilities):
Research and development credits 2,748 3,126
Deferred revenue 523 17
Pension liability 90 19
Amortization of intangible assets - 314
Gain/loss on assets held for sale 559 (35)
Property and equipment (626) (875)
Net operating loss carryforwards 62,930 58,874
---------- -----------
66,224 61,440
Valuation allowance (66,224) (61,440)
---------- -----------
Total noncurrent deferred tax assets (liabilities) $ - $ -
========== ===========
The components of the income tax expense (benefit) are as follows (in
thousands):
YEAR ENDED DECEMBER 31,
-------------------------------------
2001 2000
---------------- -----------------
Deferred income tax benefit:
Federal $ (4,261) $ (7,265)
State (552) (969)
Foreign (201) (490)
------------- ------------
Total benefit (5,014) (8,724)
Valuation allowance 5,014 8,724
------------ ------------
Total income tax expense (benefit) $ - $ -
============ ============
The Company's income tax benefit relating to losses, respectively, for the
periods presented differ from the amounts that would result from applying the
federal statutory rate to those losses as follows:
YEAR ENDED DECEMBER 31,
---------------------------------
2001 2000
------------- -------------
Statutory federal tax rate (35%) (35%)
State income taxes, net of federal benefit (3%) (3%)
Other permanent differences 11% 1%
Change in valuation allowance 27% 37%
------- -------
Effective income tax rate 0% 0%
======= =======
8.CAPITAL STOCK
Common Stock
In December 2001, the Company completed a private placement of 7.8 million
shares of common stock at a price of $0.77 per share providing the Company with
net proceeds of approximately $5.7 million.
In February 2001, the Company completed a private placement of 4.6 million
shares of common stock at a price of $1.247 per share, providing the Company
with net proceeds of approximately $5.3 million.
In December 1999, the Company completed a public offering of 6.5 million
shares of common stock at a price of $2.063 per share, providing the Company
with net proceeds of approximately $13.3 million.
Stock Option Plans
The Company has a stock option plan which authorizes granting of stock
options and stock purchase rights to employees, officers, directors and
consultants of the Company to purchase shares of common stock. In 1997, the
board of directors adopted the 1997 Stock Incentive Plan and terminated two
prior option plans. However, options granted and unexercised under the prior
plans are still outstanding. All shares that remained available for grant under
the terminated plans were incorporated into the 1997 Plan. In addition, all
shares subsequently cancelled under the prior plans are added back to the 1997
Plan on a quarterly basis as additional options available to grant. The number
of shares reserved for issuance under the 1997 Plan increases automatically on
January 1 of each year by a number equal to the lesser of (a) 1,500,000 shares
or (b) 5% of the shares of common stock outstanding on the immediately preceding
December 31. The number of shares reserved for issuance under all plans as of
January 1, 2002 was 8,223,728.
The stock options granted by the board of directors may be either incentive
stock options ("ISOs") or non-qualified stock options ("NQs"). The purchase
price for options under all of the plans may be no less than 100% of fair market
value for ISOs or 85% of fair market value for NQs. Options granted will expire
no later than the tenth anniversary subsequent to the date of grant or three
months following termination of employment, except in cases of death or
disability, in which case the options will remain exercisable for up to twelve
months. Under the terms of the 1997 Plan, in the event the Company is sold or
merged, outstanding options will either be assumed by the surviving corporation
or vest immediately.
SFAS No. 123 ("SFAS 123")
SFAS 123, Accounting for Stock-Based Compensation, defines a fair value
based method of accounting for employee stock options, employee stock purchases,
or similar equity instruments. However, SFAS 123 allows the continued
measurement of compensation cost for such plans using the intrinsic value based
method prescribed by APB Opinion No. 25, Accounting for Stock Issued to
Employees ("APB 25"), provided that pro forma disclosures are made of net
income or loss, assuming the fair value based method of SFAS 123 had been
applied. The Company has elected to account for its stock-based compensation
plans under APB 25; accordingly, for purposes of the pro forma disclosures
presented below, the Company has computed the fair values of all options granted
during 2001, 2000 and 1999, using the Black-Scholes pricing model and the
following weighted average assumptions:
2001 2000 1999
---------- ---------- ----------
Risk-free interest rate 4.39% 6.26% 5.63%
Expected lives 1.7 years 7.59 years 3.5 years
Expected volatility 86% 94% 91%
Expected dividend yield 0% 0% 0%
To estimate expected lives of options for this valuation, it was assumed
options will be exercised at varying schedules after becoming fully vested
dependent upon the income level of the option holder. For measurement purposes,
options have been segregated into three income groups, and estimated exercise
behavior of option recipients varies from one and one half years to two years
from the date of vesting, dependent on income group (less highly compensated
employees are expected to have shorter holding periods). All options are
initially assumed to vest. Cumulative compensation cost recognized in pro forma
basic net income or loss with respect to options that are forfeited prior to
vesting is adjusted as a reduction of pro forma compensation expense in the
period of forfeiture. Fair value computations are highly sensitive to the
volatility factor assumed; the greater the volatility, the higher the computed
fair value of the options granted.
The total fair value of options granted was computed to be approximately
$1.1 million, $1.7 million and $3.8 million for the years ended December 31,
2001, 2000 and 1999, respectively. The amounts are amortized ratably over the
vesting periods of the options. Pro forma stock-based compensation, net of the
effect of forfeitures, was $906,000, $2.2 million and $3.6 million for 2001,
2000 and 1999, respectively.
A summary of the Company's stock option plans is as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
2001 2000 1999
------------------------------- ------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
-------------- -------------- ---------- ------------ ------------- ----------
Outstanding at beginning of period 3,964,668 $ 4.4979 4,246,183 $ 4.6994 3,209,317 $ 5.1203
Granted at Market 1,444,844 $ 1.2047 753,700 $ 3.3453 1,725,480 $ 3.4876
Granted above Market 431 $ 0.9400 - - - -
Cancelled (1,477,500) $ 6.6312 (600,228) $ 6.5438 (329,820) $ 6.6815
Exercised (30,583) $ 0.3649 (434,967) $ 1.0904 (358,794) $ 0.8148
--------- --------- ----------
Outstanding at end of period 3,901,860 $ 2.5689 3,964,668 $ 4.4979 4,246,183 $ 4.6994
========== ========= ==========
Exercisable at end of period 2,399,954 $ 2.9447 2,274,489 $ 4.6293 1,973,349 $ 4.1737
========== ========= ==========
The weighted average estimated fair value of options granted during the
years ended December 31, 2001, 2000 and 1999 were $0.7821, $2.3277 and $2.1814,
respectively.
The Company also granted stock options to non-employees in exchange for
consulting services, recording deferred compensation based on the estimated fair
value of the options at the date of grant. Deferred compensation was amortized
over the applicable service periods. The amortization of deferred compensation
resulted in a non-cash charge to operations of $648,000 and $629,000 in the
years ended December 31, 2000 and 1999, respectively.
The following table summarizes information about stock options outstanding
and exercisable at December 31, 2001:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------ ---------------------------------------
EXERCISE PRICES NUMBER OF NUMBER OF WEIGHTED
OPTIONS WEIGHTED OPTIONS
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE
AT REMAINING AVERAGE AT AVERAGE
DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
2001 LIFE IN YEARS PRICE 2001 PRICE
-------------- ------------------- ----------------- ------------------- -----------------
$0.25 - $1.14 790,988 7.86 $ 0.9312 315,836 $ 0.6309
$1.19 - $1.20 547,598 4.63 $ 1.1999 545,016 $ 1.1999
$1.22 - $1.81 835,850 9.19 $ 1.2818 438,617 $ 1.3000
$2.00 - $3.25 820,580 7.70 $ 2.4252 480,808 $ 2.5059
$3.37 - $15.00 906,844 7.19 $ 2.5689 619,677 $ 7.1631
--------- ----------
$0.25 - $15.00 3,901,860 7.50 $ 2.5689 2,399,954 $ 2.9447
========= ==========
Employee Stock Purchase Plan (the "ESPP")
Under the 1997 Employee Stock Purchase Plan, the Company is authorized to
issue up to 750,000 shares of common stock to its employees. Employees of the
Company and its U.S. subsidiaries who are expected to work at least 20 hours per
week and five months per year are eligible to participate. Under the terms of
the plan, employees can choose to have up to 10% of their annual base earnings
withheld to purchase the Company's common stock. The purchase price of the
stock is 85% of the lower of its beginning-of-enrollment period or end-of-
measurement period market price. Each enrollment period is two years, with six
month measurement periods ending June 30 and December 31.
For the years ended December 31, 2001, 2000 and 1999, the weighted-average
fair value of the purchase rights granted was $0.35, $0.91 and $1.24 per share,
respectively. Pro forma stock-based compensation, net of the effect of
adjustments, was approximately $88,161, $112,462 and $96,000 in 2001, 2000 and
1999, respectively, for the ESPP.
Restricted Stock Exchange
On August 9, 2001, the Board of Directors approved a proposal to give Heska
employees an opportunity to exchange all options outstanding with exercise
prices greater than $3.90 per share under the 1997 Stock Incentive Plan for
shares of restricted stock. The offer closed on September 28,2001 with options
to purchase 1,044,900 shares of common stock exchanged for 1,044,900 shares of
restricted stock. The fair market value of the restricted stock at the time of
the exchange was $0.68 per share. The restricted stock vests over 48 months
beginning November 1, 2001. This exchange resulted in deferred compensation of
approximately $710,000 that is being recognized over the vesting period of the
restricted stock. The Company recognized $29,000 of non-cash compensation
expense from this exchange in 2001.
Pro Forma Basic Net Loss per Share under SFAS 123
If the Company had accounted for all of its stock-based compensation plans
in accordance with SFAS 123, the Company's net loss would have been reported as
follows (in thousands, except per share amounts):
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2001 2000 1999
----------------- ---------------- ---------------
Net loss:
As reported $ (18,691) $ (21,870) $ (35,836)
========= ========= =========
Pro forma $ (19,597) $ (24,143) $ (39,564)
========= ========= =========
Basic net loss per share:
As reported $ (0.48) $ (0.65) $ (1.31)
========= ========= =========
Pro forma $ (0.50) $ (0.71) $ (1.45)
========= ========= =========
9.MAJOR CUSTOMERS
The Company had sales of greater than 10% of total revenues to only one
customer during the years ended December 31, 2001, 2000 and 1999. One customer
who represented 16% and 17% of total revenues in 2001 and 2000, respectively,
and a different customer who represented 12% of total revenues 1999, purchased
vaccines from Diamond. One customer represented 24% of total accounts
receivable at December 31, 2001.
10. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
2001 2000 1999
--------------- ----------------- -----------------
(IN THOUSANDS)
Cash paid for interest $ 587 $ 1,155 $ 1,857
Purchase of assets under direct $ - $ 45 $ 193
capital lease financing
11. HEDGING ACTIVITIES
In April 2001, the Company entered into a series of forward contracts to
purchase Japanese yen at various dates throughout the remainder of the year.
The yen were used to purchase inventory from a Japanese manufacturer throughout
fiscal 2001. These derivative instruments have been designated and qualify as
cash flow hedging instruments under the definition provided by SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities". The forward
contracts were entered into with settlement dates, and for amounts, that
approximately correspond with the Company's projected needs to purchase
inventory with the hedged currency. All of these forward contracts have been
settled as of December 31, 2001. These derivative instruments were consistent
with the Company's risk management policy, which allows for the hedging of risk
associated with fluctuations in foreign currency for anticipated future
transactions. These instruments have been determined to be fully effective as a
hedge in reducing the risk of the underlying transaction. An unrealized loss of
approximately $24,000 has been recorded in Other Comprehensive Loss as of
December 31, 2001. This unrealized loss will be reclassified to cost of
products sold and recognized as the purchase inventory is sold to customers.
The Company has recognized a loss of approximately $48,000 in cost of products
sold during the fiscal year ended December 31, 2001.
Accumulated gains and losses from derivative contracts is as follows:
2001
------------
Accumulated derivative gains (losses), December 31, 2000 $ -
Unrealized losses on forward contracts (72)
Realized losses on forward contracts reclassified to current earnings 48
------
Accumulated derivative gains (losses), December 31, 2001 (24)
======
12. COMMITMENTS AND CONTINGENCIES
In November 1998, Synbiotics Corporation ("Synbiotics") filed a lawsuit
against the Company in the United States District Court for the Southern
District of California in which it alleges that the Company infringed a patent
owned by Synbiotics relating to heartworm diagnostic technology. The Company
has answered the complaint and no trial date has been set. The Company has
obtained legal opinions from outside patent counsel that its heartworm
diagnostic products do not infringe the Synbiotics patent and that the patent is
invalid. The opinions of non-infringement are consistent with the results of
the Company's internal evaluations. In September 2000, the U.S. District Court
hearing the case granted the Company's request for a partial summary judgment,
holding two of the Synbiotics patent claims to be invalid, leaving only one
remaining claim, which is scheduled for trial in 2002. While management
believes that the Company has valid defenses to Synbiotics' allegations and
intends to defend the action vigorously, there can be no assurance that an
adverse result or settlement would not have a material adverse effect on the
Company's financial position, its results of operations or cash flow.
The Company holds certain rights to market and manufacture all products
developed or created under certain research, development and licensing
agreements with various entities. In connection with such agreements, the
Company has agreed to pay the entities royalties on net product sales. In the
years ended December 31, 2001, 2000 and 1999, royalties of $866,000, $931,000
and $1.0 million became payable under these agreements, respectively.
The Company contracts with various parties that conduct research and
development on the Company's behalf. In return, the Company generally receives
the right to commercialize any products resulting from these contracts. In the
event the Company licenses any technology developed under these contracts, the
Company will generally be obligated to pay royalties at specified percentages of
future sales of products utilizing the licensed technology.
The Company has entered into operating leases for its office and research
facilities and certain equipment with future minimum payments as of December 31,
2001 as follows (in thousands):
YEAR ENDING DECEMBER 31,
--------------------------
2002 $ 878
2003 799
2004 666
2005 108
2006 -
--------
$ 2,451
========
The Company had rent expense of $861,000, $1.0 million and $1.1 million in
2001, 2000 and 1999, respectively.
13. SEGMENT REPORTING
Our business is comprised of two reportable segments, Companion Animal
Health and Food Animal Health. Prior to June 30, 2000, we also had a third
reportable segment, Allergy Treatment, which represented the operations of a
subsidiary sold as of June 23, 2000. Within the Companion Animal Health segment
there are two major product groupings which we define as pharmaceuticals,
vaccines and diagnostics (PVD) and veterinary diagnostic and patient monitoring
instruments. These products are sold through our operations in Fort Collins,
Colorado and Europe. Within the Food Animal Health segment, there is one major
product grouping, food animal vaccine and pharmaceutical products. We
manufacture these food animal products at our Diamond Animal Health subsidiary.
Additionally, we generate non-product revenues from sponsored research and
development projects for third parties, licensing of technology and royalties.
We perform these sponsored research and development projects for both companion
animal and food animal purposes.
Summarized financial information concerning the Company's reportable
segments is shown in the following table (in thousands).
COMPANION FOOD
ANIMAL ANIMAL ALLERGY
HEALTH HEALTH TREATMENT OTHER TOTAL
----------- ---------- ---------- ------------- ------------
2001:
Revenues:
PVD $ 16,704 $ - $ - $ - $ 16,704
Instruments 16,018 - - - 16,018
Diamond Animal Health - 13,664 - - 13,664
Sold businesses and other - - - - -
Research, development and other 1,532 365 - - 1,897
-------- --------- ----- -------- ---------
Total revenues 34,254 14,029 - - 48,283
Operating income (loss) (18,349) 2,250 - (2,023)(a) (18,122)
Total assets 52,102 21,079 - (35,424) 37,757
Capital expenditures 420 419 - - 839
Depreciation and amortization 1,978 1,447 - - 3,425
(a) Includes restructuring expenses of $1,528 million and $495,000 of other
(See Note 4).
COMPANION FOOD
ANIMAL ANIMAL ALLERGY
HEALTH HEALTH TREATMENT OTHER TOTAL
----------- ---------- ---------- ------------- ------------
2000:
Revenues:
PVD $ 13,961 $ - $ - $ - $ 13,961
Instruments 14,194 - - - 14,194
Diamond Animal Health - 18,203 - - 18,203
Sold business and other - - 3,191 - 3,191
Research, development and other 1,834 1,292 - - 3,126
-------- -------- ------- --------- ---------
Total revenues 29,989 19,495 3,191 - 52,675
Operating income (loss) (22,065) 1,539 (24) (790)(b) (21,340)
Total assets 53,109 17,533 - (31,482) 39,160
Capital expenditures 724 483 - - 1,207
Depreciation and amortization 2,277 1,577 212 - 4,066
(b) Includes the write-down of certain fixed assets to their expected net
realizable values, resulting in a loss of $355,000 and restructuring
expenses of $435,000 (See Note 4).
COMPANION FOOD
ANIMAL ANIMAL ALLERGY
HEALTH HEALTH TREATMENT OTHER TOTAL
----------- ---------- ---------- ------------- ------------
1999:
Revenues:
PVD $ 12,716 $ _ $ _ $ _ $ 12,716
Instruments 12,106 _ _ _ 12,106
Diamond Animal Health _ 12,086 _ _ 12,086
Sold businesses and other 301 3,901 9,181 _ 13,383
Research, development and other 505 380 _ _ 885
--------- -------- -------- --------- ---------
Total revenues 25,628 16,367 9,181 _ 51,176
Operating income (loss) (27,878) (2,534) (372) (3,803)(c) (34,587)
Total assets 89,199 22,185 6,376 (46,592) 71,168
Capital expenditures 743 2,368 185 - 3,296
Depreciation and amortization 2,155 1,294 415 - 3,864
(c) Includes the write-down of certain tangible and intangible assets to their
expected net realizable values, resulting from a loss on assets held for
disposition of $2.6 million, restructuring expenses of $1.2 million (See
Note 4).
The Company manufactures and markets its products in two major geographic
areas, North America and Europe. The Company's primary manufacturing
facilities are located in North America. Revenues earned in North America are
attributable to Heska, Diamond, Heska Waukesha (through 1999) and Center
(through June 2000). Revenues earned in Europe are primarily attributable to
Heska UK (through January 2000), Heska AG. There have been no significant
exports from North America or Europe.
During each of the years presented, European subsidiaries purchased
products from North America for sale to European customers. Transfer prices to
international subsidiaries are intended to allow the North American companies to
produce profit margins commensurate with their sales and marketing efforts.
Certain information by geographic area is shown in the following table (in
thousands).
NORTH AMERICA EUROPE OTHER TOTAL
--------------- ------------ ------------ ------------
2001:
Revenues:
PVD $ 15,213 $ 1,491 $ - $ 16,704
Instruments 15,744 274 - 16,018
Diamond Animal Health 13,664 - - 13,664
Sold businesses and other - - - -
Research, development and other 1,897 - - 1,897
---------- --------- --------- ---------
Total revenues 46,518 1,765 - 48,283
Operating income (loss) (15,782) (317) (2,023)(a) (18,122)
Total assets 71,288 1,893 (35,424) 37,757
Capital expenditures 821 18 - 839
Depreciation and amortization 3,324 101 - 3,425
(a) Includes restructuring expenses of $1,528 million and $495,000 of other
(See Note 4).
NORTH AMERICA EUROPE OTHER TOTAL
--------------- ------------ ------------ ------------
2000:
Revenues:
PVD $ 12,352 $ 1,609 $ - $ 13,961
Instruments 13,562 632 - 14,194
Diamond Animal Health 18,203 - - 18,203
Sold businesses and other 2,889 302 - 3,191
Research, development and other 3,126 - - 3,126
---------- --------- --------- ---------
Total revenues 50,132 2,543 - 52,675
Operating income (loss) (20,444) (896) - (b) (21,340)
Total assets 68,130 2,512 (31,482) 39,160
Capital expenditures 1,082 125 - 1,207
Depreciation and amortization 3,956 110 - 4,066
(b) Includes the write-down of certain fixed assets to their expected
net realizable values, resulting in a loss of $355,019 and restructuring
expenses of $435,000 (See Note 4).
NORTH AMERICA EUROPE OTHER TOTAL
--------------- ------------ ------------ ------------
1999:
Revenues:
PVD $ 9,308 $ 3,408 $ - $ 12,716
Instruments 11,314 792 - 12,106
Diamond Animal Health 12,086 - - 12,086
Sold business and other 10,436 2,947 - 13,383
Research, development and other 885 - - 885
--------- ---------- --------- ---------
Total revenues 44,029 7,147 - 51,176
Operating income (loss) (27,431) (3,353) (3,803)(c) (34,587)
Total assets 114,165 3,595 (46,592) 71,168
Capital expenditures 3,292 4 - 3,296
Depreciation and amortization 3,701 163 - 3,864
(c) Includes the write-down of certain tangible and intangible assets to their
expected net realizable values, resulting from a loss on assets held for
disposition of $2.6 million, restructuring expenses of $1.2 million (See Note
4).
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following summarizes selected quarterly financial information for each
of the two years in the period ended December 31, 2001 (amounts in thousands
except per share data).
Q1 Q2 Q3 Q4 TOTAL
---------- ---------- ---------- ---------- ----------
2001:
Total revenues $ 10,927 $ 10,938 $ 11,755 $ 14,663 $ 48,283
Gross profit from product sales 4,100 3,710 4,115 5,806 17,731
Net loss (4,572) (4,664) (3,894) (5,561) (18,691)
Net loss per share - basic and diluted (0.12) (0.12) (0.10) (0.14) (0.48)
2000:
Total revenues $ 14,363 $ 14,243 $ 12,708 $ 11,361 $ 52,675
Gross profit from product sales 4,001 4,250 3,944 4,055 16,250
Net loss (5,929) (5,703) (4,731) (5,507) (21,870)
Net loss per share - basic and diluted (0.18) (0.17) (0.14) (0.16) (0.65)
15. SUBSEQUENT EVENTS
On March 13, 2002, the Company re-negotiated the covenants under its
revolving line of credit facility. The Company's ability to borrow under this
agreement varies based upon available cash, eligible accounts receivable and
eligible inventory. The minimum liquidity (cash plus excess capacity) required
to be maintained has been reduced to $2.5 million during 2002.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
PART III
Certain information required by Part III is incorporated by reference to
our definitive Proxy Statement filed with the Securities and Exchange Commission
in connection with the solicitation of proxies for our 2002 Annual Meeting of
Stockholders.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this section is incorporated by reference to
the information in the sections entitled "Election of Directors-Directors and
Nominees for Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement.
EXECUTIVE OFFICERS OF THE REGISTRANT
Our executive officers and their ages as of March 16, 2002 are as follows:
NAME AGE POSITION
- ---------------------------------- ---------------- -------------------------------------------------------
Robert B. Grieve, Ph.D. 50 Chairman of the Board and Chief Executive Officer
James H. Fuller 57 President and Chief Operating Officer
Ronald L. Hendrick 56 Executive Vice President, Chief Financial Officer and
Secretary
Dan T. Stinchcomb, Ph.D. 48 Executive Vice President, Research and Development
Carol Talkington Verser, Ph.D. 49 Executive Vice President, Intellectual Property and
Business Development
Robert B. Grieve, Ph.D., one of our founders, currently serves as Chief
Executive Officer and Chairman of the Board. Dr. Grieve was named Chief
Executive Officer effective January 1, 1999, Vice Chairman effective March 1992
and Chairman of the Board effective May 2000. Dr. Grieve also served as Chief
Scientific Officer from December 1994 to January 1999 and Vice President,
Research and Development, from March 1992 to December 1994. He has been a
member of our Board of Directors since 1990. He holds a Ph.D. degree from the
University of Florida and M.S. and B.S. degrees from the University of Wyoming.
James H. Fuller has served as President and Chief Operating Officer since
January 1999. Prior to joining us, Mr. Fuller served as Corporate Vice
President of Allergan, Inc., a leading specialty pharmaceutical company, from
1994 through 1998. Prior to 1994, Mr. Fuller served in a number of sales and
marketing positions at Allergan since 1974. He holds M.S. and B.S. degrees from
the University of Southern California.
Ronald L. Hendrick serves as Executive Vice President, Chief Financial
Officer and Secretary. He joined us in December 1998. From 1995 until December
1998, Mr. Hendrick was Executive Vice President and Chief Financial Officer of
Xenometrix, Inc., a human biotechnology concern. From 1993 until 1995,
Mr. Hendrick served as Vice President and Corporate Controller at Alexander &
Alexander Services, Inc., a NYSE financial services firm, and before that he
held a number of finance and accounting positions at Adolph Coors Company. He
holds a M.B.A. from the University of Colorado and a B.A. degree from Michigan
State University.
Dan T. Stinchcomb, Ph.D., was appointed Executive Vice President, Research
and Development, in December 1999. Dr. Stinchcomb previously served as Vice
President, Research from December 1998 to November 1999, and as Vice President,
Biochemistry and Molecular Biology from May 1996 until December 1998. From July
1993 until May 1996, Dr. Stinchcomb was employed by Ribozyme Pharmaceuticals,
Inc., most recently as Director of Biology Research. From 1988 until April
1993, Dr. Stinchcomb held various positions with Synergen, Inc. Prior to
joining Synergen, Dr. Stinchcomb was an Associate Professor in Cellular and
Developmental Biology at Harvard University. He holds a Ph.D. degree from
Stanford University and a B.A. degree from Harvard University.
Carol Talkington Verser, Ph.D., was appointed Executive Vice President,
Intellectual Property and Business Development in February 2001. From June 2000
until January 2001 she was Vice President, Intellectual Property and Business
Development. From July 1996 to May 2000, she served us as Vice President,
Intellectual Property. From July 1995 to June 1996, Dr. Verser served us as
Director, Intellectual Property. From July 1991 to June 1995, Dr. Verser was a
Patent Agent and Technical Specialist at Sheridan, Ross and McIntosh, an
intellectual property law firm. Prior to July 1991, she was Director,
Scientific Development and Laboratory Director at Biogrowth, Inc., currently a
subsidiary of Insmed Inc. Dr. Verser holds a Ph.D. in cellular and
developmental biology from Harvard University and a B.S. in biological sciences
from the University of Southern California.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this section is incorporated by reference to
the information in the sections entitled "Election of Directors-Directors'
Compensation" and "Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this section is incorporated by reference to
the information in the section entitled "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this section is incorporated by reference to
the information in the section entitled "Certain Transactions and
Relationships" in the Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Form 10-K.
(1) FINANCIAL STATEMENTS:
Reference is made to the Index to Consolidated Financial Statements
under Item 8 in Part II of this Form 10-K.
(2) FINANCIAL STATEMENT SCHEDULES:
Schedule II - Valuation and Qualifying Accounts.
SCHEDULE II
HESKA CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
ADDITIONS OTHER DEDUCTIONS BALANCE AT
BALANCE AT CHARGED TO ADDITIONS ------------- END OF
BEGINNING COSTS AND --------- YEAR
OF YEAR EXPENSES ----------
---------- --------------
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Year ended:
December 31, 2001 $ 431 $ 373 - $ (298 )(a $ 506
)
December 31, 2000 $ 188 $ 320 - $ (77 )(a $ 431
)
December 31, 1999 $ 93 $ 122 - $ (27 )(a $ 188
)
ALLOWANCE FOR RESTRUCTURING CHARGES
Year ended:
December 31, 2001 $ 176 $ 2,023 - $ (176 )(b $ 2,023
)
December 31, 2000 $ 1,123 $ 435 - $ (1,382 )(b $ 176
)
December 31, 1999 $ 1,631 $ 1,210 - $ (1,718 )(b $ 1,123
)
(a) Write-offs of uncollectable accounts.
(b) Payments for personnel severance costs and facility closing costs.
(3) EXHIBITS:
The exhibits listed below are required by Item 601 of Regulation S-K. Each
management contract or compensatory plan or arrangement required to be filed as
an exhibit to this Form 10-K has been identified.
EXHIBIT NUMBER NOTES DESCRIPTION OF DOCUMENT
- ---------------- -------------- ---------------------------------------------------------------------------
3(i)(d) (5) Restated Certificate of Incorporation of the Registrant.
3(ii) (8) Bylaws of the Registrant.
10.1H (1) Collaborative Agreement between Registrant and Eisai Co., Ltd., dated
January 25, 1993.
10.3H Bovine Vaccine Distribution Agreement between Diamond Animal Health, Inc.
and AGRI Laboratories, Ltd., dated February 13, 1998, as amended.
10.4H Exclusive Distribution Agreement between Registrant and Novartis Animal
Health Canada, Inc. dated February 14, 2001, as amended.
10.5H (1) Screening and Development Agreement between Ciba-Geigy Limited and
Registrant, dated as of April 12, 1996.
10.6 (1) Right of First Refusal Agreement between Ciba-Geigy Limited and Registrant,
dated as of April 12, 1996.
10.7 (1) Marketing Agreement between Registrant and Ciba-Geigy Limited, dated as of
April 12, 1996.
10.8H (1) Marketing Agreement between Registrant and Ciba-Geigy Corporation, dated as
of April 12, 1996.
10.9 H Amended and Restated Distribution Agreement between Registrant and i-STAT
Corporation, dated as of February 9, 1999.
10.10* (1) Employment Agreement between Registrant and Robert B. Grieve, dated January
1, 1994, as amended March 4, 1997.
10.10(a)* (4) Amended and Restated Employment Agreement with Robert B. Grieve, dated as
of February 22, 2000.
10.14H (2) Supply Agreement between Registrant and Quidel Corporation, dated July 3,
1997.
10.14(a)H First Amendment to Product Supply Agreement between Registrant and Quidel
Corporation, dated as of March 15, 1999.
10.18* (1) Form of Indemnification Agreement entered into between Registrant and its
directors and certain officers.
10.19* (8) 1997 Incentive Stock Plan of Registrant, as amended and restated.
10.20* (1) Forms of Option Agreement.
10.21* (1) 1997 Employee Stock Purchase Plan of Registrant, as amended.
10.22 (1) Lease Agreement dated March 8, 1994 between Sharp Point Properties, LLC and
Registrant.
10.23 (1) Lease Agreement dated as of June 27, 1996 between GB Ventures and
Registrant.
10.24 (1) Lease Agreement dated as of July 11, 1996 between GB Ventures and
Registrant.
10.25 Lease Agreement dated as of August 24, 1999 between GB Ventures and
Registrant.
10.26 Lease Agreement dated as of October 6, 1999 between GB Ventures and
Registrant.
10.28* (3) Employment Agreement between Registrant and Ronald L. Hendrick, dated
December 1, 1998.
10.29* (3) Employment Agreement between Registrant and James H. Fuller, dated
January 18, 1999.
10.34H (3) Exclusive Distribution Agreement between the Company and Novartis Agro
K.K., dated as of August 18, 1998
10.35 (3) Right of First Refusal Agreement between the Company and Novartis Animal
Health, Inc., dated as of August 18, 1998
10.39 (5) Second Amended and Restated Credit and Security Agreement between
Registrant, Diamond Animal Health, Inc., Center Laboratories, Inc. and
Wells Fargo Business Credit, Inc., dated as of June 14, 2000.
10.40* (5) Employment agreement by and between Registrant and Dan T. Stinchcomb, dated
as of May 1, 2000.
10.41* (5) Employment agreement by and between Registrant and Carol Talkington Verser,
dated as of May 1, 2000.
10.42* (6) Management Incentive Compensation Plan.
10.43 (7) First Amendment to Second Amended and Restated Credit and Security
Agreement between Registrant, Diamond Animal Health, Inc. and Wells Fargo
Business Credit, Inc., dated as of March 27, 2001.
10.44 Second Amendment to Second Amended and Restated Credit and Security
Agreement between Registrant, Diamond Animal Health, Inc. and Wells Fargo
Business Credit, Inc., dated as of March 13, 2002.
21.1 (6) Subsidiaries of the Company.
23.1 Consent of Arthur Andersen LLP.
24.1 Power of Attorney (See page 70 of this Form 10-K).
99.1 Letter concerning Arthur Andersen LLP.
Notes
* Indicates management contract or compensatory plan or arrangement.
H Confidential treatment has been requested with respect to certain portions of
these agreements.
(1) Filed with Registrant's Registration Statement on Form S-1 (File No. 333-
25767).
(2) Filed with the Registrant's Form 10-Q for the quarter ended September 30,
1997.
(3) Filed with the Registrant's Form 10-K for the year ended December 31, 1998.
(4) Filed with the Registrant's Form 10-K for the year ended December 31, 1999.
(5) Filed with the Registrant's Form 10-Q for the quarter ended June 30, 2000.
(6) Filed with the Registrant's Form 10-K for the year ended December 31,
2000.
(7) Filed with the Registrant's Form 10-Q for the quarter ended March 31,
2001.
(8) Filed with the Registrant's Form 10-Q for the quarter ended June 30, 2001.
(b) Reports on Form 8-K: The Company filed a Report on Form 8-K dated December
20, 2001, related to the private placement of approximately 7.8 million shares
of its common stock with certain investors at a price of $0.77 per share
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on April 1, 2002.
HESKA CORPORATION
By: /s/ ROBERT B. GRIEVE
Robert B. Grieve
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Robert B. Grieve, Ronald L. Hendrick,
Michael A. Bent and A. Lynn DeGeorge, and each of them, his or her true and
lawful attorneys-in-fact, each with full power of substitution, for him or her
in any and all capacities, to sign any amendments to this report on Form 10-K
and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact or their substitute or
substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE
- ------------------------------------ --------------------------------------- --------------------
Chairman of the Board and Chief April 1, 2002
/s/ ROBERT B. GRIEVE Executive Officer (Principal Executive
- ----------------------- Officer) and Director
Robert B. Grieve
/s/ RONALD L. HENDRICK Executive Vice President, Chief April 1, 2002
- ----------------------- Financial Officer and Secretary
Ronald L. Hendrick (Principal Financial and Accounting
Officer)
Director April 1, 2002
/s/ G. IRWIN GORDON
- -----------------------
G. Irwin Gordon
Director April 1, 2002
/s/ A. BARR DOLAN
- -----------------------
A. Barr Dolan
Director April 1, 2002
/s/ LYLE A. HOHNKE
- -----------------------
Lyle A. Hohnke
Director April 1, 2002
/s/ EDITH W. MARTIN
- -----------------------
Edith W. Martin
Director April 1, 2002
/s/ WILLIAM A. AYLESWORTH
- ----------------------
William A. Aylesworth
Director April 1, 2002
/s/ LYNNOR B. STEVENSON
- ----------------------
Lynnor B. Stevenson
Director April 1, 2002
/s/ JOHN F. SASEN, Sr.
- ----------------------
John F. Sasen, Sr.
[CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTIONS OF THIS DOCUMENT
HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY FILED WITH THE COMMISSION]
BOVINE VACCINE DISTRIBUTION AGREEMENT
This Agreement is entered as of the 13th day of February, 1998 (the
"Effective Date"), by and between DIAMOND ANIMAL HEALTH, INC., an Iowa
corporation with offices at 2538 S.E. 43rd Street, Des Moines, Iowa, 50317,
("Diamond") and AGRI LABORATORIES, LTD., a Delaware corporation, with offices at
20927 State Route K, St. Joseph, Missouri, 64505 ("Distributor").
WHEREAS, Diamond has the right to certain bovine antigens described on
Exhibit A attached hereto and certain USDA and other licenses (and applications
therefor) for the manufacture of such antigens and the right to enter into this
distribution agreement as to them; and
WHEREAS, Distributor desires to purchase Products from Diamond, to be
marketed under private label brand names as Distributor deems appropriate
pursuant to the terms of this Agreement.
NOW, THEREFORE, the parties agree as follows:
SECTION 1. PRODUCTION, SALE AND DISTRIBUTION
1.01 Manufacture and Sale. Diamond agrees to manufacture and sell to
Distributor, and Distributor agrees to purchase from Diamond, Products
and additional products as referenced herein for distribution in the
Territory pursuant to and in accordance with the terms and conditions of
this Agreement.
1.02 Exclusivity. Distributor's distribution rights under this Agreement
shall be exclusive worldwide for all Products identified on Exhibit A
attached hereto and additional Products added pursuant to Section 2,
except as set forth in this paragraph. Notwithstanding the foregoing,
(i) Distributor's rights under this Agreement shall be non-exclusive for
distribution in Canada for all Products; (ii) Distributor shall have no
distribution rights outside the United States for any Products
containing [ *** ] antigens listed on Exhibit C, without the prior
written consent and agreement of [ *** ] (it being understood that
Diamond does not have rights to such [ *** ] antigens outside the United
States); (iii) Distributor shall not have any right to distribute
Products consisting of the [ *** ] antigens listed on Exhibit C in
combination with any antigens other than the viral antigens listed on
Exhibit A, without the prior written consent and agreement of [ *** ];
(iv) Distributor acknowledges that [ *** ] has exclusive rights to
distribute in Canada the product combinations (and lesser fallout
products containing [ *** ] antigens) described in Exhibit C; (v)
Diamond and its Affiliates may sell, have sold and otherwise distribute
to [ *** ] without restriction the individual [ *** ] antigens listed in
Exhibit C; (vi) Diamond and its Affiliates may sell, have sold and
otherwise distribute to [ *** ] without restriction the
individual antigens and monovalent vaccines (i.e., a vaccine containing
a single bovine antigen) listed on Exhibit B; and (vii) Diamond and its
Affiliates may sell, have sold and otherwise distribute to [***] without
any restriction biological veterinary products containing antigens
specified in Exhibit D to be used in solid dose configurations or using
[ *** ] technologies. From the beginning date of the second Contract
Year, Distributor shall have twenty-four (24) months to submit an
application to any foreign jurisdiction for the registration of any one
or more Products or future products and twenty-four (24) months after
obtaining approval of the registration to begin marketing the registered
Product. If Distributor fails to submit a timely application for the
registration of any one or more Products or additional Products, or if
Distributor submits a timely application and obtains an approved
registration but fails to timely market the Product, then Distributor
shall forfeit its Exclusive License rights to foreign markets but shall
maintain its Exclusive License rights in the United States.
It is furthermore recognized by the parties hereto that parties will make
good faith efforts to hereafter negotiate fair and equitable agreements as
between them for the sale of bulk antigens to other vaccine companies which
sales should be included in the Qualified Revenue requirements as set forth
in Section 1.04(ii). If the parties hereto cannot agree for the sale of
Bulk Antigens to other vaccine companies, then Diamond shall be prohibited
from making any Bulk Sales, except as set forth in Section 1.02.
1.03 Territory. Distributor is authorized to sell, have sold and otherwise
distribute Products and additional products added pursuant to Section 2
hereafter collectively referred to as "All Products" worldwide limited only
as provided in Section 1.02.
1.04 Purchase of Requirements; Minimum Purchases.
(i) Requirements. Distributor agrees to purchase its total
requirements of Products from Diamond for bovine veterinary
biologic products of the type described on Exhibit A but only to
the extent Diamond has the Products reasonably available for
Distributor's delivery directions that conform to Section 4 hereof.
Distributor may purchase any additional requirement from any
source, but only during such period that Diamond is unable to meet
such requirements and the reasonable costs thereof shall be
included in Minimum Qualified Revenues for purposes of Section
1.04(ii).
*** Confidentail Treatment Requested
(ii) Minimums. During the term of this Agreement Distributor shall cause
the Qualified Revenues for each Contract Year to equal or exceed the
following amounts (the "Minimum Qualified Revenue").
Minimum
Contract Year Qualified
as defined in 13.06 Revenues
-------------------- -------------------
1st [ *** ]
2nd $[ *** ]
3rd $[ *** ]
4th $[ *** ]
5th and thereafter $[ *** ]
provided, however, that Distributor may permit the Qualified
Revenues to be less than the Minimum Qualified Revenue in any
Contract Year and in lieu thereof pay to Diamond an amount equal to
the difference between such Minimum Qualified Revenue and the actual
Qualified Revenues for such Contract Year (the "Additional
Payment"). If an Additional Payment is due hereunder for any
Contract Year, which payment shall be due and payable thirty (30)
days after the end of such Contract Year, Distributor may elect by
written notice to Diamond within thirty (30) days after the end of
such Contract Year, in lieu of paying such Additional Payment, to
terminate Distributor's exclusivity rights under Section 1.02 of
this Agreement. Distributor's distribution rights shall continue on
a nonexclusive basis subject to all the remaining terms of this
Agreement not inconsistent therewith, which shall remain in full
force and effect.
1.05 Responsibilities of Distributor; Diamond Technical Support. Distributor
shall use reasonable efforts to market and sell Products in the
*** Confidential Treatment Requested
Territory and shall adhere to reasonable industry practice in connection
therewith. Distributor shall be responsible, at its sole expense, for
advertising and promotion, technical support and customer service. At
Distributor's request, Diamond shall provide reasonable technical
support for Distributor's marketing, sales and customer service efforts,
and shall pay the support costs thereof.
1.06 Registration and Licensing. Diamond shall use reasonable efforts to obtain
Licenses in the United States with respect to all Products and will pay all
Registration Costs associated with obtaining and maintaining such Licenses,
except as set forth in Section 2.02. Diamond will use reasonable efforts to
assist Distributor in the registration of Products (bulk or packed form)
outside the United States at Distributor's expense. Distributor shall pay
all Registration Costs associated with obtaining and maintaining any
Licenses required in the Territory outside the United States and said cost
shall be included in the Qualified Revenue requirements as set forth in
Section 1.04(ii).
1.07 Specifications. Diamond and Distributor agree that all Products will be
manufactured in accordance with the Specifications and applicable USDA
regulations. The Specifications may be changed at any time by mutual
agreement of the parties, subject to applicable regulatory requirements,
notices and approvals. Any disagreement concerning revisions to the
Specifications shall be first addressed by mutual discussion and
negotiation. Except to the extent the parties may otherwise agree in
writing, any increases in costs resulting from Specification changes
(including, but not limited to, those relating to packaging and raw
materials) may be reflected in a direct cost increase to the Purchase.
1.08 Labeling; Trademarks. Diamond shall affix labeling to all Products, such
labeling to bear one or more Distributor trademarks, as specified in
writing by Distributor. Nothing contained herein shall give Diamond any
right to use any Distributor trademark except on all Products manufactured
and delivered for Distributor. Diamond shall not obtain any right; title
or interest in any Distributor trademark by virtue of this Agreement
Distributor shall not use, nor shall Distributor obtain any right, title or
interest in, any Diamond trademark or any [ *** ] trademark, including
without limitation "Pneumo-Star," "Somnu-Star" and "Somnu-Star PH." All
Product labeling shall in addition to the Distributor trademark, contain
the notation "Manufactured by Diamond Animal Health, Inc." with its address
or such similar notation as may be necessary or advisable under applicable
law, and shall contain the notation "Distributed by Agri Laboratories,
Inc.," with its address. Distributor shall cause All Product labeling to
contain only such claims as are permitted under applicable Licenses for
such Products and to otherwise comply with applicable law. All labeling
and packaging of All Products shall be subject to the prior written
approval of both parties, which shall not be unreasonably withheld.
Diamond will order quantities of labeling and packaging sufficient to
perform its obligations hereunder in its reasonable discretion. Distributor
shall be responsible for the costs of developing and changing packaging for
All Products, including costs of obsolete labeling and packaging due to
changes requested by Distributor but only those occurring after initial
License for the same. Furthermore, Diamond shall be responsible for the
cost occasioned by any changes required by a government agency.
1.09 Location of Manufacture. All Products shall be manufactured by Diamond
at its plant located in Des Moines, Iowa.
SECTION 2. ADDITIONAL PRODUCTS
2.01 Additional Products. At Distributor's request, additional Products may
be added to Exhibit A to this Agreement, providing for additional
combinations of the antigens listed in Exhibit A and/or combinations of
such antigens and new antigens specified by Distributor. Diamond shall
have the right, in its discretion, to approve or disapprove any such
additional Products and if approved, to establish reasonable Purchase
Prices therefor. Any such approved additional Products and the Purchase
Prices therefor shall be set forth in an amended Exhibit A signed by
both parties to be collectively known as "All Products". Any such
approved additional product shall be included in the requirements of
Section 1.04(ii).
2.02 Registration Costs; Ownership. Distributor shall advance to Diamond the
Registration Costs for any additional Products approved pursuant to Section
2.01, which are added at Distributor's request. Each of Distributor and
Diamond shall retain ownership of any antigens it supplies for any such
additional Products and the addition of additional Products to Exhibit A
shall not be deemed to transfer any right, title, interest or license in or
to the antigens supplied by either party to the other party for such
Products, except as necessary to manufacture and sell Products under this
Agreement. Each of Distributor and Diamond shall retain joint ownership of
any jointly produced antigens developed by the parties hereto, and the
addition of said Products to Exhibit A shall not be deemed to transfer any
right, title, interest or license in or to the jointly developed antigens
or Products, except as necessary to manufacture and sell Products under
this Agreement. It is contemplated that a separate agreement would be
entered into for the joint development of antigens or Products between the
parties hereto.
SECTION 3. PRICE; PAYMENT
3.01 Purchase Prices. Distributor agrees to purchase the Products at prices
shown in Exhibit A hereto, subject to adjustment from time to time as
specified below (the "Purchase Price"). All prices are F.O.B. Diamond's
manufacturing plant and are exclusive of taxes, freight and insurance, if
any, which shall be invoiced to and paid by Distributor.
3.02 Annual Price Adjustment. Purchase Prices for each Product set forth in
Exhibit A shall be in effect for Products having specified delivery
dates during the first Contract Year. Purchase Prices to be in effect
for Products to be delivered in each subsequent Contract year shall be
negotiated by the parties in good faith, taking into account factors
including, but not limited to, cost changes, volume changes and plant
utilization. In the event that Purchase Price changes are not agreed
upon as a result of such good faith negotiations, then the Purchase
Prices in effect for the preceding Contract Year shall remain in effect.
3.03 Cost Increases. Diamond may also notify Distributor in writing during
any Contract Year of any cost increases for raw materials and packaging
components for All Products to the extent such increases, individually
or in the aggregate, would cause total finished cost of goods of such
Product to increase by more than 2%. Upon Distributor's request,
Diamond will furnish reasonable supporting documentation therefor. Upon
such notification, the parties shall negotiate in good faith to adjust
the applicable Purchase Prices to account for such increases. In the
event that Purchase Price changes are not agreed upon as a result of
such good faith negotiations, then the Purchase Prices then in effect
shall remain in effect.
3.04 Payment Terms. Diamond shall notify Distributor of the date when Products
are ready for shipment. Diamond shall invoice the Distributor for Products
on the later of (i) the date Diamond notifies Distributor that the Products
are ready for shipment or (ii) the delivery date specified in Distributor's
purchase order accepted by Diamond. Diamond shall invoice Distributor for
the Additional Payment, if any, within thirty (30) days after the end of
any Contract Year for which it is due. Diamond shall invoice Distributor
for Registration Costs, Support Costs and other amounts payable by
Distributor under this Agreement, if applicable, monthly as incurred.
Payment terms shall be net 30 days from the date of each such invoice. An
interest charge of one and one-half percent (1 1/2 %) per month or portion
of a month shall be charged for late payments. Diamond shall be entitled
to place Distributor on shipment hold and otherwise suspend performance
under this Agreement if Distributor shall be materially late or in default
of its payment obligations.
3.05 Packaging. Purchase Prices include packaging for bulk palletized shipment
for Distributor by common carrier for next-day delivery. Distributor shall
pay to Diamond the additional charges for labor and materials costs for
special or additional packaging or shipping requested by Distributor.
SECTION 4. FORECASTS; ORDER PROCEDURES; DELIVERIES
4.01 Firm Orders. Except to the extent that the parties otherwise agree in
writing with regard to a particular order, Distributor shall submit to
Diamond a firm written purchase order or orders specifying the types,
quantities and delivery dates and instructions of Products that it
desires to purchase at least five (5) months prior to the requested
delivery date(s). Diamond will review each purchase order within five
(5) business days of receipt and either issue in writing its
confirmation or its proposal for changes and modifications for delivery
to accommodate, to the extent reasonable, Diamond's scheduling
requirements. Diamond will use reasonable commercial efforts to
accommodate and to minimize changes and modifications to the delivery
dates requested by Distributor. Each purchase order shall be binding on
Distributor upon written confirmation by Diamond or, if Diamond has made
a proposal for changes or modifications to delivery, upon Distributor's
written acceptance of such changes or modifications; provided, that no
material modification or change will become effective after confirmation
without the written approval of both parties. Diamond agrees that with
respect to Products covered by a purchase order confirmed by it in
writing, the Products shall be available for shipment on the specified
delivery dates, except to the extent it is prevented from doing so due
to conditions beyond its reasonable control as provided in Section 8.
The applicable delivery schedules shall be suspended during any period
that Products have been selected for testing by a regulatory authority.
4.02 Standard Batch Size. Distributor will order Products in standard batch
sizes as shown on Exhibit A. If specified order amounts for Distributor
would result in a batch which is thirty percent (30 %) or more below the
applicable standard batch size set forth in Exhibit A, Diamond will so
notify Distributor and at Distributor's option (i) the parties will
mutually agree to an increased Purchase Price for such Products; (ii)
Distributor will agree to accept and pay for the entire standard batch
size of the ordered Products or (iii) Distributor may submit a revised
purchase order for a quantity of Products within the permitted
parameters.
4.03 Forecasts. Within 15 days after the date hereof Distributor will furnish
Diamond a written forecast of the quantities and types of Products that the
Distributor anticipates it will order from Diamond during each of the
anticipated first twelve (12) months of this Agreement. Thereafter, within
fifteen (15) days after the first day of each calendar quarter during the
term of this Agreement, Distributor will also furnish to Diamond revised
written estimates of the quantities it anticipates it will order during
each month of the succeeding twelve (12) month period. Such forecasts will
not be deemed binding commitments, but are for the purpose of enabling
Diamond to more effectively schedule the use of its facilities.
4.04 Delivery; Title. Diamond shall ship the Products at the Distributor's
expense and in accordance with Distributor's written instructions. Written
shipping instructions shall be provided by Distributor in each purchase
order or not later than two (2) days prior to the specified delivery date.
Title and risk of loss of the Products shall pass to the Distributor upon
receipt of the Products at the location directed by Distributor.
4.05 Warehousing . Diamond agrees to store the Products as required by the
Distributor for a period of not to exceed thirty (30) days from the later
of (i) the date Diamond notifies Distributor the Products are ready for
shipment or (ii) the delivery date specified in Distributor's purchase
order accepted by Diamond. With respect to Products that are not picked up
by the common carrier designated by Distributor's shipping instructions
within thirty (30) days from the date Diamond notifies Distributor the
Products are ready for shipment, Diamond shall charge a warehousing fee of
one and one-half percent (1 1/2%) of the invoice amount per month or
portion thereof until such Products are shipped.
4.06 Order of Precedence. In the event of conflict between the typewritten
terms of Distributor's purchase orders and the terms and conditions of
this Agreement, the order of precedence shall be first, the typewritten
terms of Distributor's accepted purchase orders and then this Agreement.
All other terms and conditions contained in Distributor's and Diamond's
standard form purchasing and selling documents shall be disregarded.
SECTION 5. LABEL CODES: QUALITY ASSURANCE; DATING
5.01 Label Codes. Diamond shall code all labels affixed to each unit of the
packaged Products to identify the Product batch. Distributor shall not
remove or obliterate label codes or patent marking on any Products.
5.02 Product Analysis . Prior to shipping any Product for the Distributor,
Diamond shall analyze the Product for the purpose of determining whether
it conforms with the Specifications.
5.03 Audit. Once during each Contract Year, Diamond shall provide to
Distributor reasonable access, during normal business hours, upon
reasonable notice to Diamond's manufacturing facilities to permit
Distributor to examine, audit and copy Diamond's records with respect to
manufacture, quality control and regulatory compliance of the Products,
at Distributor's sole expense. Such audit rights shall not extend to
financial and other records of Diamond not pertinent hereto.
5.04 Dating. Unless otherwise approved by Distributor prior to shipment,
Products will have a dating at time of shipment as follows; provided,
that in the event that retesting is required for a Product, the minimum
dating otherwise required shall be reduced by a period of sixty (60)
days:
(i) Products released for sale with twenty-four (24) months dating will
be shipped for Distributor with a minimum of twenty (20) months
dating remaining.
(ii) Products released for sale with eighteen (18) months dating will be
shipped for Distributor with a minimum of fourteen (14) months
dating remaining.
(iii) Products released for sale with twelve (12) months dating will be
shipped for Distributor with a minimum of eight (8) months dating
remaining.
5.05 Outdates. Should Product remain undistributed beyond the date permitted
by regulation or other government agency requirement, Diamond will
accept redelivery to it at Distributor's shipping costs, with
Distributor to receive credit for same at the price paid to Diamond up
to a maximum cumulative credit of 1 % of the aggregate Purchase Prices
of the products ordered for shipment within a Contract Year, to be
included in the calculation of the Qualified Revenue Requirement in
Section 1.04 (ii). Diamond agrees to destroy said returned Product at
its cost and in compliance with all regulatory requirements.
SECTION 6. TERM; TERMINATION
6.01 Term. The initial term of this Agreement shall be for a period
commencing on the Effective Date and ending on the fifth (5th)
anniversary of the end of the first Contract Year. This Agreement shall
automatically renew thereafter for additional renewal terms of one year
each, unless either party gives at least twelve (12) months prior
written notice to the other that it does not wish to renew this
Agreement.
6.02 Termination for Breach. Subject to the provisions of Section 8, if
either party shall breach any material obligation required under this
Agreement the other party may give written notice of its intention to
terminate this Agreement describing in reasonable detail the breach. If
the breaching party fails to remedy such material breach within thirty
(30) days (ninety (90) days in the case of any failure by Diamond to
deliver any Product) following such written notice, or if such breach is
not reasonably capable of cure within such thirty (30)-day or ninety
(90)-day period, as the case may be, and the breaching party fails to
commence cure procedures within such thirty (30)-day or ninety (90)-day
period and diligently prosecute such procedures until the breach is
cured, then the non-breaching party may, in addition to all other
remedies available at law or in equity, terminate this Agreement
forthwith upon written notice.
6.03 Performance on Termination. Upon termination of this Agreement, (i)
Products manufactured pursuant to confirmed purchase orders shall be
delivered no later than the requested delivery dates in the approved
purchase order and Distributor shall pay Diamond therefor as provided in
Section 3.04 (provided, that prepayment shall be required upon
termination due to Distributor's payment default); (ii) all raw
materials furnished by Distributor shall be returned at Distributor's
expense; and (iii) all reasonable costs of unused raw materials,
containers, labeling and packaging previously ordered by Diamond in its
reasonable discretion and not reusable for other purposes by Diamond
shall be paid by Distributor.
SECTION 7. REPRESENTATIONS AND WARRANTIES; NOTIFICATIONS
7.01 Of Diamond. Diamond represents and warrants to Distributor that:
(i) the Products delivered to Distributor hereunder shall conform to
the Specifications and all other requirements and shall be free
from material defects in workmanship and materials through their
respective expiration dates;
(ii) the execution and delivery of this Agreement by Diamond, and the
performance of its obligations hereunder, do not require the
consent of any third party and will not violate, with or without
notice, the lapse of time or both, any agreement, contract, license
or permit to which Diamond is a party or its organizational
documents; and
(iii)prior to delivery of any Product hereunder it will have, and
will thereafter maintain, all required manufacturing establishment
designations, permits and Licenses required to perform its
obligations with respect to such Product under this Agreement.
7.02 Of Distributor. Distributor represents and warrants to Diamond that:
(i) the execution and delivery of this Agreement by Distributor, and the
performance of its obligations hereunder, do not require the consent
of any third party and will not violate, with or without notice, the
lapse of time or both, any agreement, contract, license or permit to
which Distributor is a party or its organizational documents; and
(ii) it has, and will maintain, all permits and licenses required to
perform its obligations under this Agreement and Products
distributed hereunder will bear labels conforming to the
requirements of this Agreement.
7.03 Non-Conforming Products. The Distributor shall have 30 days after
receipt of the Product to inspect the Product for gross visual defects
and reject the same. If the Product is rejected, written notice must be
given to Diamond no later than 30 days after receipt by the Distributor.
The parties within 30 days after rejection will endeavor in good faith
negotiations to determine whether or not the Product conforms to
Diamond's warranties. If the parties conclude it does conform, it will
be treated as conforming in all respects under this Agreement with time
requirements to be adjusted to cover the time required by this process.
If the parties conclude it does not conform with Diamonds warranties in
Section 7.01 (i), at the Distributor's option, (i) Diamond shall be
relieved of any obligation to deliver any Product with respect to the
non-conforming shipment and in such case Diamond shall credit against
future purchases by Distributor the purchase price of such
non-conforming Product paid by Distributor together with any shipping
costs paid by the Distributor for delivery of such non-conforming
Product, or (ii) Diamond shall replace the non-conforming Product with
substitute Product which conforms with said warranties, within the time
agreed to by both parties, in which case the Distributor shall pay to
Diamond amounts in accordance with Section 3 hereof based on the
substitute shipment, net of the purchase price and shipping costs, if
any, previously paid by Distributor for such non-conforming Products.
The nonconforming Product shall become the property of and be returned
to Diamond at Diamond's expense. Diamond shall dispose of such Product
at its own expense according to all appropriate regulations. The
Purchase Price of nonconforming product shall be treated as Minimum
Qualified Revenue in the Contract Year the product is ordered for
shipment.
7.04 Recall. Diamond shall replace Product at no cost to the Distributor to
complete any Product recall or stop-sale required by a subsequent
determination that the Product (i) was not produced in accordance with
Specifications when released to the Distributor, (ii) failed to remain
in compliance with Specifications through the dating period of such
Product, (iii) contained any material defect in workmanship and
materials not detectable by Distributor's inspection testing, or (iv)
was not produced in compliance with applicable USDA regulations. The
reasonable costs of any such recall or stop-sale shall be borne by
Diamond. Any such recall or stop-sale shall be conducted in accordance
with USDA Veterinary Services Memorandum No. 800.57 or any successor
regulations. The Distributor shall be responsible for all other recalls
related to marketing, handling or storage of Product by Distributor or
its agents, including voluntary recalls made by Distributor. Minimum
Qualified Revenue for any Contract Year shall include the Purchase Price
for product recalled under the first sentence of this Section 7.04.
7.05 Exclusive Remedy. THE REMEDIES DESCRIBED IN THIS AGREEMENT ARE
EXCLUSIVE AND IN LIEU OF ANY 0THER REMEDY DISTRIBUTOR WOULD OTHERWISE
HAVE AGAINST DIAMOND WITH RESPECT TO DEFECTIVE PRODUCTS OR ANY BREACH OF
DIAMOND'S LIMITED WARRANTY UNDER SECTION 7.01 (i) OF THIS AGREEMENT;
PROVIDED, THAT THIS SECTION SHALL NOT LIMIT DIAMOND'S INDEMNITY
OBLIGATION SET FORTH IN SECTION 11 WITH RESPECT TO THIRD PARTY CLAIMS.
7.06 Limitations.
(i) EXCEPT AS EXPRESSLY SET FORTH IN THIS SECTION 7, DIAMOND MAKES NO
WARRANTIES, EXPRESSED OR IMPLIED, CONCERNING TECHNOLOGY, GOODS,
SERVICES, RIGHTS OR THE MANUFACTURE AND SALE OF PRODUCTS, AND HEREBY
DISCLAIMS ALL WARRANTIES, INCLUDING WITHOUT LIMITATION ANY WARRANTY OF
MERCHANTABILITY, FITNESS FOR A PARTICULAR USE OR PURPOSE OR
NONINFRINGEMENT WITH RESPECT TO ANY AND ALL OF THE FOREGOING.
(ii) IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY OR ANY
THIRD PARTY FOR LOST PROFITS, LOSS OF GOODWILL, OR ANY SPECIAL,
INDIRECT, CONSEQUENTIAL OR INCIDENTAL DAMAGES, HOWEVER CAUSED, ARISING
UNDER ANY THEORY OF LIABILITY. THIS LIMITATION SHALL APPLY EVEN IF A
PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, AND
NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED
REMEDY.
(iii) THE WARRANTY IN SECTION 7. 01 (i) WILL NOT APPLY TO THE EXTENT
OF ANY DEFECTS CAUSED BY IMPROPER OR INADEQUATE HANDLING OR STORAGE
OF PRODUCTS AFTER SHIPMENT BY DIAMOND OR FAILURE OF ANY RAW
MATERIALS SUPPLIED BY DISTRIBUTOR.
7.07 Notifications.
(i) Of Diamond. Diamond agrees that it will promptly notify the
Distributor in writing of any contact, claim or other communication
by any entity or agency that relates to, or may relate to,
Diamond's ability to perform its responsibilities herein. Any
communication (other than routine regulatory filings, notices and
reports and other non-adverse communications), either initiated by
Diamond or by the USDA, that references a Product in this Agreement
or the submission of any such Product will immediately be brought
in writing to the attention of the Distributor.
(ii) Of Distributor. Distributor agrees that it will promptly notify
Diamond in writing of any contact, claim or other communication by
any entity or agency that relates to, or may relate to,
Distributor's ability to perform its responsibilities herein. Any
communication (other than routine regulatory filings, notices and
reports and other non-adverse communications), either initiated by
Distributor or by the USDA, that references a Product in this
Agreement or the submission of any such Product will immediately be
brought in writing to the attention of Diamond.
SECTION 8. FORCE MAJEURE
8.01 Force Majeure. No party shall be held liable or responsible for failure
or delay in fulfilling or performing any obligation of this Agreement in
case such failure or delay is due to Acts of God, strikes or other labor
disputes, governmental regulations or actions (not otherwise the
responsibility of the parties), inability to obtain material, labor,
equipment or transportation, or any other condition beyond the
reasonable control of the affected party, provided such party has taken
reasonable steps to avert such causes or conditions. Each party agrees
to give the other party prompt written notice of the occurrence and the
nature of any such condition or act,, and the extent to which the
affected party will be unable to fully perform its obligation hereunder.
Each party further agrees to use all reasonable efforts to correct the
condition as quickly as possible.
8.02 Right to Terminate. If, as a result of causes or conditions described
in this Section, either party is unable to perform substantially all of
its material obligations hereunder for any consecutive period of three
(3) months, the other party shall have the right to terminate this
Agreement upon at least thirty (30) days prior written notice.
SECTION 9. CONFIDENTIAL INFORMATION
9.01 Non-Disclosure. All Confidential Information disclosed hereunder shall
remain the property of the disclosing party and shall be maintained in
confidence and not disclosed by the receiving party to any person except
to officers, employees, and consultants to whom it is necessary to
disclose the information for the purpose of performing and enforcing
this Agreement. Each party shall take all steps it would normally take
to protect its own Confidential Information to ensure that the received
Confidential Information shall be maintained in confidence and not
disclosed, but in no event less than reasonable care.
9.02 Use. Unless otherwise agreed in writing, all Confidential Information
disclosed hereunder shall be used by the parties only pursuant to and in
accordance with this Agreement.
9.03 Exceptions. The obligations of Diamond and Distributor under this
paragraph shall not apply to:
(i) Information which, at the time of disclosure, is in the public
domain or thereafter comes within the public domain other than as a
result of breach of this Agreement; or
(ii) Information which either party can establish was in its possession
at the time of disclosure; or
(iii) Information which was received from a third party not under an
obligation of confidentiality; or
(iv) Information which either party can establish was independently
developed without reference to the information received hereunder.
9.04 Termination; Survival. Upon termination of this Agreement, Diamond and
Distributor agree upon written request to return to the other all
written or other physical embodiments of the other's Confidential
Information, except for one record copy. The obligations under this
paragraph shall be binding on any affiliate, parent, subsidiary,
successor or assign of Diamond or Distributor as if a party to the
Agreement. The obligations of confidentiality and non-use of the
Confidential Information under this Agreement shall, continue throughout
the term of this Agreement and for a period of two (2) years following
the termination or expiration of this Agreement.
9.05 Confidentially of Agreement. Except to the extent required by law,
neither party shall disclose to third parties the terms of this Agreement
or the negotiations giving rise to this Agreement.
SECTION 10. OWNERSHIP OF INTELLECTUAL PROPERTY
Any and all design, patent, copyright and other relevant ownership and other
rights in and to the intellectual property aspects of the Products which are
the subject of this Agreement and all modifications, adjustments, changes and
derivatives thereto and thereof (collectively, the "Rights") shall belong
exclusively to Diamond, except as otherwise agreed in writing with respect to
additional Products added to this Agreement pursuant to Section 2.
Distributor agrees that it does not have, and will not claim, any Rights in
any Product delivered pursuant to this Agreement or aspect thereof, except as
so agreed in writing. Diamond. shall own the raw materials and Products,
subject to any security interest, until title passes pursuant to Section
4.04.
SECTION 11. INDEMNIFICATION
11.01 By Diamond. Diamond hereby agrees to defend, indemnify and hold
Distributor, its directors, officers, employees, agents and Affiliates
harmless from and against any loss, claim, action, damage, expense or
liability (including defense costs and attorneys' fees) resulting from
any third party claim or suit arising out of or relating to Diamond's
failure to manufacture a Product in compliance with its Specifications;
provided, however, that the foregoing indemnity obligations shall not
apply where such claim is the result of the willful misconduct or
negligent act of Distributor or its Affiliates, and there shall be
apportionment in accordance with responsibility when such obligation
derives in part from such acts of Diamond and in part from such acts of
Distributor and its Affiliates.
11.02 By Distributor. Distributor hereby agrees to defend, indemnify and
hold Diamond, its directors, officers, employees, agents and Affiliates
harmless from and against any loss, claim, action, damage, expense or
liability (including defense costs and attorneys' fees) resulting from
any third party claim or suit arising out of or relating to the use,
sale or distribution of any of the Product manufactured in conformity
with the Specifications, including, but not limited to any warranty for
the Products extended by Distributor other than the warranties given by
Diamond in Section 7.01(i) above and any of the claims identified in
Section 7.06(i) above; provided, however, that the foregoing indemnity
obligation shall not apply where such claim is solely the result of the
willful misconduct or negligent act of Diamond or its Affiliates and
there shall be apportionment in accordance with responsibility when such
obligation derives in part from acts of Distributor and in part from
such acts of Diamond and its Affiliates.
11.03 Procedures. In the event that a third-party claim is made or
third-party suit is filed for which either party intends to seek
indemnification from the other party pursuant to this Section 11, the
party seeking indemnification (the "Indemnitee" shall promptly notify the
other party (the "Indemnitor")of said claim or suit. The Indemnitor shall
have the right to control, through counsel of its choosing, the defense of
such third-party claim or suit, but may compromise or settle the same only
with the consent of the Indemnitee, which consent shall not be unreasonably
withheld. The Indemnitee shall promptly consult in good faith with the
Indemnitor with respect to any proposed settlement. The Indemnitee shall
cooperate fully with the Indemnitor and its counsel in the defense of any
such claim or suit and shall make available to the Indemnitor any books,
records or other documents necessary or appropriate for such defense. The
Indemnitee shall have the right to participate at the Indemnitee's expense
in the defense of any such claim or suit
through counsel chosen by the Indemnitee.
11. 04 Insurance. Diamond and Distributor will each Maintain product
liability insurance covering their individual performance of their
obligations hereunder with a minimum limit of liability of Two Million
Dollars ($2,000,000) in the aggregate. Each party will maintain
insurance to protect themselves and the other from claims under any
workers compensation acts and from any other damages from personal
injury including death, which may be sustained by the said parties,
their agents, servants or employees and the general public and/or claims
of property damage which might be sustained from any one of them due to
the negligence of the parties. Each party shall furnish the other with a
certificate of insurance.
11.05 Survival. The provision of Sections 11.01 through 11.03 shall
survive the expiration or termination of this Agreement.
SECTION 12. MISCELLANEOUS
12.01 Notices. All notices or other communications provided for in this
Agreement shall be in writing and shall be considered delivered upon the
earliest of actual receipt, or personal or courier delivery, or sending
by facsimile with confirmation of receipt in good order requested and
received, or on the fourth business day after they are deposited in the
United States mail, certified first class or air mail postage prepaid,
return receipt requested, addressed to the respective parties as
follows:
(i) If to Diamond: (ii) If to Distributor:
Diamond A al Health, Inc. AGRI Laboratories, ltd.
2538 S.E. 43rd Street 20927 State Route K
Des Moines, Iowa 50317 St. Joseph, MO 64505
ATTN: President ATTN: President
Fax: (515) 263-8661 Fax: (816) 233-9546
Copy to: Copy to:
Heska Corporation Edward S. Sloan
Legal Department Niewald, Waldeck & Brown
1825 Sharp Point Drive 120 W. 12th Street
Fort Collins, CO 80525 Kansas City, MO 64105
Fax: (816) 474-0872
The parties may, at any time, change their addresses or other information in
this section by written notice under this section.
12.02 Independent Contractors. The parties are and shall always remain
independent contractors as to the other in their performances of this
Agreement. The provisions of this Agreement shall not be construed as
authorizing or reserving to either party any right to exercise any
control or direction over the operations, activities, employees, or
agents of the other in connection with this Agreement except to the
extent required by law, it being understood and agreed that the control
and direction of such operations, activities, employees, or agents
shall otherwise remain with each party. Neither party to this
Agreement shall have any authority to employ any person as an employee
or agent for or on behalf of the other party to this Agreement, nor
shall any person performing any duties or engaging in any work at the
request of such party, be deemed to be an employee or agent of the
other party to this Agreement.
12.03 Governing Law. The validity, interpretation and performance of
this Agreement shall be governed and construed in accordance with the
internal laws of the State of Iowa.
12.04 Severability. Whenever possible, each provision of this Agreement
shall be interpreted in such a manner as to be effective and valid under
applicable law, but if any provision hereof shall be prohibited by or be
invalid under applicable law, such provision shall be ineffective to the
extent of such prohibition or invalidity, without invalidating the
remainder of such provision or the remaining provisions of this
Agreement.
12.05 Modification. No modification or waiver of any provision of this
Agreement shall be effective unless the modification is made in writing and
signed by the party sought to be charged, and the same shall then be
effective only for a period and on the conditions and for the specific
instances and purposes specified in such writing. No course of dealing
between Diamond and the Distributor or delay or failure to exercise any
rights hereunder shall operate as a waiver of such rights or preclude the
exercise of any other rights hereunder.
12.06 Survival. Termination or expiration of this Agreement shall not
relieve either party from any obligation under this Agreement which may
have accrued prior thereto or which survives by its terms.
12.07 Captions. The captions set forth in this Agreement are for
convenience only and shall not be used in any way to construe or
interpret this Agreement.
12.08 Assignment. Neither party to this Agreement may assign this
Agreement or its rights or obligations hereunder without the prior
written consent of the other party; except that either party may assign
its right and delegate its obligations hereunder without prior consent
of the other party to any successor entity by way of merger,
consolidation, or reorganization or to the purchaser of all or
substantially all of its assets. Any permitted assignee shall assume
all obligations of its assignor under this Agreement. No assignment
shall relieve either party of responsibility for the performance of any
accrued obligation which it has hereunder. Any consent required shall
not be unreasonably withheld.
12.09 Entire Agreement. This Agreement (including the Exhibits hereto)
constitutes the entire understanding of the parties with respect to the
subject matter hereof and supersede all prior negotiations or
communications, however given, regarding the subject matter hereof.
There are no other understandings, representations or warranties of any
kind, express or implied.
12.10 Arbitration. Should the parties hereto be unable to amicably
resolve between themselves any disagreements relating to or arising from
any one or more of the provisions of this Agreement, which does not
involve injunctive or equitable relief, both parties shall submit such
disagreement to arbitration under the Commercial Rules of the American
Arbitration Association in Kansas City, Missouri, with any hearing to be
held in St. Joseph, Missouri. Neither party shall have the right to
further appeal or redress an arbitration award in any other court or
tribunal except solely for the purpose of obtaining execution of the
judgment rendered by the American Arbitration Association.
SECTION 13. DEFINITIONS
13.01 "Affiliate" shall mean with respect to any person or entity (i) any
other person or entity that controls, is controlled by or is under common
control with such first person or entity, with "control" meaning direct or
indirect beneficial ownership of more than fifty percent (50%) of the
equity interest of an entity or more than a fifty percent (50%) interest
in the decision making authority of an entity, and (ii) an entity in which
the maximum equity interest permitted by law to be held by another entity
is held by such other entity.
13.02 "[***]" shall mean [ *** ].
13.03 "[ *** ]" shall mean [ *** ], Inc., a corporation organized under
the laws of Canada.
13.04 "[ *** ]" shall mean [ *** ]
Inc., a Delaware corporation.
13.05 "Confidential Information" shall, mean all information disclosed in
writing, or by oral communication if reduced to writing and confirmed as
confidential within (30) days of disclosure, by either party to the
other relating to raw materials, product specifications, formulations
and compositions, scientific know-how, chemical compound and composition
data, manufacturing processes, analytical methodology, product
applications, including safety and efficacy data, current and future
product and marketing plans and projections, and other information of a
technical or economic nature related to the Products and/or Diamond's
manufacture of the Products.
13.06 "Contract Year" shall mean (i) for Contract Year one (1) the period
commencing on the Effective Date and ending on the date Diamond has
obtained licenses in the United States for all of the viral antigens
listed on Exhibit A, and (ii) for each Contract Year thereafter, each
succeeding twelve-month period thereafter.
13.07 "License" shall mean a veterinary biologic license issued to
Diamond by the United States Department of Agriculture or other
regulatory agency with jurisdiction in the Territory for a Product to be
manufactured by Diamond pursuant to this Agreement.
13.08 "Minimum Qualified Revenue" shall mean the minimum amounts of
Qualified Revenue per Contract Year, as specified in Section 1.04 (ii)
above.
13.09 "Product" shall mean the antigens set forth on Exhibit A attached
hereto, together with any additional antigens added to this Agreement
pursuant to Section 2 hereof, individually or in any combination
permitted by this Agreement, in bulk or packaged as set forth in Exhibit
A.
13. 10 "Qualified Revenue" shall mean, for any Contract Year, an amount
equal to (i) the Purchase Price of Products ordered for shipment in such
Contract Year by Distributor, plus (ii) any amounts paid by Distributor
to Diamond in such Contract Year for Registration Costs and Support
Costs, plus (iii) any other amounts paid or advanced by Distributor to
Diamond in such Contact Year for research and development or other
services not contemplated by this Agreement, as adjusted for (iv) all
other adjustments to Minimum Qualified Revenue expressly as provided in
this Agreement.
13.11 "Registration Costs" shall mean all costs and expenses associated
with obtaining Licenses, including without limitation clinical trial
costs, assay development and validation, development of seed stocks,
production processes scale-up, formulation development, production of
pre-licensing serials, conduct of field safety trials, application fees
and other costs and expenses reasonably incidents thereto. As between
the parties, Registration Costs shall include labor and service charges
at Diamond's standard hourly rates, as amended from time to time, direct
cost of materials, and out-of-pocket and third-party expenditures.
13.12 "Specifications" shall mean, as the context may require, either one
or both of the following, which have been mutually agreed upon by the
parties: (i) vendor-certified appropriate quantitative and qualitative
particulars for all raw materials including active and non-active
excipients that are used to prepare all components represented in and by
final Products, and (ii) a filed and approved USDA Outline of Production
describing in detail the manufacturing process applicable for each
Product and the testing and release criteria applicable to each Product.
13.13 "Support Costs" shall mean all costs and expenses of Diamond
associated with providing technical support to Distributor under this
Agreement, including without limitation labor and service charges at
Diamond's standard hourly rates, as amended from time to time, direct
cost of materials, and out-of-pocket and third-party expenditures.
13.14 " Territory" shall mean the territory specified in Section 1.03.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
by their duly authorized representatives as of the date first written above.
DIAMOND ANIMAL HEALTH, INC. AGRI LABORATORIES, LTD.
By: /s/ LOUIS VAN DAELE By: /s/ STEVE SCHRAM
--------------------- ---------------------
Title: President Title: President
EXHIBITS
A - Products and Prices
B - [ *** ] Rights
C - [ *** ] Antigens
D - [ **** ]
Exhibit A (Modified Live)
Products and Pricing
Trade Name Antigens 1Ods 50ds 5ds
Titanium BRSV (BRSV) [***] [***] [***]
Titanium BRSV Vac3 (BRSV-PI3-IBR) [***] [***] [***]
Titanium 5 (BRSV-PI3-IBR-BVD1,BVD2) [***] [***] [***]
Titanium 5-L5 (BRSV-PI3-IBR-BVD1,BVD2-Lepto 5) [***] [***] [***]
Titanium 3 + BRSV LP (BRSV-IBR-BVD1,BVD2-Lepto Pomona) [***] [***] [***]
Titanium IBR (IBR) [***] [***] [***]
Titanium IBR LP (IBR-Lepto Pomona) [***] [***] [***]
Titanium 3 (IBR-BVD1,BVD2) [***] [***] [***]
Titanium 4 (IBR-PI3-BVD1,BVD2) [***] [***] [***]
Titanium 4 L5 (IBR-PI3-BVD1,BVD2-Lepto 5) [***] [***] [***]
Diamond Animal Health, Inc Agri Laboratories, LTD
By: /s/ CONNIE PHILLIPS By: /s/ STEVE SCHRAM
--------------------- ------------------
Title: V. P. Ops Title: President
Date: 11-6-00 Date: 11-3-00
Standard Batch Size Large Freeze Dryer Small Freeze Dryer
5 dose [ *** ] units [ *** ]ds [ *** ] units [ *** ] ds
10 dose [ *** ] units [ *** ]ds [ *** ] units [ *** ] ds
50 dose [ *** ] units [ *** ]ds [ *** ] units [ *** ] ds
NOTE: THESE PRICES ARE IN EFFECT FOR DELIVERIES MADE BETWEEN 1/1/2001 AND
12/31/2001
INCLUDING PURCHASE ORDERS PLACED AFTER 8/1/2000
Those products that are no longer carried are not included in this price
restructure. Should any of these
be ordered after this agreement, new pricing will be established.
Handscribed:
Note: 5ds pricing subject to reduction if forecasting/batches (larger) are
obtainable. SDS 11/3/00
*** Confidential Treatment Requested
Exhibit A
DAH World Wide Products
Single Bovine Antigens or Bovine Combinations
Modified Live Virus Antigens (Signature Line)
Infectious Bovine Rhinotracheitis (IBR)
Bovine Virus Diarrhea Virus-Type I (BVD)
Bovine Virus Diarrhea Virus-Type 11 (BVD)
Parainfluenza (P13)
Bovine Respiratory Syncytial Virus (BRSV)
Inactivated Virus Antigens (Signature Line)
Infectious Bovine Rhinotracheitis (IBR)
Bovine Virus Diarrhea - Type I (BVD)
Bovine Virus Diarrhea - Type II (BVD)
Lepto 5-way
Lepto Pomona
[ *** ] [ *** ] product (US Only)
[ *** ] [ *** ] product (US Only)
Camplylobacter (Vibrio) [ *** ] product
[ *** ]
[ *** ]
[ *** ]
[ *** ]
[ *** ]
[ *** ]
[ *** ]
[ *** ]
*** Confidential Treatment Requested
Exhibit B
[ *** ]
[ *** ] Antigens or [ *** ] Vaccine
Infectious Bovine [ *** ]
Bovine [ *** ]
> [ *** ]
> [ *** ]
Bovine [ *** ]
[ *** ]
[ *** ]
(Master Cell Stock)
Exhibit C
[ *** ] ANTIGENS
Generic Names Antigens
- -------------------------- -----------------------
1. [ *** ] [ *** ]
[ *** ] [ *** ]
2. [ *** ] [ *** ]
[ *** ]
3. [ *** ] [ *** ]
[ *** ] [ *** ]
[ *** ] [ *** ]
*** Confidentail Treatment Requested
Exhibit C, continued
[ *** ], Inc.
Exclusive [ *** ] Product Combinations (Canada Only)
[ *** ]
[ *** ]
[ *** ]
Any other Signature Line antigen in combination with the [ *** ] antigen.
Note: Non-exclusive on any other Signature Line product in Canada that does
not contain the [ *** ] antigen.
*** Confidential Treatment Requested
Exhibit D
[ *** ]
Diamond antigens to be incorporated into the [ *** ] or Solid Dose
Technologies:
[ *** ]
[ *** ]
[ *** ]
[ *** ]
[ *** ]
Note: [ *** ] component contains both Type I and Type II
*** Confidential Treatment Requested
AMENDMENT NO. 1
TO
BOVINE VACCINE DISTRIBUTION AGREEMENT
This Amendment No. 1 ("Amendment") is entered into as of the 13th day of
July, 1998, by and between DIAMOND ANIMAL HEALTH, INC., an Iowa corporation with
offices at 2538 Southeast 43rd Street, Des Moines, Iowa 50317 ("Diamond") and
AGRI LABORATORIES, LTD., a Delaware corporation, with offices at 20927 State
Route K, St. Joseph, Missouri 64505 ("Distributor") as an amendment to that
certain Bovine Vaccine Distribution Agreement between Diamond and Distributor
dated as of February 13, 1998, (the "Distribution Agreement").
WHEREAS, Diamond and Distributor are parties to the Distribution Agreement
providing for the distribution of certain bovine antigens; and
WHEREAS, Section 2.01 of the Distribution Agreement contemplates that
additional
products may be added to the Products subject to the Distribution Agreement; and
WHEREAS, Distributor and [ *** ] are parties to a separate agreement
providing for an exclusive worldwide license of [ *** ] rights in the
Additional Product to Distributor and providing for compensation to [ *** ]
from Distributor on account of Distributor's sales of such Additional Product;
and
WHEREAS, Diamond and Distributor desire to add the Additional Product as a
Product under the Distribution Agreement in the event that the Additional
Product is successfully developed and licensed.
NOW, THEREFORE, the parties agree as follows:
1 . Definitions.
a. In General. Capitalized terms used herein shall have the
meanings ascribed to them in the Distribution Agreement, unless otherwise
defined herein.
b. "Additional Product" shall mean the Product described on
Exhibit A, attached hereto.
c. "[ *** ] Antigens" shall mean the [ *** ] and [ *** ]
antigens owned by [ *** ] and more particularly described in Exhibit A
hereto.
d. "[ *** ] Technology" means all patents, patent applications,
copyrights, trademarks, know-how, trade secrets and other intellectual
property rights relating to the [ *** ] Antigens and the Additional Product
other than the Diamond Antigens and Diamond Technology.
*** Confidential Treatment Requested
e. "Diamond Antigens" shall mean the [ *** ] and [ ***
[ *** ] antigens owned by Diamond and more particularly described in
Exhibit A hereto.
f. "Diamond Technology " shall mean all patents, patent
applications, copyrights, trademarks, know-how, trade secrets and other
intellectual property rights of Diamond relating to the Diamond Antigens and
the Additional Product.
2. Additional Product Subject to Distribution Agreement. If a
License is issued to Diamond for the Additional Product by the United States
Department of Agriculture, and effective upon the date of such issuance (the
"License Date"), the Additional Product shall be added as a "Product" under
the Distribution Agreement. All provisions of the Distribution Agreement
relating to Products shall apply to the Additional Product, except as
expressly provided in this Amendment.
3. [ *** ] Rights. The provisions of Sections 1.01 (Manufacture and
Sale), 1.02 (Exclusivity), 1.03 (Territory), 1.05 (Responsibility of
Distributor; Diamond Technical Support), and 1.06 (Registration and
Licensing) shall NOT apply with respect to the Additional Product, except to
the extent of the Diamond Antigens included therein. Distributor represents
and warrants to Diamond that Distributor has all necessary rights in and to
the [ *** ] Antigens and [ *** ] Technology for the development, manufacture
and sale of the Additional Product pursuant to the Distribution Agreement
and this Amendment ("[ *** ] Rights"). Distributor hereby grants to Diamond
exclusive manufacturing rights to Additional Product and to have sold the
Additional Product exclusively to Distributor pursuant to the Distribution
Agreement and this Amendment. Diamond shall exercise such rights only for
the purpose of performing its obligations to Distributor under the
Distribution Agreement and this Amendment.
4. Purchase Price; Batch Sizes. The Purchase Price for the
Additional Product shall be $[ *** ] per dose for and during the first three
(3) Contract Years, as defined in Paragraph 5 below, subject to a price
adjustment beginning with the fourth Contract Year and thereafter pursuant
to the terms of Sections 3.02 and 3.03 of the Distribution Agreement.
5. Term. With respect to the Additional Product (but not other
Products, with respect to which Section 6.01 of the Distribution Agreement
shall control: (i) the initial Term of this Amendment shall be for a period
commencing on the License Date and ending on the fifth (5th) anniversary of
the end of the Contract Year during which the License Date occurs and (ii)
this Amendment shall automatically renew thereafter for additional renewal
terms of one year each, unless either party gives at least twelve (12)
months prior written notice to the other that it does not wish to renew this
Amendment.
6. Registration and Licensing. Diamond will use reasonable efforts
to assist Distributor in the registration of Additional Product (bulk or
packed form) outside the United States at Distributor's expense. Distributor
shall pay all registration costs associated with obtaining and maintaining
any License required outside the United States and said costs shall be
included in Qualified Revenue requirements as set forth in Section 1.04(ii)
of the Distribution Agreement.
*** Confidential Treatment Requested
7. Effect of Amendment. This Amendment is hereby incorporated by
reference into the Distribution Agreement as if fully set forth therein, and
the Distribution Agreement as amended by this Amendment shall continue in
full force and effect following execution and delivery hereof. In the event
of any conflict between the terms and conditions of the Distribution
Agreement and this Amendment, the terms and conditions of this Amendment
shall control.
8. Indemnification. In addition to the indemnification contained in
Section 11 of the Distribution Agreement, Distributor agrees to defend,
indemnify and hold Diamond, its directors, officers, employees, agents and
affiliates harmless with respect to any third-party claim or suit arising
out of any claim that [ *** ] Antigens or [ *** ] Technology infringes the
patent, copyright or other intellectual property right of any third-party.
IN WITNESS WHEREOF, the parties have caused this Amendment No. 1 to be
executed by their duly authorized representatives as of the date first written
above.
DIAMOND ANIMAL HEALTH, INC.
By: /s/ LOUIS VAN DAELE
Its: President
AGRI LABORATORIEES, LTD.
By: /s/ STEVE SCHRAM
Its: President
*** Confidential Treatment Requested
EXHIBIT A TO AMENDMENT NO. I TO BOVINE DISTRIBUTION AGREEMENT
Additional Product, Pricing and Batch Sizes
Additional Product Purchase Price Standard Batch Size
-------------------- ---------------- --------------------
[ *** ] $[ *** ] [ *** ] units (est.)
[ *** ]
[ *** ]
[ *** ]
[ *** ]
[ *** ]
IN WITNESS WHEREOF, the parties have caused this revised Exhibit A to be
executed by their duly authorized representatives as of July 13, 1998.
DIAMOND ANIMAL HEALTH, INC.
By: /s/ LOUIS VAN DAELE
Its: President
AGRI LABORATORIES, LTD.
By: /s/ STEVE SCHRAM
Its: President
*** Confidential Treatment Requested
AMENDMENT NO. 2
TO
BOVINE VACCINE DISTRIBUTION AGREEMENT
This Amendment No. 2 ("Amendment") is entered into as of the 13th day of
December, 1999, ("Effective Date") by and between DIAMOND ANIMAL HEALTH, INC.,
an Iowa corporation with offices at 2538 Southeast 43rd Street, Des Moines, Iowa
50317 ("Diamond") and AGRI LABORATOREES, LTD., a Delaware corporation, with
offices at 20927 State Route K, St. Joseph, Missouri 64505 ("Distributor") as an
amendment to that certain Bovine Vaccine Distribution Agreement between Diamond
and Distributor dated as of February 13, 1998 (the "Distribution Agreement").
WHEREAS, Diamond and Distributor are parties to the Distribution Agreement
providing for the distribution of certain bovine antigens; and
WHEREAS, Diamond, Distributor and [ *** ] have entered into a "Bovine
Testing Agreement" for the Product Titanium 5 + Once PMH.
WHEREAS, Section 2.01 of the Distribution Agreement contemplates that
additional products may be added to the Products subject to the Distribution
Agreement; and
WHEREAS, Diamond and Distributor desire to provide for the development and
licensure of certain Additional Cattle Products (defined below) and if licensed,
to add them as Products under the Distribution Agreement.
NOW, THEREFORE, the parties agrees as follows:
1. Definitions.
(1) In General. Capitalized terms used herein shall have the
meanings ascribed to them in the Distribution Agreement, unless otherwise
defined herein,
(2) "Additional Cattle Products" shall mean the products
described in Exhibit A, attached hereto.
2. Development and Registration of Additional Cattle Products. In
consideration of Distributor's payment of the fees provided in the Bovine
Vaccine Testing Agreement, Diamond agrees to and hereby grants to
Distributor exclusive world wide marketing rights to the product identified
on Exhibit A attached hereto and incorporated herein for a period of five
(5) years from the License Date by United States Department of Agriculture
("USDA"). Diamond shall use reasonable efforts to assist Distributor in the
registration of such Additional Cattle Products (bulk or packed form)
outside the United States at Distributor's expense. Distributor shall pay
all Registration Costs associated with obtaining and maintaining any
Licenses required in the Territory outside the United States and said
Registration Costs shall be included in the Qualified Revenue requirements
as set forth in Section 1.04(ii) of the Distribution Agreement. This
Section 2 of this Amendment shall supersede any and all inconsistent
provisions of Section 1.06, and the first sentence of Section 2.02, of the
Distribution Agreement.
*** Confidential Treatment Requested
3. Development and Registration Fees. Amounts paid by Distributor
under the Bovine Testing Agreement to Diamond shall constitute Qualified
Revenue under the Distribution Agreement, be credited to Distributor's
Minimum Qualified Revenue obligations under the Distribution Agreement,
beginning with the Second Contract Year's Minimum Qualified Revenue, under
the Distribution Agreement.
4. Additional Product Subject to Distribution Agreement. If a
License is issued to Diamond, [ *** ], Distributor or any combination of the
three (3) named parties for the Additional Cattle Product as identified in
Exhibit A by the United States Department of Agriculture, and effective upon
the date of such issuance (the "License Date"), such Additional Cattle
Products shall be added as a "Product" under the Distribution Agreement. All
provisions of the Distribution Agreement relating to Products shall apply to
the Additional Product, except as expressly provided in this Amendment.
5. Ownership. Section 2.02 of the Distribution Agreement shall not
apply to the Additional Cattle Products. Diamond shall retain ownership of
(i) the Additional Cattle Products developed pursuant to this Amendment and
(ii) any antigens it supplies for such Additional Cattle Products, and the
addition of the Additional Cattle Products as Products under the
Distribution Agreement shall not be deemed to transfer any right, title,
interest or license in or to such Additional Cattle Products and/or antigens
to Distributor, except for the distribution rights expressly granted in the
Distribution Agreement and this Amendment.
6. Purchase Price: Batch Sizes. The initial Purchase Prices and batch
sizes for the Additional Cattle Products are set forth in Exhibit A attached
hereto.
*** Confidential Treatment Requested
7. Term.
In General. With respect to all Additional Cattle Products (but
not other Products, with respect to which Section 6.01 of the Distribution
Agreement shall control): (i) the initial term of this Amendment shall be
for a period commencing on the License Date and ending on the fifth (5th)
anniversary of the end of the Contract Year during which the License Date
occurs and (ii) this Amendment shall automatically renew thereafter for
additional renewal terms of one year each, unless either party gives at
least twelve (12) months prior written notice to the other that it does not
wish to renew this Amendment with respect to such Additional Cattle Product.
8. Effect of Amendment. This Amendment is hereby incorporated by
reference into the Distribution Agreement as if fully set forth therein, and
the Distribution Agreement as amended by this Amendment shall continue in
full force and effect following execution and delivery hereof. In the event
of any conflict between the terms and conditions of the Distribution
Agreement and this Amendment, the terms and conditions of this Amendment
shall control.
IN WITNESS WHEREOF, the parties have caused this Amendment No. 2 to be
executed by their duly authorized representatives as of the date first written
above.
DIAMOND ANIMAL HEALTH, INC.
By: /s/ LOUIS VAN DAELE
----------------------
Its: President
AGRI LABORATORIES, INC,
By: /s/ STEVE SCHRAM
-----------------------
Its: President
EXHIBIT A
AMENDMENT NO. 2
BOVINE VACCINE DISTRIBUTION AGREEMENT
ADDITIONAL CATTLE PRODUCTS, PRICING, AND BATCH SIZES
Additional Products:
Titanium 5 + Once PMH (MLV IBR, BRSV, P13, BVD I and II + Live avirulent
P.haemolytica/multocida).
Standard Batch Size:
5 dose [ *** ] units
10 dose [ *** ] units
50 dose [ *** ] units
Purchase Price: 5 dose 10 dose 50 dose
- ------------------------- -------- --------- --------
[ *** ] (unlabeled) [ *** ] [ *** ] [ *** ]
AgriLabs (final packaged) [ *** ] [ *** ] [ *** ]
1) All prices include viricidal testing performed at Diamond.
2) Bactericidal testing is performed by [ *** ] and is incorporated into the
Once PMH cost to Agrilabs.
3) [ *** ] will bill Agrilabs directly for the Once PMH component and
Agilabs will provide the Once PMH component to Diamond for labeling and
final packaging at no cost to Diamond.
Diamond Animal Health Agri Laboratories, Inc.
By: /s/ LOUIS VAN DAELE By: /s/ STEVE SCHRAM
---------------------- -----------------------
Its: President Its: President
Date: 6-29-00 Date: 6-30-00
Note: Prices will be effective with the first shipment of product after
licensing and will be in effect for 12 months following the first shipment.
*** Confidential Treatment Requested
AMENDMENT NO. 3 TO
BOVINE VACCINE DISTRIBUTION AGREEMENT
This Amendment No. 3 modifies the Bovine Vaccine Distribution Agreement
dated
February 13, 1998, between Diamond Animal Health, Inc. and Agri
Laboratories, Ltd. ("Original Agreement").
1. Purchase of Requirements: Minimum Purchases: Section 1.04 (ii) of the
Original Agreement is hereby modified to delete and replace a certain
year and monetary amount under "Contract Year as defined in 13.06" and
"Minimum Qualified Revenues" as follows:
Delete in total:
----------------
5th and thereafter $[ *** ]
Replace with:
----------------
5th $[ *** ]
6th and thereafter $[ *** ]
2. No Other Changes. Except as expressly modified by this Amendment,
Amendment No. 1 dated July 13, 1998 and Amendment No. 2 dated December
13, 1999, all provisions of the Original Agreement shall remain in full
force and effect.
IN WITNESS WHEREOF, this Amendment has been executed by the duly authorized
representatives of the parties.
SIGNED:
Diamond Animal Health, Inc. Agri Laboratories
By: /s/ CAROL TALKINGTON VERSER By: /s/ STEVE SCHRAM
------------------------------ ---------------------------------
Name: Carol Talkington Verser, Ph.D. Name: Steve Schram
Title: Executive Vice President Title: CEO
Date: 7-12-01 Date: 7-05-01
*** Confidential Treatment Requested
[CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTIONS OF THIS DOCUMENT
HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY FILED WITH THE COMMISSION]
THIS EXCLUSIVE DISTRIBUTION AGREEMENT (THE "AGREEMENT") is entered into as of
February 14, 2001 (the "EFFECTIVE DATE") between HESKA CORPORATION ("Heska"), a
Delaware corporation and NOVARTIS ANIMAL HEALTH CANADA, INC. ("Novartis").
WHEREAS, Novartis wishes to purchase certain veterinary products from Heska for
the purpose of distribution for resale in Canada.
THE PARTIES AGREE AS FOLLOWS:
1. DEFINITIONS.
In this Agreement, including the Schedules hereto, the following words and
expressions shall have the following meanings:
"AFFILIATE" means, with respect to any entity, any other entity which is
controlled by, in control of, or under common control with, such entity. For
the purpose of this definition, "control" of an entity shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of its management or policies, whether through the ownership of voting
securities, by contract or otherwise.
"BASE RATE" initially means for the FluAvert I.N. Vaccine. $[***] US per $
[***] Cdn, and for additional Products pursuant to SECTION 6.2, the average
exchange rate of Canadian Dollar to United States Dollar for the [
*** ] by Novartis
in Canada. The Base Rate shall be adjusted pursuant to SECTION 4.2.
"COMMERCIAL RELEASE" means, with respect to a Product, that such Product
has been approved for marketing in Canada by all applicable regulatory
authorities.
"COMPETITIVE PRODUCT" means any product (other than a Product) which has
any of the same diagnostic or therapeutic applications as any Product.
"INITIAL PERIOD" has the meaning given to such term in SECTION 2.4(A).
"MARKETING PLAN" has the meaning given to such term in SECTION 2.4(A).
"MINIMUM EXPIRATION DATE" means, for each Product, the minimum amount of
time from the scheduled shipment date of any such Product unit to the stated
expiration date of such unit which Heska agrees to provide under SECTION 3.4.
The Minimum Expiration Date for each Product shall be specified pursuant to
SECTION 3.4.
"MINIMUM PURCHASE REQUIREMENT" means, for each Product, the number of units
as set forth on Schedule A, which Novartis is required to purchase in each
Calendar Year. This shall be prorated for partial year periods.
"PARTY" means Heska and/or Novartis.
"PERIOD" means each of the Initial Period and each calendar year
thereafter.
"PRICE" has the meaning given to such term in SECTION 4.1.
"PRODUCT SCHEDULE" has the meaning given to such term in SECTION 2.4(A).
"PRODUCTS" means Heska's Flu Avert(TM) I.N. Vaccine. The Parties may revise
(definition of Products pursuant to SECTIONS 6 AND 12.2.
*** Confidential Treatment Requested
"TERM" means the period commencing on the date hereof and, unless
terminated in accordance with SECTION 12, continuing to December 31, 2006 and
shall be automatically renewed for additional successive one (1) year terms
unless either Party provides written notification to the other Party of its
intention not to renew at least six (6) months prior to the termination date.
2. DISTRIBUTOR APPOINTMENT.
2.1 Appointment. Subject to the terms and conditions set out in this
Agreement, Heska hereby appoints Novartis as its exclusive distributor in
Canada during the Term to promote, market and sell the Products for use by
veterinarians.
2.2 No Sales Outside Canada. Other than pursuant to other
distribution agreements for other territories with Heska, Novartis shall not
(a) seek customers outside of Canada, (b) establish distribution points
outside of Canada, nor (c) sell the Products to any distributor or reseller
which Novartis reasonably understands will sell the Products outside of
Canada.
2.3 No Limit on Price. Notwithstanding SECTION 2.4, Novartis has the
unrestricted right to unilaterally determine the prices at which it resells
the Products which it purchases hereunder. No Heska representative has the
authority to require or suggest that Novartis charge a particular resale
price for the Products which it purchases hereunder.
2.4 Initial Marketing Plan; Product Schedule.
(a) Initial Period. At least six months prior to the projected
Commercial Release of each Product (or, if later, on or prior to the date on
which such Product becomes a Product hereunder), Novartis will provide to
Heska. a draft marketing plan (the "MARKETING PLAN") for such Product for
the remainder of the initial calendar year and, if less than nine months
remains in such calendar year, the next succeeding calendar year (the
"INITIAL PERIOD"). The Marketing Plan shall specify in reasonable detail
Novartis' marketing plans for such Product and shall include for the Initial
Period Novartis' anticipated sales price of the Product and goals for the
Product based on its good faith sales estimates. In addition, the Parties
will finalize any remaining terms for such Product on SCHEDULE A (a "PRODUCT
SCHEDULE").
(b) Subsequent Periods. For each Period after the Initial Period,
Novartis will provide to Heska a revised Marketing Plan. Each such plan shall
be delivered by November 1 of the year prior to the start of such Period.
2.5 Competitive Products. Novartis hereby represents and agrees that
neither it nor any of its Affiliates sell nor will sell during the Term, any
Competitive Products in Canada. This representation will be deemed restated as
of the date any item becomes a Product as provided in SECTION 6.2.
3. SALES.
3.1 Orders. Novartis shall place orders for Products consistent with
the binding portion of the forecasts as set forth in SECTION 5.4. All
orders shall be initiated by written purchase order to Heska. Orders shall
not be binding upon Heska unless and until expressly accepted by Heska in
writing or by shipping Product in accordance with the order. Heska shall
endeavor to accept or reject all orders within five (5) business days of
receipt. No partial shipment of an order shall constitute the acceptance of
the entire order, absent the written acceptance of such entire order.
3.2 Shipping. Anticipated shipment dates shall be as specified in
Heska's written acceptance of the order. Heska shall use its commercially
reasonable efforts to meet acknowledged shipment dates; however, Heska shall
not be liable for any damages resulting from its failure to meet such
shipment dates, even if Heska has been advised of the possibility of such
damages. Novartis shall select the common carrier and method of shipment.
Novartis shall be responsible for arranging the exporting and importing of
all Products ordered under this Agreement. Risk of loss or damage shall
pass to Novartis on delivery of the Products by Heska to a common carrier.
All Products in each order may be shipped only to a single destination.
3.3 Cancellation/Rescheduling. Novartis may not cancel purchase
orders for Products which have been formally accepted by Heska. Novartis
shall be entitled to reschedule an accepted purchase order one time without
penalty; provided that such rescheduling is requested at least fifteen (15)
days prior to the scheduled shipment date and the purchase order is
rescheduled to a date no more than thirty (30) days beyond the originally
scheduled shipment date.
3.4 Minimum Expiration Date. Heska agrees that the stated expiration
date of each Product shall be at least the respective Minimum Expiration
Date after the scheduled shipment date of the related order. The Minimum
Expiration Date for each Product is indicated in Schedule A. If any order
is rescheduled by Novartis such commitment regarding the Minimum Expiration
Date shall be based on the original scheduled shipment date, not the
rescheduled date. Heska shall use its best efforts to ship the most recent
lot of Product to Novartis.
3.5 Rejection of Products. A Product shall be deemed accepted if not
rejected within thirty (30) days after receipt by Novartis or, if earlier,
shipment by Novartis to its customer. The sole basis for rejection shall be
the failure of the product to conform to the Technical Specifications as set
forth in Schedule A. Heska shall replace such a defective product, at
Heska's cost, with equivalent unit(s) of the same Product and shall
reimburse Novartis for reasonable costs realized by Novartis for destroying
defective product.
4. PRICES AND PAYMENT.
4.1 Prices. Prices for each Product shall be as set forth in Schedule
A.
4.2 Adjustments.
(a) With respect to any Product, if at any time after the first
full calendar year of sales of the Product in Canada, the Average Rate
(defined below) differs from the then current Base Rate by more than [ *** ]%
then the Price for such Product shall be adjusted. Under such adjustment,
the Price shall be the Original Dollar Price (defined below) for such
Product converted into Canadian Dollars using such Average Rate. Following
such adjustment, such Average Rate shall become the Base Rate for all future
calculations and all Product Schedules will be appropriately adjusted.
"AVERAGE RATE" means the exchange rate of Canadian dollars to United States
dollars [ *** ]. "ORIGINAL DOLLAR PRICE" shall mean
the Price for such Product (prior to adjustment) expressed in United States
dollars using the Base Rate (prior to adjustment) as the rate of exchange.
(b) With respect to any Product, after the first full calendar
year of sales of the Product in Canada, Heska can implement an annual price
increase/decrease equal to the percentage increase/decrease in its
documented manufacturing costs over then prevailing prices. Heska shall
provide notice to Novartis of such price increase/decrease no later than
November 30 with respect to an increase/decrease for the following year. In
no case shall price increases be higher than the Canadian Consumer Price
Index (CPI).
4.3 Prices. The Prices are FOB, Diamond Animal Health, Des Moines,
Iowa. The Prices do not include the costs of shipping and insurance and
sales, use, VAT, excise, withholding or similar taxes, all of which shall be
the obligation of Novartis.
4.4 Payment. Payment for Products shall be due in full thirty (30)
days from the receipt of goods by Novartis. All payments hereunder shall be
made in immediately available funds in Canadian dollars by wire transfer to
the account from time to time specified by Heska. Amounts not paid when due
are subject to a monthly charge at the rate of one and one-half percent
(1-1/2%) per month, or the maximum rate permitted by law whichever is less.
*** Confidential Treatment Requested
5. NOVARTIS OBLIGATIONS.
5.1 Sales and Product Support. Novartis agrees to use reasonable
commercial efforts to develop, promote, support and sell the Products in Canada.
Such activities shall include, but are not limited to, (a) development of
marketing support materials such as sales brochures, journal advertisements,
sales aids, technical bulletins, slide presentations and other related
supportive documentation, Heska to provide to Novartis one printed and one
electronic copy of all USA advertising and support materials including slides,
CD Roms , films etc. (b) ensuring sales personnel detail the Products to
distributors, veterinarians and other interested parties, (c) organizing and
sponsoring seminars and meetings with distributors, veterinarians and other
interested parties, (d) actively participating in trade shows, including
prominently displaying and promoting the Products, and (e) other activities
deemed appropriate for the commercial success of the Products. Heska will
provide Novartis personnel, at no charge, reasonable amounts of training
regarding the Products at Novartis's Sales meeting at one location in
Canada. Novartis will maintain throughout Canada customer service phone
support for the Products for its distributors and veterinarians. Heska will
provide back-up telephone customer support only to Novartis. Novartis shall
contact Heska immediately regarding any material complaints or reports of
material adverse experiences regarding use of the Products.
5.2 Approvals. No later than promptly following the Effective Date,
Novartis will inform Heska of any legal, administrative or regulatory
requirements in Canada with which Heska or Novartis must or should comply in
connection with this Agreement or the performance by Novartis of the
marketing or distribution of any Product (collectively, the "APPROVALS").
Novartis will comply with all applicable laws in connection with performing
its rights and obligations under this Agreement, including obtaining, prior
to offering and reselling any Product, all applicable Approvals required for
import, storage, distribution, and sales (Application for permit to import
Veterinary Biologics into Canada, CFIA-1493). Novartis will maintain the
Import Approvals throughout the Term at its own expense. Heska will
provide, at no cost to Novartis, reasonable assistance in connection with
obtaining the Approvals, including providing Novartis such data, samples and
other information and materials as are in Heska's possession. Novartis will
periodically, and in any event promptly following Heska's request, provide
Heska reasonable information regarding the status of all Approvals. Heska
will be responsible for providing to the Canadian Food Inspection Agency all
information required from the manufacturer of the products including
labeling provided by Novartis (Veterinary Biologics Information Form,
CFIA-1503). Heska shall notify Novartis of any U.S. regulatory changes that
significantly impact any of the Products.
5.3 Inventory and Sales Reports. Novartis will furnish to Heska
inventory and sales reports by the 10th day of the month following each
calendar quarter. Such inventory reports will include, at a minimum, with
respect to all inventory on hand at the end of the prior calendar quarter:
Product number, quantity, and expiration dates. Such sales reports will
include, at a minimum, with respect to sales made during the prior calendar
quarter: Product number, quantity and Novartis' weighted average sales price
and the range of sales prices.
5.4 Forecasts. At least six months prior to the calendar quarter in
which Commercial Release of the first Product is projected to occur and,
thereafter, at least sixty days prior to the beginning of each calendar
quarter, Novartis will furnish Heska with a forecast of Novartis' projected
Product requirements for the next succeeding 4 calendar quarters. Each such
forecast shall be binding on Novartis only if covered by the applicable
purchase order (Section 3) for the first calendar quarter of such forecasted
period. Each such forecast will specify the projected requirements for each
Product by month, except that it shall be broken out by requested shipping
dates for the first calendar quarter of such forecast.
5.5 Approval of Promotional Materials. Novartis will submit to Heska
for approval prior to use copies (with translations) of all new
advertisements and other promotional materials, including catalog
descriptions, involving the Products prepared by or for Novartis in
connection with the Products. If Heska fails to reject such materials
within two weeks of receipt, then Heska will be deemed to have approved such
materials.
5.6 Certain Practices. Novartis agrees to not directly or indirectly
offer, pay, promise to pay, or authorize the payment of money or anything of
value to any governmental official or representative for the purpose of
influencing such persons' decisions or actions regarding the Products.
5.7 No Modifications to Product. Unless otherwise agreed by Heska in
writing, Novartis will not (a) sell Products other than in original,
unmodified, and unused condition, (b) remove, obscure or modify any label or
other indication of patent, any trademark or other intellectual property
rights on the Products, (c) add any label or mark to any Product, nor (d)
promote any Product under any name or mark other than the names and
trademarks provided by Heska.
5.8 Minimum Purchase Requirement. Novartis shall purchase the Minimum
Purchase Requirement with respect to each Product for each applicable period
as set out in Schedule A which may be modified at least thirty (30) days
prior to the upcoming calendar year upon mutual agreement of the Parties.
6. PRODUCT DISCONTINUANCE; NEW PRODUCTS.
6.1 Product Discontinuance. Heska shall have the right, without
liability to Novartis, to discontinue the manufacture or sale in Canada of
any Product covered by this Agreement. Heska shall endeavor to notify
Novartis as soon as practicable prior to such discontinuance no later than
sixty (60) days prior to discontinuance.
6.2 New Products. Heska agrees that from time to time it may offer
Novartis the first right to purchase for resale in Canada, other Heska drug,
vaccine and point of care diagnostic products, except for any such
product(s) for which Heska has identified a worldwide (with the possible
exception of the United States) partner. Such purchase right shall be on
the terms set forth in this Agreement as modified in writing by the Parties.
Upon agreement, the affected product shall become a Product hereunder and
the Parties shall complete and execute a Product Schedule for such Product.
Heska and Novartis further agree to complete and execute a Product Schedule
for Solo Step(TM) CH Cassettes, Solo Step(TM) CH Batch Test Strips, and
Heska's IgE point of care screen ("Pending New Products") within one hundred
twenty (120) days of the Effective Date of this Agreement. Should such a
Product Schedule for any of these Pending New Products not be executed within
such one hundred twenty (120) day period then Heska shall have the right to
offer any such Pending New Product to any third party, but at substantially
no better terms than were offered to Novartis, unless Novartis declines such
terms.
7. INTELLECTUAL PROPERTY INFRINGEMENT INDEMNIFICATION.
7.1 Indemnity. Heska will defend, at its own expense, any claim, suit
or proceeding brought against Novartis to the extent it is based upon a
claim that any Product sold pursuant to this Agreement infringes upon any
presently issued patent, or misappropriates any trade secret, of any third
party. Novartis agrees that it shall promptly notify Heska in writing of
any such claim or action and give Heska full information and assistance in
connection therewith. Heska shall have the sole right to control the
defense of any such claim or action and the sole right to settle or
compromise any such claim or action. If Novartis complies with the
provisions hereof, Heska will pay all damages, costs and expenses finally
awarded to third parties against Novartis in such action. If a Product is,
or in Heska's opinion might be, held to infringe as set forth above, Heska
may, at its option replace or modify such Product so as to avoid
infringement, or procure the right for Novartis to continue the use and
resale of such Product. If neither of such alternatives is, in Heska's
opinion, commercially reasonable, the infringing Product shall be returned
to Heska and Heska's sole liability, in addition to its obligation to
reimburse awarded damages, costs and expenses as set forth above, shall be
to refund the amounts paid to Heska for such Products by Novartis.
7.2 Limitations. Heska will have no liability for any claim of
infringement arising as a result of Novartis' use or sale of a Product in
combination with any items not supplied by Heska or any modification of a
Product by Novartis or third parties.
7.3 Entire Liability. THE FOREGOING STATES THE ENTIRE LIABILITY OF
HESKA TO NOVARTIS OR ANY PURCHASER OF PRODUCTS CONCERNING INFRINGEMENT OF
INTELLECTUAL PROPERTY RIGHTS, INCLUDING BUT NOT LIMITED TO, PATENT,
COPYRIGHT, TRADEMARK AND TRADE SECRET RIGHTS.
8. SUITABILITY/LIABILITY.
8.1 Express Remedies. The express remedies set forth in this
Agreement are in lieu of all obligations or liabilities on the part of Heska
for damages resulting from breach of warranty, breach of contract,
negligence or on any other legal theory.
8.2 No Consequential Damages, Etc. IN NO EVENT SHALL HESKA BE LIABLE
FOR COSTS OF PROCUREMENT OF SUBSTITUTE PRODUCTS OR SERVICES, NOR WILL EITHER
PARTY BE LIABLE FOR LOST PROFITS, OR ANY OTHER SPECIAL, INDIRECT,
CONSEQUENTIAL OR INCIDENTAL DAMAGES, HOWEVER CAUSED AND ON ANY THEORY OF
LIABILITY, ARISING OUT OF OR RELATING TO THIS AGREEMENT, ANY REPRESENTATION
OR WARRANTY HEREUNDER, OR RESULTING FROM THE SALE OF PRODUCTS OR SERVICES BY
NOVARTIS OR RESALE OR USE BY ANY DISTRIBUTOR, END-USER OR TRANSFEREE OF SUCH
PRODUCTS. THIS LIMITATION SHALL APPLY EVEN IF A PARTY HAS BEEN ADVISED OF
THE POSSIBILITY OF SUCH DAMAGES, AND NOTWITHSTANDING ANY FAILURE OF
ESSENTIAL PURPOSE OF ANY LIMITED REMEDY. The limitations in this section
shall not limit the obligations of the Parties under Sections 7, 8.4, 8.5
AND 11 of this Agreement.
8.3 No Prospective Profits. Each of Heska and Novartis acknowledges
that it is acting independently in connection with any actions taken in
connection with this Agreement, including any investments in personnel,
facilities, and marketing activities undertaken hereunder, and is not
relying on any express or implied representation or promise from the other
that this Agreement will continue beyond the Term or will not be terminated
in accordance with its terms. As a result, neither Heska nor Novartis
shall, by reason of the termination of this Agreement under any
circumstances be liable to the other for compensation, reimbursement or
damages on account of the loss of prospective profits on anticipated sales,
or on account of expenditures, investments, leases or commitments, in
connection with the business or goodwill of Heska or Novartis, or otherwise.
8.4 General Indemnity by Heska. Heska will defend, at its own
expense, any claim, suit or proceeding brought against Novartis to the
extent it is based upon a claim that any Product sold pursuant to this
Agreement is defective. Novartis agrees that it shall promptly notify Heska
in writing of any such claim or action and give Heska full information and
assistance in connection therewith. Heska shall have the sole right to
control the defense of any such claim or action and the sole right to settle
or compromise any such claim or action. If Novartis complies with the
provisions hereof, Heska will pay all damages, costs and expenses finally
awarded to third parties against Novartis in such action. If any Product
unit is, or in Heska's opinion might be, defective, Heska may, at its
option, replace such unit or request the return of such unit and refund the
amount paid for such unit by Novartis. Heska shall have no liability
hereunder to the extent any such defect was caused by Novartis' or its
employees' acts or omissions.
8.5 General Indemnity by Novartis. Novartis agrees to indemnify and
hold Heska harmless from and against all damages, costs and expenses arising
with respect to the sale, distribution or use of any Product, to the extent
caused by any act or omission by Novartis. Without limiting the generality
of the foregoing, Novartis agrees to indemnify and hold Heska harmless from
and against all damages, costs and expenses to the extent caused by
Novartis' sale of any Product in violation of any regulatory requirements in
Canada or into any jurisdiction outside of Canada.
9. TRADEMARKS.
9.1 Limited Trademark License. Subject to the next succeeding
sentence, Heska grants to Novartis a limited license to use during the Term,
for proper purposes in connection with the promotion and sale of the
Products on a non-exclusive basis, Heska's name and logo and the other
trademarks used by Heska from time to time with respect to the Products
(collectively, the "TRADEMARKS").
9.2 Novartis's Use. Novartis's use of the Trademarks shall be in
accordance with applicable trademark law and Heska's policies regarding
advertising and trademark usage as established and amended from time to
time. Novartis shall include all applicable Trademarks in any literature,
promotional materials or advertising which it produces or distributes
concerning the Products. Novartis will not use any such Trademarks other
than with respect to the direct promotion of the Products.
9.3 Ownership of Trademarks. Novartis agrees that the Trademarks are
and will remain the sole property of Heska and agrees not to do anything
inconsistent with that ownership or to contest ownership of the Trademarks.
Novartis agrees to always identify the Trademarks as being the property of
Heska. Novartis also agrees that all use of the Trademarks by Novartis will
inure to the benefit of, and be on behalf of, Heska.
10. PRODUCT MATERIALS; WARRANTY; MANUFACTURING QUALITY; DEFECTIVE BATCH.
10.1 Product Materials. Novartis may not make any representations or
warranties regarding a Product in addition to or different from those
specified by Heska in the applicable Product documentation and any
representations or warranties made by Novartis with respect to the Products
shall contain the same limitations and disclaimers as are included by Heska
in such documentation.
10.2 Exclusive Warranty. HESKA HEREBY REPRESENTS AND WARRANTS THAT
EACH PRODUCT WILL MEET ITS RESPECTIVE SPECIFICATIONS SET FORTH IN THE
APPLICABLE PRODUCT SCHEDULE IN ALL MATERIAL RESPECTS. SUCH WARRANTY IS IN
LIEU OF, AND HESKA DISCLAIMS, ALL OTHER WARRANTIES, EXPRESS OR IMPLIED,
INCLUDING ANY WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE
AND NONINFRINGEMENT, OR ARISING FROM THE COURSE OF DEALING BETWEEN THE
PARTIES OR USAGE OF TRADE.
10.3 Manufacturing Quality; Defective Batch. The Products sold to
Novartis will be manufactured by Heska using the same quality assurance
procedures as it uses for Product units sold directly by Heska outside of
Canada. If Heska confirms that any Product unit contains any material
defect which, based on the nature of the defect, is reasonably likely to be
present in other Product units from the same batch, then Heska shall
exchange such defective units at Heska's expense, for other units of the
same Product and shall reimburse Novartis for reasonable costs realized by
Novartis for destroying defective product.
11. CONFIDENTIAL INFORMATION.
Neither Party shall use for any purpose, other than as contemplated by this
Agreement, or divulge to any third party, any trade secrets, processes,
techniques, designs, know how or other confidential information provided to
such Party by the other. Notwithstanding the foregoing, these
confidentiality provisions shall not apply to any information: (a) which is
independently developed by the receiving Party or its Affiliates or lawfully
received free of restriction from another source having the right to so
furnish such information; (b) after it has become generally available to the
public without breach of this Agreement by the receiving Party or its
Affiliates; (c) which at the time of disclosure to the receiving Party was
known to such Party or its Affiliates free of restriction; or (d) which and
to the extent the receiving Party is required to disclose pursuant to law,
regulations, or an order of a court of competent jurisdiction, provided that
the disclosing Party shall have been afforded a reasonable opportunity to
limit such disclosure. In addition to the above, subject to disclosure as
required under the foregoing CLAUSE (D), the Parties shall maintain in
confidence and not divulge to any third party the terms of this Agreement or
any Product Schedule.
12. TERMINATION PROVISIONS.
12.1 Termination for Cause. Either Party shall have the right to
terminate this Agreement prior to the end of the Term by notice immediately
if:
(a) Breach. The other Party commits any material breach of this
Agreement which has not been remedied, or remedy has not been commenced,
within ninety (90) days of notice thereof; or
(b) Insolvency. The other Party enters into liquidation or
reorganization, whether compulsory or voluntary, or has a receiver appointed
as to all or a substantial part of its assets, or takes or suffers any
similar action in consequence of debt.
12.2 Termination Due to Failure to Make Minimum Purchases. Heska shall
have the right to terminate this Agreement with respect to any Product if
Novartis fails in any Period to achieve the Minimum Purchase Requirement for
such Product in such Period (unless such failure is due to Heska's failure
to deliver Products in accordance with accepted purchase orders).
12.3 Effect of Termination as to Any Product. Upon termination of this
Agreement as to any Product as provided in SECTION 12.2:
(a) Termination of Licenses. Except as expressly provided in
this SECTION 12, all rights and licenses granted to Novartis under this
Agreement for such Product and the related Trademarks shall immediately
terminate; provided, that, subject to Heska's rights under CLAUSE (B) below,
Novartis may sell on a nonexclusive basis but otherwise on the terms set
forth in this Agreement its remaining inventory of such Product for a period
of up to ninety (90) days following the date of termination; and
(b) Right to Purchase Inventory. Heska shall have the right (but
not the obligation) on notice to Novartis from time to time to purchase from
Novartis all or any portion of such Product in its inventory at the time of
such termination for credit against outstanding invoices, or for cash refund
to the extent there are no invoices then outstanding. Any credit or refund
due Novartis for such Product shall be equal to the purchase price of the
Product, less any discounts or credits previously received.
12.4 Termination Due to Acquisition. Heska shall have the right to
terminate this agreement upon three (3) months written notice to Novartis
should Heska be acquired by a third party, in which case Heska will honor
all purchase orders accepted as of the notice date which have not been
filled, and Novartis shall be able to sell any Products in inventory or the
subject of such purchase orders for a ninety (90) day period following such
termination, provided, however, that Novartis shall pay royalties and render
reports to Heska thereon in the manner specified herein.
12.5 Effect of Termination of Agreement. Upon expiration or
termination of this Agreement for any reason:
(a) Termination of Licenses. Except as expressly provided in
this SECTION 12, all rights and licenses granted to Novartis under this
Agreement shall immediately terminate; provided, that, unless this Agreement
is terminated by Heska, (i) Heska shall honor all accepted purchase orders
providing for delivery within 30 days of the date of termination and for
which Novartis pays in full prior to shipment, and (ii) Novartis may sell on
a nonexclusive basis but otherwise on the terms set forth in this Agreement
its remaining inventory of Products for a period of up to one hundred and
eighty (180) days following the date of termination, subject to Heska's
rights under CLAUSE (B) below;
(b) Right to Purchase Inventory. Heska shall have the right (but
not the obligation) on notice to Novartis from time to time to purchase from
Novartis all or any portion of the Products in its inventory at the time of
such expiration or termination for credit against outstanding invoices, or
for cash refund to the extent there are no invoices then outstanding. Any
credit or refund due Novartis for such Product shall be equal to the
purchase price of the Product, less any discounts or credits previously
received; and
(c) Confidential Information. Each Party shall return all copies
of the other Party's confidential information which remain in such Party's
possession or under its control.
12.6 Survival. The provisions of SECTIONS 1, 4, 7, 8, 10, 11, 12 AND 13
shall survive any termination or expiration of this Agreement.
13. GENERAL.
13.1 No Other Agreements. All previous agreements and arrangements (if
any) made by Heska and Novartis and relating to the subject matter hereof are
hereby superseded. This Agreement embodies the entire understanding of the
Parties. There are no promises, terms, conditions or obligations, oral or
written, express or implied, other than those contained in this Agreement. This
Agreement shall supersede any provision of any purchase order submitted by
Novartis for Products during the Term, notwithstanding any provision in such
purchase order to the contrary. This Agreement may only be amended by a writing
signed by the Parties.
13.2 Notices. Any notice required to be given hereunder shall be in
writing and may be given by facsimile transmission (confirmed by mail),
personal delivery (including by professional courier), or mailing (by first
class receipted prepaid mail) to the respective address or facsimile number
set forth below, or to such other address or facsimile number as such Party
may have notified the other pursuant to this Section. In the case of
facsimile transmission or personal delivery, such notice shall be deemed to
have been given upon the date of such transmission or delivery if delivered
during normal business hours, otherwise it shall be deemed received the next
business day. In the case of mailing, such notice shall be deemed to have
been given seven days after such mailing.
Heska: Novartis:
Heska Corporation Novartis Animal Health Canada Inc
1613 Prospect Parkway 2233 Argentia Road, Suite 200 East
Fort Collins, CO 80525 Mississauga, Ontario L5N 2X7
Attn: Chief Executive Officer Canada
Telephone: 970-493-7272 Attn: President
Telecopier: 970-484-9505
cc: Executive Vice President,
Intellectual Property and
Business Development
Telecopier: 970-491-9976
13.3 Governing Law. The Parties hereby agree that their rights and
obligations under this Agreement will not be governed by the United Nations
Conventions on Contracts for the International Sale of Goods, the
application of which is expressly excluded. Rather, this Agreement shall be
governed by and construed in accordance with the laws of the State of
Colorado, without regard to its provisions concerning the applicability of
the laws of other jurisdictions.
13.4 No Agency. Nothing in this Agreement or any other document or
agreement between the Parties shall constitute or be deemed to constitute a
partnership between the Parties. The relationship between Heska and Novartis
shall be that of seller and buyer. Novartis, its officers, agents and
employees, shall under no circumstances be considered the agents, employees
or representatives of Heska. Neither Party shall have the right to enter
into any contracts or binding commitments in the name of or on behalf of the
other Party in any respect whatsoever.
13.5 Assignment. Neither party may assign any of its rights or
obligations hereunder, whether voluntarily or by operation of law, without
the prior written consent of the other party (which may not be withheld
unreasonably, except that either Party may make such assignment to a
partner, subsidiary or entity otherwise controlling, controlled by or under
control with such Party, or to an entity acquiring all or substantially all
relevant assets of a Party to which this Agreement pertains. Subject to the
foregoing, this Agreement will inure to the benefit of and be binding upon
the successors and assigns of the Parties.
13.6 Construction. This Agreement is the result of negotiations among, and
has been reviewed by, Heska and Novartis and their respective counsel.
Accordingly, this Agreement shall be deemed to be the product of each Party
hereto, and no ambiguity shall be construed in favor of or against Heska or
Novartis.
13.7 Headings; Plural Terms; Other Interpretive Provisions. Headings
and captions used to introduce Sections of this Agreement are only for
convenience and have no legal significance. All terms defined in this
Agreement or any exhibit in the singular form shall have comparable meanings
when used in the plural form and vice versa. References in this Agreement
to "Recitals," "Sections" and "Schedules" are to recitals, sections and
schedules herein and hereto unless otherwise indicated. The words "include"
and "including" and words of similar import when used in this Agreement or
in any exhibit shall not be construed to be limiting or exclusive. The word
"or" when used in this Agreement or in any schedule shall mean either or
both.
13.8 Force Maieure Events. Neither Party shall be liable for any
failure to perform any of its obligations hereunder (other than the payment
of money) which results from an act of God, the elements, fire, flood,
component shortages, a force majeure event, riot, insurrection, industrial
dispute, accident, war, embargoes, legal restrictions or any other cause
beyond the control of the Party.
13.9 Attorneys' Fees. In any litigation, arbitration or court
proceeding between the Parties with respect to this Agreement, the
prevailing Party shall be entitled to recover, in addition to any other
amounts awarded, attorneys' fees and all costs of proceedings incurred in
enforcing this Agreement.
13.10 Arbitration. If a dispute or disagreement (a "DISPUTE")
arises between the Parties in connection with this Agreement, then the
Dispute will be finally settled by binding arbitration to be conducted in
English in not sure why this is proposed ... suggest Chicago under the
International Chamber of Commerce Rules of Conciliation and Arbitration then
prevailing by one arbitrator appointed in accordance with those rules. The
arbitrator shall be chosen from a panel of arbitrators knowledgeable in the
companion animal health care industry. The arbitrator will apply the law
specified in SECTION 13.3 to the merits of the Dispute. The decision of the
arbitrator shall be final, conclusive and binding on the Parties to the
arbitration.
Judgment on the award rendered by the arbitrator may be entered in any court
having jurisdiction thereof. The arbitrator may grant permanent injunctions
or other relief in such dispute or claim; provided that the arbitrator may
not grant licenses to any intellectual property owned by either Party nor
may the arbitrator award punitive damages. Notwithstanding the foregoing,
without breach of this arbitration provision either Party may apply to any
appropriate court for temporary injunctive relief.
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
Effective
Date.
HESKA CORPORATION NOVARTIS ANIMAL HEALTH CANADA, INC.
By: /s/ CAROL TALKINGTON VERSER By: /s/ BYRON E. BEELER
------------------------------- -----------------------
Name: Carol Talkington Verser, Ph.D. Name: Byron E. Beeler
Title: Executive Vice President, Title: President
Intellectual Property and Business
Development
By: /s/ DR. VIC PARKS
-----------------------
Name: Dr. Vic Parks
Title: VP, Companion Animal Business
SCHEDULE A
TO
EXCLUSIVE DISTRIBUTION AGREEMENT
PRODUCT SCHEDULE
This Product Schedule shall apply to the Period commencing February 14, 2001.
Heska and Novartis hereby agree that until revised, the following terms shall
apply to the specified Product and shall supercede all prior Product Schedules
for such Product:
A. PRODUCT: Flu Avert(TM) I.N. Vaccine
PRICE: $[***] CANADIAN FOR 1OX PACKAGE ("UNIT"), FOB, DIAMOND ANIMAL HEALTH,
DES MOINES, IOWA
ORIGINAL US $ PRICE (SEE 4.2): $ [*** ] US
MIN. PURCHASE REQUIREMENT:
FIRST (1ST) YEAR [*** ] UNITS
SECOND (2ND) AND SUBSEQUENT YEARS [*** ] UNITS
PRODUCT INFORMATION:
Technical Specifications:
Clear plastic tray with ten (10) one-dose (1-dose) vials of lyophilized
Equine Influenza Vaccine; ten (10) one-dose (1-dose) vials containing one
milliliter (1 ml) of liquid diluent and 10 nasal applicators. Tray will have
clear plastic lid with printed card label.
Product Packaging:
Finished trays are shrink-wrapped. All trays are placed in corregated
overshippers and will be shipped within coolers or refrigerated trucks.
Minimum Expiration Date:
Twelve (12) months from shipment date; eighteen (18) months from
manufacture date.
*** Confidential Treatment Requested
AMENDMENT NO. 1 TO
EXCLUSIVE DISTRIBUTION AGREEMENT
This Amendment No. I modifies the Exclusive Distribution Agreement dated
February 14, 2001, between Heska Corporation and Novartis Animal Health Canada,
Inc. ("Original Agreement").
1. Product Discontinuance; New Products: Section 6.2 New Products, of the
Original Agreement is hereby modified to extend the date to complete
and execute a Product Schedule for Solo Step CH Cassettes, Solo
Step(TM) CH Batch Test Strips and Heska's IgE point of care screen
("Pending New Products") from June 14, 2001 to October 14, 2001.
2. No Other Changes. Except as expressly modified by this Amendment, all
provisions of the Original Agreement shall remain in full force and
effect.
IN WITNESS WHEREOF, this Amendment has been executed by the duly authorized
representatives of the parties.
SIGNED:
Heska Corporation Novartis Animal Health Canada, Inc.
By: /s/ CAROL TALKINGTON VERSER By: /s/ BYRON E. BEELER
----------------------------- --------------------------
Name: Carol Talkington Verser, Ph.D. Name: Byron E. Beeler
Title: Executive Vice President,
Intellectual Title: President
Property and Business Development
Date: July 5, 2001 Date: June 25, 2001
By: /s/ DR. VIC PARKS
-------------------------
Name: Dr. Vic Parks
Title: VP, Companion Animal Business
[CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTIONS OF THIS DOCUMENT
HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY FILED WITH THE COMMISSION]
AMENDED AND RESTATED
DISTRIBUTION AGREEMENT
between
HESKA CORPORATION,
Distributor
and
i-STAT CORPORATION,
Manufacturer
AMENDED AND RESTATED
DISTRIBUTION AGREEMENT
PARTIES
This Amended and Restated Distribution Agreement (it, together with any
Schedules and Exhibits, the "Agreement"), between i-STAT Corporation, a
Delaware corporation having its principal place of business at 104 Windsor
Center Drive, East Windsor, New Jersey 08520 U.S.A. ("Manufacturer"), and Heska
Corporation, a Delaware corporation having its principal place of business at
1613 Prospect Parkway, Fort Collins, Colorado, 80525 U.S.A. ("Distributor").
RECITALS
Distributor desires to market and distribute Manufacturer's Products to
the animal health care market and Manufacturer desires to grant Distributor
such marketing and distribution rights, all on the terms and conditions of this
Agreement.
Manufacturer and Distributor previously executed and delivered that
certain Distribution Agreement dated as of February 9, 1998 (the "Prior
Agreement"), which Prior Agreement is hereby amended and restated in its
entirety by this Agreement.
TERMS OF AGREEMENT
1. APPOINTMENT AND TERRITORY Subject to the terms and conditions of
this Agreement, Manufacturer hereby appoints Distributor as its exclusive
distributor worldwide except for Japan and New Zealand, as its non-exclusive
distributor in Japan and, commencing July 1, 1999 through the end of the Term,
as its exclusive distributor in New Zealand (the "Territory"), to distribute,
market and sell the Products to Customers in the Territory, and Distributor
accepts such appointment. "Products" means only the articles listed on
Schedule 1.1, including the i-STAT analyzers (the "Analyzers") and cartridges
(the "Cartridges") listed thereon. Manufacturer agrees that, subject only to
the prior fights of Abbott Laboratories ("Abbott") under that certain Funded
Research and Development and License Agreement dated as of August 3, 1998, as
the same may be amended from time to time, between Manufacturer and Abbott,
prior to offering any other or new products to any other person for resale in
the animal health care market, it will first offer Distributor the opportunity
to negotiate to have such products included as a Product hereunder on such
terms and conditions as are mutually acceptable to the parties. "Customer"
means any animal healthcare organization or animal healthcare individual that
purchases Products, excluding individuals operating within human healthcare
institutions. Manufacturer reserves the right, upon reasonable notice to
Distributor, to modify any of the Products and their specifications and to
discontinue sales of any Product. Recognizing the end use of the Products in
healthcare, Distributor shall not solicit or sell any Products to Customers or
other third parties which Distributor has reason to believe will redistribute
or otherwise direct them for use to classes of customers not contained within
the Customer class described above, and shall otherwise take all reasonable
necessary actions to prevent sales of Products to classes of customers known by
Distributor to be not contained within the Customer class described above.
Upon request by Manufacturer, if and to the extent Distributor sells Products
to customers outside the Customer class in violation of the above restrictions,
Distributor will remit to Manufacturer an amount equal to the difference
between (i) the amount of Net Sales collected by Distributor from sales of such
Products and (ii) the Purchase Price paid to Manufacturer for such Products.
Distributor represents that it is competent under the laws of the Territory to
enter into this Agreement and to act hereunder.
2. TERMS AND CONDITIONS.
2.1.PRICES. Manufacturer shall sell the Products to Distributor at
the prices set forth on Schedule 1.1. Manufacturer has the right to modify
prices as described on Schedule 1.1.
2.2.PAYMENT TERMS AND CONDITIONS. Prices quoted by Manufacturer,
unless otherwise stated, shall be paid in U.S. Dollars and are freight on board
(FOB) at Manufacturer's facility in East Windsor, New Jersey, U.S.A. Legal
title, control of, right of possession and risk of loss of Products shall pass
to Distributor upon shipment FOB. Distributor shall pay for each order within
the terms stated in Schedule 1.1 by check or wire transfer through a bank
designated by Manufacturer which shall cover, at Distributor's charge, the
price of Products in such order. Distributor shall pay all expenses associated
with the cost of export packing, carriage to the port of shipment, refrigerated
freight to the port of destination, customs clearance, warehousing and
insurance, including war risk insurance, if applicable, and other costs and
expenses occurring after the Products are made available to Distributor.
Distributor shall ensure that Products are shipped, stored and handled in
accordance with the specifications Manufacturer shall from time to time
provide. Manufacturer reserves the right at any time to take legal proceedings
to recover overdue payments by Distributor.
2.3.PLACEMENT OF ORDERS. Distributor shall place all orders with
Manufacturer at Manufacturer's principal office. Manufacturer shall promptly,
and in any event within five (5) business days, notify Distributor of any
Purchase Orders (or parts of Purchaser Orders) accepted, rejected, or delayed,
and the reason for any such rejection or delay. No Purchase Order shall be
binding upon Manufacturer until accepted by Manufacturer. Purchase Orders not
rejected within five (5) business days shall be deemed accepted. Distributor
may not modify any Purchase Orders after acceptance by Manufacturer of such
Purchase Order without Manufacturer's prior consent. All Purchase Orders
should be placed 45 days prior to the requested shipping date from
Manufacturer. Products shipped in connection with Purchase Orders placed less
than 45 days prior to required shipment of product from Manufacturer may not
have optimum dating.
2.4.SUBMISSION OF FORECASTS. Distributor shall furnish Manufacturer
with a non-binding forecast for the following quarter 45 days in advance of
that quarter.
3. RESPONSIBILITIES OF MANUFACTURER.
3.1. CATALOGS, BULLETINS. Manufacturer shall, without charge,
furnish to Distributor reasonable quantities of technical data and technical
bulletins adequate to describe the Products in the English language, and in
other languages to the extent already available. Distributor may, at its own
cost, provide a translation of the documents into the local language.
3.2. TRAINING. Manufacturer shall provide follow-up training, as
mutually agreed by the parties, at Distributor's facility. In connection with
such follow-up training, Manufacturer shall pay for its employees' salaries and
their travel and travel-related expenses, including meals, lodging and other
living expenses. For training situations not covered by the above, both Parties
agree to discuss how to equitably share the travel and related expenses.
3.3. INTERFACE TRAINING. Manufacturer shall assist Distributor with
ASTM interface training, as to how to interface between a Central Data Station
at the Customer's site and other computer workstations of the Customer.
3.4. PRODUCT SUPPLY. To the extent Manufacturer is unable to supply
adequate quantities of Products to fill Distributor's Purchase Orders submitted
from time to time, and provided that such Purchase Orders are not for
quantities of Products materially exceeding Distributor's ordinary requirements
or forecasted needs, the minimum sales Targets and Milestones set forth in
Section 4.2 hereof shall be adjusted accordingly by the parties.
4. RESPONSIBILITIES OF DISTRIBUTOR.
4.1. SALES EFFORTS; MARKETING SUPPORT. (a) Distributor shall devote
commercially reasonable efforts to the promotion, sale and servicing of the
Products to Customers in the Territory. Distributor shall, at its expense,
take such commercially reasonable actions as it deems necessary to promote the
Products, which may include: (i) including the Products in its appropriate
catalogs, promotional mailings and like publications; (ii) developing,
preparing and placing advertising concerning the Products in appropriate media
or through direct mail; (iii) exhibiting the Products at appropriate trade
shows and informing Manufacturer at least 30 days in advance of trade shows;
(iv) conducting appropriate market research as it deems necessary or desirable;
and (v) rendering other services customarily rendered by a distributor of
veterinary medical products. Manufacturer shall have the right to prior review
and to approve (or not approve) any and all copy, layout or other advertising,
promotional or other distributed material involving the Products. Failure to
object to any materials within fifteen (15) business days of sending shall be
deemed approval. Distributor shall discuss strategy and Product positioning
with Manufacturer and shall use commercially reasonable efforts to market and
position the Products in accordance with the recommendations of Manufacturer.
(b) In furtherance of the above, for each calendar year during the
Term, Distributor shall use commercially reasonable efforts to make or commit
to make Marketing Expenditures (as defined below) in connection with its
promotion of the Products, which should be approximately five percent (5%) of
Net Sales (as defined below) of Analyzers for the preceding calendar year. As
used herein, "Marketing Expenditures" shall include, without limitation,
amounts spent or committed to be spent (whether internally or externally) on
promotion of the Products (or any of them) (i) in catalogs, brochures,
pamphlets, product information sheets and other mailings and publications, (ii)
in broad or targeted advertising (including the development, preparation and
cost of placing advertisements), (iii) at trade shows or other formal or
informal industry or customer gatherings, (iv) by other accepted means employed
by Distributor or the industry in general, but excluding salaries or
commissions paid to Distributor's employees. Notwithstanding the foregoing, in
the event, Distributor fails to make the Marketing Expenditures set forth above
in any year during the Term, but reaches the total sales Milestones for such
year set forth in Section 4.2 below, such failure shall not constitute a breach
of this Agreement or otherwise entitle Manufacturer to exercise any rights or
remedies under this Agreement or otherwise. "Net Sales" for purposes of this
Agreement shall mean, with respect to any Products (or any of them specifically
designated for any purpose in this Agreement) sold by Distributor, its
affiliates and sales agents or distributors, the invoiced sales price of such
Products billed to independent Customers who are not affiliates of Distributor,
less (a) credits, allowances, discounts and rebates to, and chargebaeks from
the account of, such Customers for damaged, rejected, outdated or returned
product returned in accordance with Distributor's or Manufacturer's policies;
(b) freight and insurance costs incurred in transporting such Products to such
Customers; (c) quantity, trade and cash discounts and other price reductions
allowed; (d) discounts, fees and commissions payable to third party sales
agents or distributors (but not Distributor's employees) with respect to orders
or sales of such Products; (e) sales, use, value-added and other direct taxes
incurred; and (f) customs, duties, tariffs surcharges and other governmental
charges incurred in connection with the exportation or importation of such
Products. For purposes of Distributor's obligation to meet its Marketing
Expenditures goal set forth above, Net Sales shall be measured by reference to
sales of Analyzers only.
4.2. SALES TARGETS AND MILESTONES. The tables below set forth sales
targets ("Targets") and sales milestones ("Milestones") for Purchase Orders
submitted by Distributor. The parties acknowledge that it is their goal that
Distributor will take delivery of or schedule delivery within 30 days of the
end of the periods referenced below of the number of Analyzers and the number
of Cartridges set forth below under the caption "Milestones," in the aggregate,
for sales by Distributor in each of North America and the remainder of the
Territory outside of North America during the periods referenced, and
Distributor shall use reasonable commercial efforts to achieve such Milestones.
For purposes of determining achievement of Milestones, monthly total Purchase
Orders for each of the last three months of the year cannot exceed [ *** ]% of
the monthly average for Purchase Orders for the previous six months.
(numbers shown represent units of products ordered)
TARGETS 1999 2000 2001
- -------------------- ------- ------- -------
US
- -------------
Analyzers [ *** ] [ *** ] [ *** ]
Cartridges [ *** ] [ *** ] [ *** ]
International
- -------------
Analyzers [ *** ] [ *** ] [ *** ]
Cartridges [ *** ] [ *** ] [ *** ]
Target Totals
- -------------
Analyzers [ *** ] [ *** ] [ *** ]
Cartridges [ *** ] [ *** ] [ *** ]
MILESTONES 2000 2001
- -------------------- ------- -------
US
- --------------
Analyzers [ *** ] [ *** ]
Cartridges [ *** ] [ *** ]
International
- --------------
Analyzers [ *** ] [ *** ]
Cartridges [ *** ] [ *** ]
Milestone Totals
- ----------------
Analyzers [ *** ] [ *** ]
Cartridges [ *** ] [ *** ]
*** Confidential Treatment Requested
The parties further agree that (i) the above Targets for all years
shown are intended to be goals and not minimum purchase obligations and any
failure to achieve such Targets shall in no event constitute or give rise to a
breach of this Agreement by Distributor or the exercise of any remedy by
Manufacturer; (ii) in the event Distributor fails to reach the above Milestones
in 2000 for either the United States or the rest of the Territory, but
nonetheless achieves the total Milestone in 2000, Distributor will be deemed to
have reached the Milestone 2000 for each of the United States and the rest of
the Territory; and (iii) in the event Distributor fails to reach the Milestones
in 2000 for either the United States or the rest of the Territory, or both, and
also fails to achieve the total Milestone in 2000, Manufacturer will have the
option, exercisable by delivery of written notice to Distributor, to convert
the distribution rights of Distributor under this Agreement, effective not
sooner than January 1, 2001, from exclusive to non- exclusive during 2001 in
the portion of the Territory in which Distributor has failed to achieve its
2000 Milestones, with Distributor's exclusive distribution rights remaining
unaffected in the portion of the Territory where Distributor has achieved its
Milestones in 2000. In the event Manufacturer exercises its rights set forth
in (iii) above, Distributor's obligation to make Marketing Expenditures
pursuant to Section 4.1 above shall terminate and be deemed waived by
Manufacturer.
4.3. MODIFIED AND NEW PRODUCTS. Distributor shall timely provide
comprehensive information to its Customers with respect to newly available
Products, discontinuance of Products and changes in existing Products,
including, but not limited to, performance specification changes and required
software upgrades in Analyzers (which may or may not be coupled to specific
lots of Cartridges). Distributor shall use commercially reasonable efforts to
ensure that each Customer in the Territory makes any such performance
specification changes and software upgrades in a timely manner.
4.4. COMPETITIVE PRODUCTS. In ftutherance of its duties, and in
recognition of the unique healthcare and related responsibilities in connection
with the distribution of the Products, during the Term, Distributor shall not
anywhere in the Territory market or sell any hand held device performing blood
gas or electrolyte tests currently performed by the Analyzer. For purposes of
this Section 4.4, the term "Analyzer" will be amended by the parties from time
to time to include other categories (such as future tests) added as Products to
this Agreement. Distributor shall exclusively use Manufacturer's control
products unless Manufacturer gives prior written approval for substitution.
4.5. COMPETENCE OF PERSONNEL. Distributor shall have an adequate
number of technically competent personnel for sales and after-sales service of
the Products. The number of sales personnel will depend on the market size and
the market penetration over time.
4.6. MARKETING OF THE PRODUCTS IN THE TERRITORY. Distributor shall
be informed of Manufacturer's suggested resale prices but shall retain full
discretion to set resale prices of the Products.
4.7. TRAINING OF CUSTOMERS. Distributor shall, prior to shipment,
provide to each Customer Product storage and use instructions, and shall
provide its Customers with adequate training and support within the first two
months after delivery to a Customer of the first batch of Products.
Distributor shall use commercially reasonable efforts to ensure that all
introductory training is made available to the Customer within the first week
after receipt of Analyzers and Cartridges. Full use will be made of training
material and technical information supplied by Manufacturer.
4.8. PRODUCT WARRANTY. Distributor shall provide to Customers
Manufacturer's standard written limited warranty for all Products. Distributor
shall not alter or expand such warranty. During the term of this Agreement,
Distributor shall be responsible for providing technical support to Customers
at its expense and shall assist them without charge in obtaining warranty
service from Manufacturer. In addition, at the written request of
Manufacturer, Distributor shall perform certain warranty repairs during the
standard warranty period which shall be billed to and paid by Manufacturer at
mutually agreed upon labor rates.
4.9. COMPUTER INTERFACING. At a Customer's request, during the
Termof this Agreement, Distributor shall perform all computer interfacing
activities between Central Data Stations ("CDS") and other computer
workstations for each of its Customers based upon the ASTM interface provided
on the CDS.
4.10. INVENTORY. Distributor shall maintain inventory of the
Products sufficient to satisfy the reasonably projected needs of its Customers
in light of order and shipping lead times.
4.11. REGULATORY COMPLIANCE. Distributor shall advise
Manufacturer promptly of all Rovemment regulations outside the United States
affecting the importation, use, sale, record maintenance and disposal of the
Products and shall be responsible for compliance therewith. Without limiting
the foregoing, Distributor shall obtain from competent govemmental authorities
such import permits, licenses, exemptions from customs duties and governmental
approvals and consents required in connection with the execution and
performance of this Agreement. All governmental permits, registrations,
licenses, exemptions and consents specifically relating to i- STAT products,
shall be sought in the name of and shall, at the end of the Term, be the
exclusive property of Manufacturer. Distributor shall comply with all
applicable United States of America and Territory laws, rules and regulations
and shall not engage in any activity that is illegal under, or would cause
Manufacturer to be in violation of, any law, decree, rule or regulation in the
Territory or in the United States of America.
4.12.BOOKS AND RECORDS. Distributor shall maintain books and records
in keeping with standard industry practice regarding the performance of its
obligations hereunder and shall retain such records during the Term and for
three years thereafter.
4.13.PROPRIETARY INFORMATION AND TRADE SECRETS. Neither Party shall
use for any purpose, other than as contemplated by this Agreement, or divulge
to any third party, any trade secrets, processes, techniques, designs, know how
or other confidential information provided to such Party by the other.
Notwithstanding anything to the contrary provided herein, these confidentiality
provisions shall not apply to any information: (a) which is independently
developed by the receiving Party or its affiliated company or lawfully received
free of restriction from another source having the right to so furnish such
information; (b) after it has become generally available to the public without
breach of this Agreement by the receiving Party or its affiliated company; (c)
which at the time of disclosure to the receiving Party was known to such Party
or its affiliated company free of restriction; or (d) which the receiving Party
is required to disclose pursuant to law, regulations, or an order of a court of
competent jurisdiction, provided that the disclosing Party shall have been
afforded a reasonable opportunity to limit such disclosure.
4.14.NOTICE OF INFRINGEMENT ACTIVITIES. Distributor shall notify
Manufacturer of any actual or suspected infringement or misappropriation of any
of Manufacturer's patents, copyrights (including its computer software),
proprietary information or trade and service marks and at Manufacturer's
expense shall fully cooperate with and assist Manufacturer in any legal action
that Manufacturer elects to bring to prevent or redress such violations of its
rights.
4.15.CATALOG AND PRODUCT LABELS. Distributor may affix its label on
catalogs and Products being distributed by Distributor in the Territory during
the Term, provided that Manufacturer shall have been provided with a catalog
and a photograph of each Product with Distributor's label affixed in the same
manner in which the Products will be distributed. If Manufacturer shall
reasonably object to the manner in which such label is affixed, Distributor
shall promptly cease any such use and change its use to comply with the
Manufacturers requirements.
4.16.REVIEW OF PRACTICES. Periodically, and at least quarterly,
Manufacturer and Distributor shall review Distributor's marketing and selling
strategy, training of Customers, inventory, computer interfacing activities and
other practices with a view toward maximizing Customer use of and satisfaction
with the Products.
5. RIGHTS TO PROPERTY OF MANUFACTURER.
5.1. MARKS. Manufacturer hereby authorizes Distributor to use, on a
nonexclusive basis for the Term, without cost to Distributor other than payment
for the Products, the trademark "i- STAT" and any other trademarks, service
marks or trade names used by Manufacturer to identify the Products (the
"Marks"), solely for Distributor's distribution of Products and related
performance under this Agreement. The Marks and the goodwill associated with
the Marks are the exclusive property of Manufacturer. Distributor shall not
(a) use the Marks as part of any composite mark including any elements not
approved in advance in writing by Manufacturer, (b) challenge the validity or
enforceability of the Marks or (c) acquire any proprietary rights in the Marks
by reason of any activities under this Agreement or otherwise. All uses of the
Marks by Distributor and any additional goodwill created thereby shall inure to
the exclusive benefit of Manufacturer. Manufacturer shall, at all times during
the Term on reasonable notice, have the right to inspect the materials and
services on or in connection with which the Marks are used in order to assure
Manufacturer that Manufacturer's quality standards relating to the Products and
Distributor's servicing and other mark-pertinent provisions of this Agreement
are being observed. If Manufacturer shall at any time reasonably object to any
use to which the Marks are put, Distributor shall promptly cease any such use.
5.2. LICENSE TO USE COMPUTER SOFTWARE. All software, on whatever
media and in whatever form, which Manufacturer shall deliver to Distributor
(the "Software") is and shall remain the property of Manufacturer and its
suppliers and licensors thereof and shall only be used in accordance with the
terms of this Agreement. Upon the sale of any central data station software
package during the Term, Distributor shall collect and pay to Manufacturer the
first year's fee for the use of such software as set forth in Schedule 1.1.
Manufacturer shall thereafter invoice Customers directly for any further
license or maintenance fees. Software contains copyrighted and proprietary
trade secrets of Manufacturer (and its suppliers and licensors), and
Distributor shall keep the Software in confidence. Distributor shall not copy,
use or disassemble the Software unless agreed by Manufacturer. Distributor
shall have the right to reproduce Software only for (a) one backup/archival
copy and (b) installation on and use with equipment designated by Manufacturer
as suitable therefor and for use solely with the Products distributed by
Distributor. Distributor shall reproduce the copyright and other proprietary
notices of Manufacturer and third parties present in the Software delivered to
Distributor. Distributor's license to use and distribute the Software shall
terminate on the earlier of (a) the end of the Term; (b) discontinuance of use
of the designated equipment for the Software; (c) discontinuance of payment of
periodic license and maintenance fees, if any; and (d) breach of any of the
above given terms. All copies of Software with respect to which the license
hereunder is terminated shall be returned to Manufacturer within 30 days after
such termination. Distributor shall deliver to each end user a copy of
Manufacturer's written software license.
6. CORRUPT PRACTICES. Distributor shall not use any compensation
hereunder as payment to any governmental official or employee of any country in
the Territory for the purpose of influencing such person's decisions or actions
regarding the Products.
7. DURATION AND TERMINATION.
7.1. TERM OF AGREEMENT. The initial term of this Agreement (the
"Initial Term") shall commence effective February 9, 1999 after signed and
delivered by both parties, and shall expire (if not automatically renewed as
provided herein) on December 31, 2001. (As provided in Section 4.2, however,
Distributor's rights in the third year of this Agreement may be made
non-exclusive if the Milestones are not achieved). Thereafter, this Agreement
shall renew automatically for additional renewal terms (each an "Additional
Tenn") of twelve (12) months each, unless either party gives at least nine (9)
months prior written notice to the other before the expiration of the Initial
Term or any Additional Tenn that it does not wish to renew this Agreement
beyond such Initial Term or such Additional Tenn; provided, however, that if
Manufacturer fails to provide notice of termination within such nine month
period, and Distributor fails to reach the Milestones for 2001 or any
subsequent year of the Agreement (as adjusted pursuant to this Agreement),
Manufacturer may elect to convert Distributor's distribution rights hereunder
from exclusive to non-exclusive for the following year Milestones for years
after 2001 shall be determined at the beginning of the preceding year,
commencing at the beginning of 2001 for 2002 Milestones). (The Initial Tenn
and each Additional Termshall be collectively referred to herein as the
"Term").
7.2. IMMEDIATE TERMINATION. Either party may terminate this
Agreement immediately upon the occurrence of any one or more of the events
contemplated in this Section 7.2.
7.2.1. Material breach or default of this Agreement by the other
party and failure to cure such default within 30 days after the other party
has given written notice of such breach or default.
7.2.2. On the 30th day following written notice by one party to
the other of such party's election to terminate this Agreement as a result of
the bankruptcy or insolvency of the other party or the appointment of a
receiver or trustee for assets of the other party.
7.2.3. On the 30th day following written notice by Manufacturer
to Distributor of Distributor's unauthorized assignment or transfer of this
Agreement.
7.3. ACTIONS UPON TERMINATION. Upon the termination of this
Agreement, the parties shall:
7.3.1. Immediately cease the use of any confidential,
proprietary or secret information of the other party and, in the case of
Distributor, of the Marks except as permitted in Section 7.3.2; and
7.3.2. unless this Agreement is terminated by Manufacturer for
Distributor's breach or bankruptcy, and, subject to Manufacturer's rights under
Section 7.3.3 below, (i) Manufacturer shall honor all accepted purchase orders
providing for delivery within 30 days of the date of termination and for which
Distributor pays in full prior to shipment, and (ii) Distributor may sell on a
nonexclusive basis but otherwise on the terms set forth in this Agreement
(except that its license to the Trademarks is also nonexclusive) its remaining
inventory of Products for a period of up to ninety (90) days following the date
of termination;
7.3.3. Manufacturer shall have the right (but not the
obligation) on notice to Distributor given within ten days after termination to
purchase from Distributor all or any portion of the Products in its inventory
at the time of such expiration or termination for credit against outstanding
invoices, or for cash refund to the extent there are no invoices then
outstanding. Any credit or refund due Distributor for such Product shall be
equal to the purchase price of the Product, less any discounts or credits
previously received; and
7.3.4. Distributor shall return to Manufacturer all promotional
and sales training materials provided to Distributor by Manufacturer.
7.3.5. Assign to Manufacturer and deliver to Manufacturer any
import permits, health resignations, licenses, exemptions from customs duties
and governmental consents of any nature specifically relating to i-STAT
products, which Distributor may have or retain directly or indirectly in
connection with the Products imported, sold and/or distributed under this
Agreement, which it has not yet assigned or waived, or which have not yet been
delivered prior to termination.
7.4.CONTINUING OBLIGATIONS. Following any termination of this
Agreement Distributor shall (a) cooperate in referring Customers to
Manufacturer or to such other persons as Manufacturer may direct for continuing
purchase of Products and related services; (b) transfer to Manufacturer or its
nominees all outstanding maintenance contracts; and (c) provide Manufacturer
with lists of each Customer who purchased product through Distributor,
including records of all Software updates performed. The parties agree that
following termination of this Agreement for any reason Distributor shall have
no further obligations to Customers with respect to software updates and
maintenance or technical support. The parties further agree that nothing in
this Agreement shall be construed as preventing Distributor from soliciting
Customers for other products following the termination of this Agreement.
8. INDEMNIFICATION; WARRANTY; LIMITATION OF LIABILITY.
8.1.INDEMNIFICATION. Manufacturer and Distributor shall each at all
times indemnify and hold the other party and their respective affiliates,
stockholders, directors, officers, employees and agents harmless from and
against all liabilities, losses, claims, damages and expenses, including
reasonable attorneys' fees and disbursements, arising out of or in connection
with the breach of any covenant, agreement, warranty or representation made by
it herein. In the event of any third party action, the other party shall have
the right to participate in the defense, at its own expense, with counsel of
its own choosing. Distributor shall indemnify Manufacturer against all claims,
losses, damages, liabilities and expenses, including reasonable attorneys' fees
and disbursements, incurred by Manufacturer arising with respect to the sale,
distribution or use of a Product to the extent caused by any action or omission
of Distributor or its stockholders, directors, officers, employees or agents.
8.2.WARRANTY. Manufacturer agrees to extend to Distributor and to
Distributor's Customers standard product warranties, as modified from time to
time, the current version of which is attached as Schedule 8.2. EXCEPT FOR THE
WARRANTY PROVIDED FOR IN'SCHEDULE 8.2, MANUFACTURER MAKES NO REPRESENTATIONS OR
WARRANTIES OF ANY KIND AND THE WARRANTIES OF MANUFACTURER ARE IN LIEU OF ALL
OTHER WARRANTIES, INCLUDING BUT NOT LIMITED TO ANY IMPLIED WARRANTY OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR OF NONINFRINGEMENT OF
ANY THIRD PARTY PATENTS, COPYRIGHTS OR MARKS. EXCEPT FOR THE WARRANTY PROVIDED
FOR IN SCHEDULE 8.2, MANUFACTURER MAKES NO WARRANTY OF ANY KIND TO CUSTOMERS OF
DISTRIBUTOR HEREUNDER.
8.3. LIMITATION OF LIABILITY. UNDER NO CIRCUMSTANCES SHALL A PARTY
BE RESPONSIBLE TO THE OTHER PARTY FOR INDIRECT, SPECIAL, INCIDENTAL OR
CONSEQUENTIAL DAMAGES ARISING OUT OF OR IN CONNECTION WITH THE SALE, DELIVERY,
NONDELIVERY, SERVICING, USE, MAINTENANCE, SUPPORT, CONDITION OR POSSESSION OF
PRODUCTS, OR FOR ANY OTHER CLAIM AGAINST A PARTY BY ANY OTHER PERSON OR ENTITY
RELATING TO THIS AGREEMENT, WHETHER SUCH CLAIM IS BASED ON BREACH OF WARRANTY,
CONTRACT, TORT OR OTHER LEGAL THEORY.
9. MISCELLANEOUS.
9.1.NO IMPLIED WAIVERS. A failure by one of the parties to assert
its rights for or upon any breach of this Agreement shall not be deemed to be a
waiver of such rights, nor shall such waiver be implied from the acceptance of
any payment.
9.2.FORCE MAJEURE. Neither party shall be liable to the other party
or in default hereunder by reason of any delay or omission caused by epidemic '
fire, labor disputes, governmental law or regulations, executive or court
order, Act of God or public enemy, war, civil commotion, earthquake, flood,
accident or explosion.
9.3.NOTICES. All notices given pursuant to this Agreement shall be
in writing in the English language and shall be deemed effective on the day
they are received by certified air mail or confirmed facsimile addressed to the
other party at the address or facsimile number stated below.
If to the Distributor:
Heska Corporation
1613 Prospect Parkway
Fort Collins, Colorado, 80525
Attn: President
Telephone Number: (970) 493-7272
Facsimile Number:(970) 484-9505
If to the Manufacturer:
i-STAT Corporation
104 Windsor Center Drive
East Windsor, New Jersey 08520
Attention: Mr. Noah Kroloff
Vice-President, International Sales and Marketing and
Corporate Development
Telephone Number: (609) 443-9300
Facsimile Number: (609) 443-3621
9.4.GOVERNING LAW. THIS AGREEMENT SHALL IN ALL RESPECTS BE GOVERNED
BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS (AND NOT THE LAWS OF
CONFLICTS) OF THE STATE OF NEW JERSEY, USA.
9.5. ENTIRE AGREEMENT; AMENDMENTS. This Agreement, including the
schedules, constitutes the entire understanding of the parties with respect to
the subject matter hereof and supersedes all prior or contemporaneous writings
or discussions. Except asotherwise expressly provided, no agreement varying or
extending the terms of this Agreement shall be binding on either party unless
covered by an addendum signed by an authorized representative of each party.
9.6. ASSIGNABILITY. Distributor may not assign any of its rights or
obligations hereunder, whether voluntarily or by operation of law, without the
prior written consent of Manufacturer, which shall not be unreasonably
withheld; provided, however, that no consent shall be required for the
assignment of this Agreement to any corporation controlled by Heska Corporation
which has, as one of its principal lines of business, the sale of diagnostic
equipment for the veterinary market Manufacturer may assign this Agreement to
any person to whom Manufacturer has sold or transferred the assets of the
business relating to the Products.
9.7. SURVIVAL. Sections 2.1, 2.2, 4.13, 5.2, 7 and 8 shall survive
the Term.
9.8. RELATIONSHIP OF THE PARTIES. Nothing in this Agreement or any
other document or agreement between the Parties shall constitute or be deemed
to constitute a partnership or joint venture between the Parties. The
relationship between Manufacturer and Distributor shall be that of seller and
buyer. No officer, agent or employee of one party shall under any
circumstances be considered the agent, employee or representative of the other
party. Neither party shall have the right to enter into any contracts or
binding commitments in the name of or on behalf of the other party in any
respect whatsoever.
EXECUTION
The parties have duly executed this Agreement through their duly authorized
representatives. This Agreement is effective as of February 9, 1999, after
signed and delivered by both parties.
i-STAT CORPORATION
Date: February 24, 1999 By: /S/
----------------------------
Place of Execution: Name Noah Kroloff
East Windsor, New Jersey, Title: Vice President
U.S.A. International Sales and
Marketing and
Corporate Development
HESKA CORPORATION
Date: February 19, 1999 By: /S/
----------------------------
Place of Execution: Name: Paul S. Hudnut
Fort Collins, Colorado, U.S.A. Title: Executive Vice President
SCHEDULE 1.1
PRICE LIST FOR HESKA CORPORATION
Distributor shall pay to Manufacturer the prices set forth below for purchases
of Cartridges and Analyzers, subject to adjustment from time to time as
specified below.
Payment Terms: Net 30 days FOB, East Windsor, New Jersey.
CARTRIDGE
PRODUCTS NO DESCRIPTION PRICE/TEST QTY/BOX PRICE/BOX
- ----------- ----------- ---------- ------- ---------
220300 EG7+ [ *** ] [ *** ] [ *** ]
220200 EG6+ [ *** ] [ *** ] [ *** ]
220100 G3+ [ *** ] [ *** ] [ *** ]
125000-02 EC8+ [ *** ] [ *** ] [ *** ]
121000-02 6+ [ *** ] [ *** ] [ *** ]
123000-02 EC6+ [ *** ] [ *** ] [ *** ]
121500-02 EC4+ [ *** ] [ *** ] [ *** ]
120100-02 G [ *** ] [ *** ] [ *** ]
*** Confidential Treatment Requested
Cartridge Price Adjustments. The parties acknowledge and agree that the above
prices for Cartridges are intended to provide Distributor with a gross profit
of approximately fifty percent (50%). In the event Distributor in good faith
deems it beneficial to offer to certain, specified Customers any volume
purchase or similar price discounts on volume or other strategic sales of
Cartridges, or in the event competitive products or competitive pressure
prevailing in the industry result in Distributor lowering prices on Products in
order to maintain or increase its market or competitive position with respect
to the Products, Manufacture agrees that it will negotiate in good faith with
Distributor a reduction of the prices on Cartridges so that Distributor and
Manufacturer share equally any such discount or price reductions to the extent
of sales of such discounted Cartridges. (By way of example, in the event
Distributor offers a volume or other discount to a Customer of $0.20 on the
price of EG7+ Cartridges (ex-Distributor), the transfer price to Distributor of
such Cartridges would be reduced by $0.10, or to $4.50 per Cartridge). As used
herein, the term "gross profit" shall have the meaning determined in accordance
with United States generally accepted accounting principles and Distributor's
customary practices commensurate therewith, applied on a consistent basis
during the periods in question.
ANALYZER
PRODUCT NO. DESCRIPTION PRICE
- ------------- ------------------------ -------------
210000 Thermal Controlled PCA [ *** ]
111700 HP Portable Printer [ *** ]
111501 Portable Printer Paper [ *** ]
111502 HP Portable Printer AC Adapter [ *** ]
112100 Printer Cradle w/o IR Link [ *** ]
ANALYZER
PRODUCT NO. DESCRIPTION PRICE
- ------------- ------------------------ -------------
111002 9 Volt Lithium Batteries [ *** ]
131000 Aqueous Controls Level 1 [ *** ]
131500 Aqueous Controls Level 2 [ *** ]
132000 Aqueous Controls Level 3 [ *** ]
135681 Calibration Verification Set [ *** ]
114000 Capillary Tubes 65 uL [ *** ]
112200 IR Link With Cradle [ *** ]
111900 Seiko Printer with IR Link [ *** ]
142000 Comprehensive Service Plan - [ *** ]
Analyzer
142000 Comprehensive Service Plan - CDS [ *** ]
PRODUCT NO. DESCRIPTION PRICE
- ------------- ------------------------ -------------
010382-02 Cable, IR Link, 5 feet [ *** ]
CDS Configuration
115002 CDS Hardware (CPU) [ *** ]
012124-01 CDS Monitor [ *** ]
010514 Cable, Printer [ *** ]
111800 Printer, CDS [ *** ]
013040-01 CDS Software [ *** ]
Total CDS Configuration [ *** ]
Software Download Kit
112200 IR Link [ *** ]
112250 Power Adaptor [ *** ]
010382-02 Cable, IR, 5 ft [ *** ]
012127-01 Adaptor, Keyboard, AT, IBM [ *** ]
012128-01 Adaptor, Keyboard, IBM, AT [ *** ]
517000 Total Software Download Kit [ *** ]
011786-01 Paper, Printer, Seiko (2) [ *** ]
*** Confidential Treatment Requested
Annual Price Adjustment-Analyzers. In the event of an increase in
Manufacturing Costs (as defined below) to Manufacturer resulting in an
increase, individually or in the aggregate, of total finished cost of goods of
any series 200 Analyzer in 2000 or 2001 for at least ninety (90) days, the
Purchase Price to Distributor for each such Analyzer may be adjusted upwards by
Manufacturer for contract year 2000 or 2001, as applicable (but only once in
each such contract year) by not more than an aggregate percentage increase in
the Purchase Price for such Analyzer of ten percent (10%). Manufacturer will
notify Distributor of such price adjustments at least 60 days priorto such
price adjustment and will furnish Distributor a revised Schedule 1.1 to this
Agreement. Upon Distributor's request, Manufacturer will finmish supporting
documentation therefor and permit Distributor to verify the accuracy of the
Manufacturing Costs and any increases thereof passed through to Distributor
hereunder Such adjustments may not be applied to previously-issued invoices.
For purposes of this Schedule 1.1, "Manufacturing Cost" shall mean direct
material and labor cost incurred by Manufacturer to manufacture Analyzers, or
alternatively, the bona fide invoice cost to Manufacturer for Analyzers
manufactured for Manufacturer by an unaffiliated third party manufacturer.
Other Hardware and Software Price Adjustments (excluding Cartridges). In the
event of a change in the cost of manufacturing or acquiring other hardware
components, the Purchase Price to Distributor may be adjusted upwards or
downwards by Manufacturer in proportion to the percentage change in the cost of
manufacture or acquisition.
Dating:
Four months of Cartridge shelf life is guaranteed for any Purchase order issued
45 days in advance of ship date. Cartridges will not be shipped to Distributor
with less than 4 months shelf life unless Distributor is notified in advance
and agrees to a shorter shelf life.
SCHEDULE 8.2
WARRANTY
Subject to Distributor's and Distributor's Customers' shipping, storing and
handling the Products in accordance with Manufacturer's (or the maker's)
specifications and instructions, Manufacturer warrants the Products (excluding
consumable supplies) to be free from defects in materials or workmanship for
one year from the original date of purchase subject to these terms and
conditions. Returns will not be accepted without prior written authorization
from Manufacturer and Products must show no evidence of improper shipping,
storing or handling or operation, including unauthorized repairs and/or damage
caused by batteries.
At its option, Manufacturer may repair or replace defective Products covered by
this warranty. MANUFACTURER EXPRESSLY DISCLAIMS ALL OTHER WARRANTIES, WHETHER
EXPRESS, IMPLIED, OR STATUTORY, INCLUDING THE WARRANTY OF MERCHANTABILITY AND
FITNESS OF USE. In no event shall Manufacturer be liable for consequential
damages arising out of the use of its Products.
[CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTIONS OF THIS DOCUMENT
HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY FILED WITH THE COMMISSION]
FIRST AMENDMENT TO
PRODUCT SUPPLY AGREEMENT
THIS FIRST AMENDMENT TO PRODUCT SUPPLY AGREEMENT (this "AMENDMENT") is
made and entered into as of March 15, 1999, by and between QUIDEL
CORPORATION, a Delaware corporation having a place of business at 10165
McKellar Court, San Diego, California 92121 ("QUIDEL"), and HESKA
CORPORATION, a Colorado corporation having a place of business at 1825
Sharp Point Drive, Fort Collins, Colorado 80525 ("HESKA").
RECITALS
A. QUIDEL and HESKA entered into that certain Product Supply Agreement
dated July 3, 1997 (the "SUPPLY AGREEMENT").
B. QUIDEL and HESKA desire to amend the Supply Agreement to make more
clear certain mutual indemnification obligations of the parties as provided
herein.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto agree as follows:
1. Section 12 of the Supply Agreement is hereby deleted in its entirety
and replaced with the following:
12.1 QUIDEL Indemnity. QUIDEL will defend, indemnify and save wholly
harmless HESKA, its Affiliates, and their respective successors, assigns and
customers, from and against any and all losses, damages, costs and expenses,
including without limitation the actual reasonable legal fees, disbursements,
investigation costs, other out-of-pocket expenses, settlements, payment of any
third party royalties that may be due, and damages finally awarded in any claim,
suit or cause of action (collectively, "LOSSES"), arising out of or in any way
related to (a) any demand, claim, suit or cause of action (each a "CLAIM")
alleging that any Products furnished and used as provided in this Agreement
infringe a patent, trade secret or other intellectual property or proprietary
right of any third party (unless and to the extent such a Claim alleges that any
biological or other materials or technology supplied by HESKA infringes or
violates any patent, trade secret or other intellectual property or proprietary
right of any third part); (b) a beach of or default by QUIDEL of any of its
representations, warranties, covenants or obligations contained in this
Agreement with HESKA, including without limitation export and governmental
requirements; (c) any actions taken by QUIDEL or its employees or agents in
marketing any Products; or (d) any other act or omission of QUIDEL, its agents
or employees taken or omitted in connection with the subject matter of this
Agreement or any other written agreement with HESKA.
12.2 HESKA Indemnity. HESKA will defend, indemnify and save wholly
harmless QUIDEL, its Affiliates, and their respective successors, assigns
and customers, from and against any and all Losses arising out of or in any
way related to (a) any Claim alleging that any biological or other materials
or technology supplied by HESKA infringes or violates any patent, trade
secret or other intellectual property or proprietary right of any third
party; (b) a breach of or default by HESKA of any of its representations,
warranties, covenants or obligations contained in this Agreement with QUIDEL,
including without limitation export and governmental requirements; (c) any
actions taken by HESKA or its employees or agents in marketing any Products;
or (d) any other act or omission of HESKA, its agents or employees taken or
omitted in connection with the subject matter of this Agreement or any other
written agreement with QUIDEL. Without limiting the foregoing, HESKA
acknowledges and agrees that its indemnification obligations under this
Section 12.2 shall apply to any and all Claims by SYNBIOTICS CORPORATION
("SYNBIOTICS"), alleging that any Product infringes or violates any patent,
trade secret or other intellectual property or proprietary right owned
or licensed by Synbiotics if and to the extent that such Claim arises out of or
is related to biological or other materials or technology supplied by HESKA (a
"SYNBIOTICS CLAIM").
12.3 Indemnification Procedures. In the event that a Claim is filed by a
third party against a party hereto (the "INDEMNIFIED PARTY"), its Affiliates or
any of its customers, the Indemnified Party will notify the other party hereto
(the "INDEMNIFYING PARTY") in writing within five (5) business days of being
advised of the filing of such Claim. Within five (5) business days of being
advised of the filing of such Claim, the Indemnifying Party will elect whether
to defend the Claim itself or to transfer the defense to the Indemnified Party,
and will notify the Indemnified Party in writing of its election. The
Indemnifying Party will have the primary responsibility, at its cost and
expense, to defend the Indemnified Party and its Affiliates, assigns,
successors and customers against such Claim. If the Indemnifying Party elects
to defend the Claim itself, then (a) the Indemnified Party may be represented
by advisory counsel selected by the Indemnified Party, at the Indemnified
Party's cost and expense (including, without limitation, actual reasonable
legal fees and disbursements); (b) the Indemnified Party will provide all
reasonable assistance requested by the Indemnifying Party for the defense of
the Claim; and (c) all decisions regarding the settlement thereof will made by
the Indemnifying Party with the Indemnified Party's written consent, which
consent shall not by unreasonably withheld. Notwithstanding the foregoing,
the Indemnifying Party shall also reimburse the Indemnified Party for the
actual reasonable legal fees and disbursements of the Indemnified Party's
advisory counsel, if any, in the event that the Claim against the Indemnified
Party, its Affiliates or any of its customers is neither settled nor defeated
in litigation or arbitration. If the Indemnifying Party elects not to defend
the Claim itself, then (i) the Indemnified Party may undertake its own defense
or the defense of any of its Affiliates and customers, as the case may be:
(ii) the Indemnifying Party will provide all reasonable assistance requested
by the Indemnified Party for the defense of such Claim; (iii) all decisions
regarding any such defense and settlement will be at the sole discretion of
the Indemnified Party; (iv) the Indemnifying Party will reimburse the
Indemnified Party, within thirty calendar (30) days of the Indemnified
Party's written notification thereof, for any and all costs, actual
reasonable legal fees, disbursements and out-of-pocket expenses incurred by
the Indemnified Party in connection with such defense; and (v) the
Indemnifying Party will be liable in any judgment for damages levied against
the Indemnified Party or any of its Affiliates, assigns, successors and
customers, and the Indemnifying Party will be liable for any royalties,
fees and/or costs incurred by the Indemnified Party or any of its
Affiliates, assigns, successors, and customers as a result of any
settlement of such Claim.
The parties hereby acknowledge that QUIDEL has been advised
of a Synbiotics Claim and has timely notified HESKA thereof, and that
HESKA has elected to defend such Synbiotics Claim itself, all in
accordance with and pursuant to the provisions of this Section 12.3.
2. Capitalized terms not otherwise defined herein shall have the
meanings ascribed to them in the Supply Agreement.
3. Except as specifically amended herein, the terms of the Supply
Agreement remain unmodified and in full force and effect. In the event of
a conflict between the terms of the Supply Agreement and this Amendment,
this Amendment will control.
4. This Amendment may be executed in any number of counterparts with
the same effect as if all parties hereto had signed the same document. All
counterparts will be construed together and will constitute one instrument.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
QUIDEL CORPORATION HESKA CORPORATION
By: /S/ By: /S/ Paul Hudnut
Its: President and Chief Executive Its: Executive Vice
Officer President
AMENDMENT NO. 1 TO PRODUCT SUPPLY AGREEMENT
THIS AMENDMENT AGREEMENT is entered into effective as of November 17, 1997
by and between Quidel Corporation ("Quidel") and Heska Corporation ("Heska").
WHEREAS, Quidel and Heska entered into that certain Product Supply
Agreement effective as of July 3, 1997 (the "Agreement"); and
WHEREAS, the parties desire to amend the Agreement with respect to the
specifications for the Feline Heartworm Antibody Test Kit and the Canine
Heartworm Antigen Test Kit;
NOW THEREFORE, in consideration of the foregoing, the parties agree as
follows:
1. Amendment to Exhibits B-1 and B-2. Exhibits B-1 and B-2 to the
Agreement are hereby amended by deleting said Exhibits in their
entirety and substituting Exhibits B-1-2 and B-2-2 to this
Amendment Agreement therefor.
2 No Other Changes. Except for the changes expressly made by this
Amendment Agreement, the Agreement remains in full force and
effect without change.
IN WITNESS WHEREOF, the parties have executed this Amendment Agreement
as of the date first written above.
QUIDEL CORPORATION HESKA CORPORATION
By: /S/ By: /S/
Name: John D. Tamerius Name: Fred M. Schwarzer
Title: Vice President Title: President
EXHIBIT B-1-2
Specifications for Feline Heartworm Antibody Test Kit
NEW PRODUCT DESIGN SPECIFICATIONS
Feline Heartworm Antibody Test Kit
HESKA/QUIDEL TEST
SPECIFICATION SPECIFICATION
- -------------------- ---------------------------------
1. MARKET/SEGMENT In-clinic
2. FORMAT One-step
3. TECHNOLOGY Lateral flow antibody detection
4. TYPE OF SPECIMEN [ *** ] anticoagulated whole blood,
serum or plasma, cat
5. STORAGE OF SPECIMEN Uncoagulated whole blood fresh or
stored at 2-7C [*** ]
[ *** ]
6. [ *** ] [ *** ]
7. [ *** ] [ *** ]
8. [ *** ] [ *** ]
9. [ *** ] [ *** ]
10. [ *** ] [ *** ]
11. END OF TEST INDICATOR No
12. [ *** ] [ *** ]
13. [ *** ] [ *** ]
14. [ *** ] [ *** ]
15. TOTAL ASSAY TIME 5 min or less
(RUN TIME)
16. [ *** ] [ *** ]
17. [ *** ] [ *** ]
18. [ *** ] [ *** ]
19. [ *** ] [ *** ]
20. KIT SIZE 25, 10 and 1
21. [ *** ] [ *** ]
*** Confidential Treatment Requested
EXHIBIT B-2-2
Specifications for Canine Heartworm Antigen Test Kit
NEW PRODUCT DESIGN SPECIFICATIONS
Canine Heartworm Antigen Test Kit
HESKA/QUIDEL TEST
SPECIFICATION SPECIFICATION
- ---------------------- --------------------------
1. MARKET/SEGMENT In-clinic
2. FORMAT One-step
3. TECHNOLOGY Lateral flow antigen detection
4. TYPE OF SPECIMEN [*** ] anticoagulated whole blood,
serum or plasma
5. STORAGE OF Uncoagulated whole blood fresh
SPECIMEN or stored at 2-7C [ ***]
[ *** ]
6. [ *** ] [ *** ]
7. [ *** ] [ *** ]
8. [ *** ] [ *** ]
9. [ *** ] [ *** ]
10. [ *** ] [ *** ]
11. END OF TEST No
INDICATOR
12. [ *** ] [ *** ]
13. [ *** ] [ *** ]
14. [ *** ] [ *** ]
15. TOTAL ASSAY TIME 5 min or less
(RUN TIME)
16. [ *** ] [ *** ]
17. [ *** ] [ *** ]
18. [ *** ] [ *** ]
19. [ *** ] [ *** ]
20. KIT SIZE 25, 10 and 1
21. [ *** ] [ *** ]
*** Confidential Treatment Requested
LEASE AGREEMENT
OFFICE AND INDUSTRIAL SPACE
This Lease Agreement is made and entered into as of the 6th day of October,
1999, by and between GB Ventures ("Landlord"), whose address is 4875 Pearl East
Cr. #300, Boulder. CO 80301, and Heska Corporation ("Tenant"), whose address is
1613 Prospect Parkway, Fort Collins, CO 80525.
In consideration of the covenants, terms, conditions, agreements and payments as
herein set forth, the Landlord and Tenant hereby enter into the following Lease:
1. Definitions. Whenever the following words or phrases are used in this Lease,
said words or phrases shall have the following meaning:
A. "Area" shall mean the parcel of land depicted on Exhibit "A" attached
hereto and commonly known and referred to as One Prospect, Fort Collins,
Colorado. The Area includes the Leased Premises and one or more buildings. The
Area may include Common Areas.
B. "Building" shall mean a building located in the Area.
C. "Common Areas" shall mean all entrances, exits, driveways, curbs,
walkways, hallways, parking areas, landscaped areas, restrooms, loading and
service areas, and like areas or facilities which are located in the Area and
which are designated by the Landlord as areas or facilities available for the
nonexclusive use in common by persons designated by the Landlord.
D. "Leased Premises" shall mean the premises herein leased to the Tenant
by the Landlord.
E. "Tenant's Prorata Share as to the Building in which the Leased
Premises are located shall mean an amount (expressed as a percentage) equal to
the number of square feet included in the Leased Premises divided by the total
number of leasable square feet included in said Building. The Tenant's Prorata
Share as to Common Areas shall mean an amount (expressed as a percentage) equal
to the number of square feet included in the Leased Premises divided by the
total number of leasable square feet included in all Buildings located in the
Area. The Tenant's Prorata Share for Common Areas may change from time to time
as the leasable square footage in all Buildings located in the Area is increased
or decreased.
2. Leased Premises. The Landlord hereby leases unto the Tenant, and the Tenant
hereby leases from the Landlord, the following described premises:
Space C, E, G, H, I, J in Building 1601 Prospect Parkway
consisting of Approximately 18,529 square feet, all
3. Base Term. The term of this Lease shall commence at 12:00 noon on May 1,
2000 , and, unless sooner terminated as herein provided for, shall end at 12:00
noon on May l, 2005 ("Lease Term"). Except as specifically provided to the
contrary herein, the Leased Premises shall, upon the termination of this Lease,
by virtue of the expiration of the Lease Term or otherwise, be returned to the
Landlord by the Tenant in as good or better condition than when entered upon by
the Tenant, ordinary wear and tear excepted.
4. Rent. Tenant shall pay the following rent for the Leased Premises:
A. Base Monthly Rent. Tenant shall pay to Landlord, without notice and
without setoff, at the address of Landlord as herein set forth, the following
Base Monthly Rent ("Base Monthly Rent"), said Base Monthly Rent to be paid in
advance on the first day of each month during the term hereof. In the event
that this Lease commences on a date other than the first day of a month, the
Base Monthly Rent for the first month of the Lease Term shall be prorated for
said partial month. Below is a schedule of Base Monthly Rental payments as
agreed upon:
During Lease Term
=================
For Period To Period A Base Monthly
Starting Ending Rent of
Tenant shall take occupancy of 1601 Specht Point Drive Suites C/E (6402 sf) on
May 1, 2000
May 1, 2000 June 1, 2000 $5,708.45 NNN
Tenant shall take occupancy of 1601 Specht Point Drive Suites G, H, I, J (12,127
sf) for a total square footage of 18,529 sf as of June 1, 2000.
June 1, 2000 May 1, 2005 $16,521,69/month NNN with
annual CPI Adjustments on:
May 1, 2001;
May 1, 2002;
May 1, 2003; and
May 1, 2004.
B. Lease Term Adjustment. If, for any reason, other than delays caused
by the Tenant, the Leased Premises are not ready for Tenants occupancy on May 1,
2000 for Suites C/E and June 1, 2000 for Suites G, H, I, J, the Tenant's rental
obligation and other monetary expenses (i.e. taxes, utilities, etc.) shall be
abated in direct proportion to the number of days of delay. It is hereby agreed
that the premises shall be deemed ready for occupancy on the day the Landlord
receives a T.C.O. or C.O. from the appropriate authority, or on the day the
Landlord gives Tenant the keys to the Leased Premises if a building permit has
not been applied for and/or is not required by the appropriate authority.
C. Cost of Living Adjustment. The Base Monthly Rental specified in
paragraph 4A above shall be recalculated for each Lease Year as defined
hereinafter following the first Lease Year of this Lease Agreement. The
recalculated Base Monthly Rental shall be hereinafter referred to as the
"Adjusted Monthly Rental". The Adjusted Monthly Rental for each Lease Year
after the first Lease Year shall be the greater of: (i) the amount of the
previous year's Adjusted Monthly Rental, (or the Base Monthly Rental if
calculating the Adjusted Monthly Rental for the second Lease Year), or (ii) an
amount calculated by the rent adjustment formula set forth below. In applying
the rent adjustment formula, the following definitions shall apply:
(1) "Lease Year" shall mean a period of twelve (12) consecutive full
calendar months with the first Lease Year commencing on the date of the
commencement of the term of this Lease and each succeeding Lease Year commencing
upon the anniversary date of the first Lease Year; however, if this Lease does
not commence on the first day of a month, then, the first Lease Year and each
succeeding Lease Year shall commence on the first day of the first month
following each anniversary date of this Lease;
(2) "Bureau" shall mean the Bureau of Labor Statistics of the United
States Department of Labor or any successor agency that shall issue the Price
Index referred to in this Lease Agreement.
(3) "Price Index" shall mean the "Consumer Price Index-All Urban
Consumers-All Items (CPI-U) U.S. City Average (1982-84=100)" issued from time to
time by the Bureau. In the event the Price Index shall hereafter be converted
to a different standard reference base or otherwise revised, the determination
of the increase in the Price Index shall be made with the use of such conversion
factor, formula or table as may be published by Prentice-Hall, Inc. or failing
such publication, by another nationally recognized publisher of similar
statistical information. In the event the Price Index shall cease to be
published, then, for the purposes of this paragraph 4C there shall be
substituted for the Price Index such other index as the Landlord and the Tenant
shall agree upon, and if they are unable to agree within sixty (60) days after
the Price Index ceases to be published, such matter shall be determined by
arbitration in accordance with the Rules of the American Arbitration
Association.
(4) "Base Price Index" shall mean the Price Index released to the
public during the second calendar month preceding the commencement of this Lease
Agreement.
(5) "Revised Price Index" shall mean the Price Index released to the
public during the second calendar month preceding the Lease Year for which the
Base Annual Rental is to be adjusted;
(6) "Basic Monthly Rental" shall mean the Basic Monthly Rental set
forth in subparagraph 4A above. The rent adjustment formula used to calculate
the Adjusted Monthly Rental is as follows:
Adjusted Monthly Rental = Revised Price Index X Base Monthly Rental
=========================================
Base Price Index
Notwithstanding the above formula, the Adjusted Monthly Rental shall not be less
than 103% or greater than 106% of the previous year's Adjusted Monthly Rental,
or the Basic Monthly Rental if such adjustment is for the Second Lease Year.
The Adjusted Monthly Rental as herein above provided shall continue to be
payable monthly as required in paragraph 4A above without necessity of any
further notice by the Landlord to the Tenant.
D. Total Net Lease. The Tenant understands and agrees that this Lease is
a total net lease (a "net, net, net lease"), whereby the Tenant has the
obligation to reimburse the Landlord for a share of all costs and expenses
(taxes, assessments, other charges, insurance, trash removal, Common Area
operation and maintenance and like costs and expenses), incurred by the Landlord
as a result of the Landlord's ownership and operation of the Area. Major
capital improvements, such as total replacement of the roof or parking lot are
not considered to be maintenance items as described in this Paragraph 6D.
5. Security Deposit. Landlord acknowledges receipt from the Tenant of the sum
of Sixteen Thousand Five Hundred Twenty Two Dollars ($16,522.00) to be retained
by Landlord without responsibility for payment of interest thereon, as security
for performance of all the terms and conditions of this Lease Agreement to be
performed by Tenant, including payment of all rent due under the terms hereof.
Deductions may be made by Landlord from the amount so retained for the
reasonable cost of repairs to the Leased Premises (ordinary wear and tear
excepted), for any rent delinquent under the terms hereof and/or for any sum
used in any manner to cure any default of Tenant under the terms of this Lease.
In the event deductions are so made, the Tenant shall, upon notice from the
Landlord, redeposit with the Landlord such amounts so expended so as to maintain
the deposit in the amount as herein provided for, and failure to so redeposit
shall be deemed a failure to pay rent under the terms hereof. Nothing herein
contained shall limit the liability of Tenant as to any damage to the Leased
Premises, and Tenant shall be responsible for the total amount of any damage
and/or loss occasioned by actions of Tenant. Landlord may deliver the funds
deposited hereunder by Tenant to any purchaser of Landlord's interest in the
Leased Premises in the event such interest shall be sold, and thereupon Landlord
shall be discharged from any further liability with respect to such deposit.
6. Use of Premises. Tenant shall use the Leased Premises only for Office,
warehouse, Laboratory, Light Manufacturing, Assembly and for no other purpose
whatsoever except with the written consent of Landlord. Tenant shall not allow
any accumulation of trash or debris on the Leased Premises or within any portion
of the Area. All receiving and delivery of goods and merchandise and all
removal of garbage and refuse shall be made only by way of the rear and/or other
service door provided therefore. In the event the Leased Premises shall have no
such door, then these matters shall be handled in a manner satisfactory to
Landlord. No storage of any material outside of the Leased Premises shall be
allowed unless first approved by Landlord in writing, and then in only such
areas as are designated by Landlord. Tenant shall not commit or suffer any
waste on the Leased Premises nor shall Tenant permit any nuisance to be
maintained on the Leased Premises or permit any disorderly conduct or other
activity having a tendency to annoy or disturb any occupants of any part of the
Area and/or any adjoining property.
7. Laws and Regulations. - Tenant Responsibility. The Tenant shall, at its sole
cost and expense, comply with all laws and regulations of any governmental
entity, board, commission or agency having jurisdiction over the Leased
Premises. Tenant agrees not to install any electrical equipment that overloads
any electrical paneling, circuitry or wiring and further agrees to comply with
the requirements of the insurance underwriter or any governmental authorities
having jurisdiction thereof.
8. Landlord's Rules and Regulations. Landlord reserves the right to adopt and
promulgate rules and regulations applicable to the Leased Premises and from time
to time amend or supplement said rules or regulations. Notice of such rules and
regulations and amendments and supplements thereto shall be given to Tenant, and
Tenant agrees to comply with and observe such rules and regulations and
amendments and supplements thereto provided that the same apply uniformly to all
Tenants of the Landlord in the Area.
9. Parking. If the Landlord provides off street parking for the common use of
Tenants, employees and customers of the Area, the Tenant shall park all vehicles
of whatever type used by Tenant and/or Tenant's employees only in such areas
thereof as are designated by Landlord for this purpose, and Tenant accepts the
responsibility of seeing that Tenant's employees park only in the areas so
designated. Tenant shall, upon the request of the Landlord, provide to the
Landlord license numbers of the Tenant's vehicles and the vehicles of Tenant's
employees.
10. Control of Common Areas. - Exclusive control of the Landlord. All Common
Areas shall at all times be subject to the exclusive control and management of
Landlord, notwithstanding that Tenant and/or Tenant's employees and/or customers
may have a nonexclusive right to the use thereof. Landlord shall have the right
from time to time to establish, modify and enforce rules and regulations with
respect to the use of said facilities and Common Areas.
11. Taxes.
A. Real Property Taxes and Assessments. The Tenant shall pay to the
Landlord on the first day of each month, as additional rent, the Tenant's
Prorata Share of all real estate taxes and special assessments levied and
assessed against the Building in which the Leased Premises are located and the
Common Areas. If the first and last years of the Lease Term are not calendar
years, the obligations of the Tenant hereunder shall be prorated for the number
of days during the calendar year that this Lease is in effect. The monthly
payments for such taxes and assessments shall be $1,961.00 until the Landlord
receives the first tax statement for the referred to properties. Thereafter,
the monthly payments shall be based upon 1/12th of the prior year's taxes and
assessments. Once each year the Landlord shall determine the actual Tenant's
Prorata Share of taxes and assessments for the prior year and if the Tenant has
paid less than the Tenant's Prorata Share for the prior year the Tenant shall
pay the deficiency to the Landlord with the next payment of Base Monthly Rent,
or, if the Tenant has paid in excess of the Tenant's Prorata Share for the prior
year the Landlord shall forthwith refund said excess to the Tenant.
Additionally, upon Lease expiration or termination Landlord shall also determine
Tenant's Prorata Share of taxes and assessments for the calendar year in which
the Lease expires or terminates based on the most recent valuation and estimate
of taxes provided by Boulder County. If the Tenant has paid less than the
Tenant's prorated Prorata Share for the current year the Tenant shall pay the
deficiency, or, if the Tenant has paid in excess of the Tenant's prorated
Prorata Share for the current year the Landlord shall forthwith refund the
excess to the Tenant.
B. Personal Property Taxes. Tenant shall be responsible for, and shall
pay promptly when due, any and all taxes and/or assessments levied and/or
assessed against any furniture, fixtures, equipment and items of a similar
nature installed and/or located in or about the Leased Premises by Tenant.
C. Rent Tax. If a special tax, charge, or assessment is imposed or
levied upon the rents paid or payable hereunder or upon the right of the
Landlord to receive rents hereunder (other than to the extent that such rents
are included as a part of the Landlord's income for the purpose of an income
tax), the Tenant shall reimburse the Landlord for the amount of such tax within
fifteen (15) days after demand therefore is made upon the Tenant by the
Landlord.
D. Other Taxes, Fees and Charges. Tenant shall pay to Landlord, on the
first day of each month, as additional rent, Tenant's Pro Rata Share of any
"Other Charges" (as hereinafter defined) levied, assessed, charged or imposed
against the Area, as a whole. Unless paid directly by Tenant to the authority
levying, assessing, charging or imposing same, Tenant shall also pay to
Landlord, on the first day of the month following payment of same by Landlord,
the entire costs of any such "Other Charges" levied, assessed, charged or
imposed against the Leased Premises, Tenant's use of same, or Tenant's conduct
of business thereon. For purposes of this provision, "Other Charges" shall mean
and refer to any and all taxes, assessments, impositions, user fees, impact
fees, utility fees, transportation fees, infrastructure fees, system fees,
license fees, and any other charge or assessment imposed by any governmental
authority or applicable subdivision on the Area, the Leased Premises or the
ownership or use of the Area or Leased Premises, or the business conducted
thereon, whether or not formally denominated as a tax, assessment, charge, or
other nominal description, whether now in effect or hereafter enacted or imposed
(excluding, however, Landlord's income taxes).
E. Should Landlord protest and win a reduction in the real estate taxes
for the Building and Area, Tenant shall be obligated to pay its Prorata Share of
the cost of such protest, if the protest is handled by a party other than the
Landlord.
12. Insurance.
A. Landlord's Insurance. Landlord shall obtain and maintain such fire
and casualty insurance on the core and shell of the Building in which the Leased
Premises are located and the Common Areas, as well as such loss of rents,
business interruption, liability or any other insurance, as it deems
appropriate, with such companies and on such terms and conditions as Landlord
deems acceptable. Such insurance shall not be required to cover any of Tenant's
inventory, furniture, furnishings, fixtures, equipment or tenant improvements
(whether or not installed on the Leased Premises by or for Tenant and whether or
not included within the tenant finish provided by Landlord), and Landlord shall
not be obligated to repair any damage thereto or replace any of same, and Tenant
shall have no interest in any proceeds of Landlord's insurance.
B. Tenant's Insurance. Tenant shall, at its sole cost and expense,
obtain and maintain throughout the term of this Lease, on a full replacement
cost basis, "all risk" insurance covering all of Tenant's Inventory, furniture,
furnishings, fixtures, equipment and all tenant improvements or tenant finish
(whether or not installed by Landlord) and betterments located on or within the
Leased Premises. In addition, Tenant shall obtain and maintain, at its sole
cost and expense, comprehensive general public liability insurance providing
coverage from and against any loss or damage occasioned by an accident or
casualty on, about or adjacent to the Leased Premises, including protection
against death, personal injury and property damage. Such liability coverage
shall be written on an "occurrence" basis, with limits of not less than
$1,000,000.00 combined single limit coverage.
All policies of insurance required to be carried by Tenant hereunder shall
be written by an insurance company licensed to do business in the State of
Colorado, and shall name Landlord as an additional named insured and/or loss
payee, as Landlord may direct. Each such policy shall provide that same shall
not be changed or modified without at least thirty (30) days' prior written
notice to Landlord and any mortgagee of Landlord. Certificates evidencing the
extent and effectiveness of all Tenant's insurance shall be delivered to
Landlord. The limits of such insurance shall not, under any circumstances,
limit the liability of Tenant under this Lease.
In the event that Tenant fails to maintain any of the insurance required of
it pursuant to this provision, Landlord shall have the right (but not the
obligation) at Landlord's election, to pay Tenant's premiums or to arrange
substitute insurance with an insurance company of Landlord's choosing, in which
event any premiums advanced by Landlord shall constitute additional rent payable
under this Lease and shall be payable by Tenant to Landlord immediately upon
demand for same. Landlord shall also have the right, but no the obligation,
whether or not Tenant maintains coverage to carry any such insurance as Landlord
may elect in order to provide coverage in the event Tenant fails to properly
maintain such insurance.
The rights of Landlord hereunder shall be in addition to, and not in lieu
of, of any other rights or remedies available to Landlord under this Lease or
provided by law or in equity. Without limiting the foregoing, in the event that
coverage of any risk for which Tenant is responsible pursuant to this Section 12
is ultimately provided by coverage maintained by Landlord, whether due to
Tenant's failure to provided or maintain such insurance or otherwise, Tenant
shall promptly reimburse Landlord for an amount equal to any deductible
incurred, immediately upon demand for same.
C. Tenants High Pressure Steam Boiler Insurance. If Tenant makes use of
any kind of steam or other high pressure boiler or other apparatus which
presents a risk of damage to the Leased Premises or to the Building or other
improvements of which the Leased Premises are a part or to the life or limb of
persons within such premises, Tenant shall secure and maintain appropriate
boiler insurance in an amount satisfactory to Landlord. The Landlord shall be
named insured in any such policy or policies. Certificates for such insurance
shall be delivered to Landlord and shall provide that said insurance shall not
be changed, modified, reduced or canceled without thirty (30) days prior written
notice thereof being given to Landlord.
D. Tenants Share of Landlord Insurance. Tenant shall pay the Landlord as
additional rent Tenant's Prorata Share of the insurance secured by the Landlord
pursuant to "12A" above. Payment shall be made on the first day of each month
as additional rent. The monthly payments for such insurance shall be $108.00
until changed by Landlord as a result of an increase or decrease in the cost of
such insurance.
E. Mutual Subrogation Waiver. Landlord and Tenant hereby grant to each
other, on behalf of any insurer providing fire and extended coverage to either
of them covering the Leased Premises, Buildings or other improvements thereon or
contents thereof, a waiver of any right of subrogation any such insurer of one
party may acquire against the other or as against the Landlord or Tenant by
virtue of payments of any loss under such insurance. Such a waiver shall be
effective so long as the Landlord and Tenant are empowered to grant such waiver
under the terms of their respective insurance policy or policies and such
waiver shall stand mutually terminated as of the date either Landlord or Tenant
gives notice to the other that the power to grant such waiver has been so
terminated.
13. Utilities.
A. Tenant shall be solely responsible for and promptly pay all charges
for heat, water, gas, electric, sewer service and any other utility service used
or consumed on the Leased Premises. For all utility services used or consumed
on the Leased Premises which are included in utility services to an area larger
than the Leased Premises, Tenant shall pay monthly, commencing with the first
month of the Lease Term, as additional rent due under the terms hereof, a sum
equal to Tenant's Prorata Share of the estimated costs for said twelve (12)
month period, divided by 12. The estimated initial monthly costs are $1,521.00
for building water, electric and gas service to the HVAC system. Once each year
the Landlord shall determine the actual costs of the foregoing expenses for the
prior year and if the actual costs are greater than the estimated costs, the
Tenant shall pay its Tenant's Prorata Share of the difference between the
estimated costs and the actual costs to the Landlord with the next payment of
Base Monthly Rent, or, if the actual costs are less than the estimated costs,
the Landlord shall forthwith refund the amount of the Tenant's excess payment to
the Tenant. Additionally, upon Lease expiration or termination Landlord shall
also determine Tenant's Prorata Share of the annualized actual costs of the
foregoing expenses for the number of days the Lease is in effect during the
calendar year in which the Lease expires or terminates. If the annualized
actual costs are greater than the estimated costs, the Tenant shall pay its
Tenant's Prorata Share of the difference between the estimated costs and the
annualized actual costs to the Landlord, or, if the annualized actual costs are
less than the estimated costs, the Landlord shall forthwith refund the excess
payment to the Tenant. For purposes of calculating Tenant's share of expenses
under this paragraph, annualized actual costs shall be the sum of actual costs
for the year at the time of reconciliation plus the total estimated costs
prorated for the number of days from the date the last actual cost was paid to
the end of the year. For all utility services used or consumed on the Leased
Premises in which the utility service is used solely on the Leased Premises, the
Tenant shall forthwith upon taking occupancy of the Leased Premises make
arrangements with the Public Service Company, U.S. West or other appropriate
utility company to pay the utilities used on the Leased Premises and to have the
same billed to the Tenant at the address designated by the Tenant. Should there
be a time where the Landlord remains responsible for utilities supplied to the
Leased Premises, the Landlord shall bill the Tenant therefore and the Tenant
shall promptly reimburse the Landlord therefore. In no event shall Landlord be
liable for any interruption or failure in the supply of any such utility to the
Leased Premises.
In the event the utility company supplying water and/or sewer to the Leased
Premises determines that an additional service fee, impact fee, and/or
assessment, or any other type of payment or penalty is necessary due to Tenant's
use and occupancy of the Building, nature of operation and/or consumption of
utilities, said expense shall be borne solely by the Tenant. Said expense shall
be paid promptly and any repairs requested by the utility company shall be
performed by Tenant immediately and without any delay.
B. Landlord Controls Selection. Landlord has advised Tenant that
presently Public Service Company of Colorado ("Utility Service Provider") is the
utility company selected by Landlord to provide electricity and gas service for
the Building. Notwithstanding the foregoing, if permitted by Law, Landlord
shall have the right at any time and from time to time during the Lease Term to
either contract for service from a different company or companies providing
electricity and/or gas service (each such company shall hereinafter be referred
to as an ("Alternative Service Provider") or continue to contract for service
from the Utility Service Provider.
C. Tenant Shall Give Landlord Access. Tenant shall cooperate with
Landlord, Utility Service Provider, and any Alternative Service Provider at all
times and, as reasonably necessary, shall allow Landlord, Utility Service
Provider, and any Alternative Service Provider reasonable access to the
Building's electric lines, feeders, risers, wiring, gas lines, and any other
machinery within the Premises.
D. Landlord Not Responsible for Interruption of Service. Landlord shall
in no way be liable or responsible for any loss, damage, or expense that Tenant
may sustain or incur by reason of any change, failure, interference, disruption,
or defect in the supply or character of the electrical and/or gas energy
furnished to the Premises, or if the quantity or character of the electric
and/or gas energy supplied by the Utility Service Provider or any Alternate
Service Provider is no longer available or suitable for Tenant's requirements,
and no such change, failure, defect, unavailability, or unsuitability shall
constitute an actual or constructive eviction, in whole or in part, or entitle
Tenant to any abatement or diminution of rent, or relieve Tenant from any of its
obligations under the Lease.
14. Maintenance 0bligations of Landlord. Except as herein otherwise
specifically provided for, and not including capital improvement. Landlord
shall keep and maintain the roof and exterior of the Building of which the
Leased Premises are a part in good repair and condition. Tenant shall repair
and pay for any damage to roof, foundation and external walls caused by Tenant's
action, negligence or fault.
15. Maintenance Obligations of the Tenant. Subject only to the maintenance
obligations of the Landlord as herein provided for, the Tenant shall, during the
entire Lease Term, including all extensions thereof, at the Tenant's sole cost
and expense, keep and maintain the Leased Premises in good condition and repair,
including specifically the following:
A. Electrical Systems. Tenant agrees to maintain in good working order
and to make all required repairs and replacements to the electrical systems for
the Leased Premises. Tenant upon signing this Lease acknowledges that Tenant
has inspected the existing electrical systems and all such systems are in good
repair and working order.
B. Plumbing Systems. Tenant agrees to maintain in good working order and
to make all required repairs or replacements to the plumbing systems for the
Leased Premises. Tenant upon signing this Lease acknowledges that Tenant has
inspected the existing plumbing systems and all such systems are in good repair
and working order.
C. Inspections and Service. Upon termination of Lease Agreement, Tenant
agrees, before vacating premises, to employ at Tenant's sole cost and expense, a
licensed contractor to inspect, service and write a written report on the
systems referred to in "A" and "B" of this Paragraph. Landlord shall have the
right to order such an inspection if Tenant fails to provide evidence of such
inspection, and, to follow the recommendations of such reports and to charge the
expense thereof to the Tenant.
D. Tenant's Responsibility for Building and Area Repairs. Tenant shall
be responsible for any repairs required for any part of the Building or Area of
which the Leased Premises are a part if such repairs are necessitated by the
actions or inactions of Tenant.
E. Cutting Roof. Tenant must obtain in writing the Landlord's approval
prior to making any roof penetrations. Failure by Tenant to obtain written
permission to penetrate a roof shall relieve Landlord of any roof repair
obligations as set forth in Paragraph "14" hereof. Tenant further agrees to
repair, at its sole cost and expense, all roof penetrations made by the Tenant
and to use, if so requested by Landlord, a licensed contractor selected by the
Landlord to make such penetrations and repairs.
F. Glass and Doors. The repair and replacement of all glass and doors on
the Leased Premises shall be the responsibility of the Tenant. Any such
replacements or repairs shall be promptly completed at the expense of the
Tenant.
G. Liability for Overload. Tenant shall be responsible for the repair or
replacement of any damage to the Leased Premises, the Building or the Area which
result from the Tenant's movement of heavy articles therein or thereon. Tenant
shall not overload the floors of any part of the Leased Premises.
H. Liability for Overuse and Overload of Operating Systems. Tenant shall
be responsible for the repair, upgrade, modification, and/or replacement of any
operating systems servicing the Leased Premises and/or all or part of the
Building which is necessitated by Tenant's change or increase in use of or
non-disclosed use of all or a part of the Leased Premises. Operating systems
include, but are not limited to, electrical systems; plumbing systems (both
water and natural gas); heating, ventilating, and air conditioning systems;
telecommunications systems; computer and network systems; lighting systems, fire
sprinkler systems; security systems; and building control systems, if any.
I. Inspection of Leased Premises - "As Is" Conditions. Tenant has
inspected the Leased Premises and accepts the Leased Premises in the condition
that they exist as of the date of this Lease, including, but not limited to, all
mechanical, plumbing, and electrical systems and the conditions of the interior
except: No Exceptions.
J. Failure of Tenant to Maintain Premises. Should Tenant neglect to keep
and maintain the Leased Premises as required herein, the Landlord shall have the
right, but not the obligation, to have the work done and any reasonable costs
plus a ten percent (10%) overhead charge therefore shall be charged to Tenant as
additional rental and shall become payable by Tenant with the payment of the
rental next due.
16. Common Area Maintenance. Tenant shall be responsible for Tenant's Prorata
share of the total costs incurred for the operation, maintenance and repair of
the Common Areas, including, but not limited to, the costs and expenses incurred
for the operation, maintenance and repair of parking areas (including restriping
and repaving); removal of snow; utilities for common lighting and signs; normal
HVAC maintenance and elevator maintenance (if applicable); trash removal;
security to protect and secure the Area; common entrances, exits, and lobbies of
the Building; all common utilities, including water to maintain landscaping;
replanting in order to maintain a smart appearance of landscape areas; supplies;
depreciation on the machinery and equipment used in such operation, maintenance
and repair; the cost of personnel to implement such services; the cost of
maintaining in good working condition the HVAC system(s) for the Leased
premises; the cost of maintaining in good working condition the elevator(s) for
the Leased Premises, if applicable; costs to cover Landlord's management fees
paid for the property. These costs shall be estimated on an annual basis by the
Landlord and shall be adjusted upwards or downwards depending on the actual
costs for the preceding twelve months. Tenant shall pay monthly, commencing
with the first month of the Lease Term, as additional rent due under the terms
hereof, a sum equal to Tenant's Prorata Share of the estimated costs for said
twelve (12) month period, divided by 12. The estimated initial monthly costs
are $1,350.00. Once each year the Landlord shall determine the actual costs of
the foregoing expenses for the prior year and if the actual costs are greater
than the estimated costs, the Tenant shall pay its Tenant's Prorata Share of the
difference between the estimated costs and the actual costs to the Landlord with
the next payment of Base Monthly Rent, or, if the actual costs are less than the
estimated costs, the Landlord shall forthwith refund the amount of the Tenant's
excess payment to the Tenant.
Additionally, upon Lease expiration or termination Landlord shall also determine
Tenant's prorated Prorata Share of the annualized actual costs of the foregoing
expenses for the number of days the Lease is in effect during the calendar year
in which the Lease expires or terminates. If the annualized actual costs are
greater than the estimated costs, the Tenant shall pay its prorated Tenant's
Prorata Share of the difference between the estimated costs and the annualized
actual costs to the Landlord, or, if the annualized actual costs are less than
the estimated costs, the Landlord shall forthwith refund the excess to the
Tenant. For purposes of calculating Tenant's share of expenses under this
paragraph, annualized actual costs shall be the sum of actual costs for the year
at the time of reconciliation plus the total estimated costs prorated for the
number of days from the date the last actual cost was paid to the end of the
year.
17. Inspection of and Right of Entry to Leased Premises--Regular, Emergency,
Reletting. Landlord and/or Landlord's agents and employees, shall have the right
to enter the Leased Premises at all times during regular business hours and, at
all times during emergencies, to examine the Leased Premises, to make such
repairs, alterations, improvements or additions as Landlord deems necessary, and
Landlord shall be allowed to take all materials into and upon said Leased
Premises that may be required therefore without the same constituting an
eviction of Tenant in whole or in part, and the rent reserved shall in no way
abate while such repairs, alterations, improvements or additions are being made,
by reason of loss or interruption of business of Tenant or otherwise. During
the six months prior to the expiration of the term of this Lease or any renewal
thereof, Landlord may exhibit the Leased Premises to prospective tenants and/or
purchasers and may place upon the Leased Premises the usual notices indicating
that the Leased Premises are for lease and/or sale.
18. Alteration-Changes and Additions-Responsibility. Unless the Landlord's
approval is first secured in writing, the Tenant shall not install or erect
inside partitions, add to existing electric power service, add telephone
outlets, add light fixtures, install additional heating and/or air conditioning
or make any other changes or alterations to the interior or exterior of the
Leased Premises. Any such changes or alterations shall be made at the sole cost
and expense of the Tenant. At the end of this Lease, all such fixtures,
equipment, additions, changes and/or alterations (except trade fixtures
installed by Tenant) shall be and remain the property of Landlord; provided,
however, Landlord shall have the option to require Tenant to remove any or all
such fixtures, equipment, additions and/or alterations and restore the Leased
Premises to the condition existing immediately prior to such change and/or
installation, normal wear and tear excepted, all at Tenant's cost and expense.
All such work shall be done in a good and workmanlike manner and shall consist
of new materials unless agreed to otherwise by Landlord. Any and all repairs,
changes and/or modifications thereto shall be the responsibility of, and at the
cost of, Tenant. Landlord may require adequate security from Tenant assuring no
mechanics' liens on account of work done on the Leased Premises by Tenant and
may post the Leased Premises, or take such other action as is then permitted by
law, to protect the Landlord and the Leased Premises against mechanics' liens.
Landlord may also require adequate security to assure Landlord that the Leased
Premises will be restored to their original condition upon termination of this
Lease.
19. Sign Approval. Except for signs which are located inside of the Leased
Premises and which are not attached to any part of the Leased Premises, the
Landlord must approve in writing any sign to be placed in or on the interior or
exterior of the Leased Premises, regardless of size or value. Specifically,
signs attached to windows of the Leased Premises must be so approved by the
Landlord. As a condition to the granting of such approval, Landlord shall have
the right to require Tenant to furnish a bond or other security acceptable to
Landlord sufficient to insure completion of and payment for any such sign work
to be so performed. Tenant shall, during the entire Lease Term, maintain
Tenant's signs in good condition and repair at Tenants sole cost and expense.
Tenant shall, remove all signs at the termination of this Lease, at Tenant's
sole risk and expense and shall in a workmanlike manner properly repair any
damage and close any holes caused by the installation and/or removal of Tenants
signs. Tenant shall give Landlord prior notice of such removal so that a
representative of Landlord shall have the opportunity of being present when the
signage is removed, or shall pre-approve the manner and materials used to repair
damage and close the holes caused by removal.
20. Right of Landlord to Make Changes and Additions. Landlord reserves the
right at any time to make alterations or additions to the Building or Area of
which the Leased Premises are a part. Landlord also reserves the right to
construct other buildings and/or improvements in the Area and to make
alterations or additions thereto, all as Landlord shall determine. Easements
for light and air are not included in the leasing of the Leased Premises to
Tenant. Landlord further reserves the exclusive right to the roof of the
Building of which the Leased Premises are a part. Landlord also reserves the
right at any time to relocate, vary and adjust the size of any of the
improvements or Common Areas located in the Area, provided, however, that all
such changes shall be in compliance with the requirements of governmental
authorities having jurisdiction over the Area. Nothing in this Lease will
require Tenant to indemnify, hold harmless or release Landlord for any claim,
loss, expense, cost judgement and/or demand, or fees, arising from the
negligence or willful misconduct of Landlord, its agents, employees or
contractors, or a breach of the obligations of the Landlord hereunder.
21. Damage or Destruction of Leased Premises. In the event the Leased Premises
and/or the Building of which the Leased Premises are a part shall be totally
destroyed by fire or other casualty or so badly damaged that, in the opinion of
Landlord and Tenant, it is not feasible to repair or rebuild same, Landlord
shall have the right to terminate this Lease upon written notice to Tenant. If
the Leased Premises are partially damaged by fire or other casualty, except if
caused by Tenant's negligence, and said Leased Premises are not rendered
untenable thereby, as determined by Landlord and Tenant, an appropriate
reduction of the rent shall be allowed for the unoccupied portion of the Leased
Premises until repair thereof shall be substantially completed. If the Landlord
elects to exercise the right herein vested in it to terminate this Lease as a
result of damage to or destruction of the Leased Premises or the Building in
which the Leased Premises are located, said election shall be made by giving
notice thereof to the Tenant within thirty (30) days after the date of said
damage or destruction.
22. Governmental Acquisition of Property. The parties agree that Landlord
shall have complete freedom of negotiation and settlement of all matters
pertaining to the acquisition of the Leased Premises, the Building, the Area, or
any part thereof, by any governmental body or other person or entity via the
exercise of the power of eminent domain, it being understood and agreed that any
financial settlement made or compensation paid respecting said land or
improvements to be so taken, whether resulting from negotiation and agreement or
legal proceedings, shall be the exclusive property of Landlord, there being no
sharing whatsoever between Landlord and Tenant of any sum so paid. In the event
of any such taking, Landlord shall have the right to terminate this Lease on the
date possession is delivered to the condemning person or authority. Such taking
of the property shall not be a breach of this Lease by Landlord nor give rise to
any claims in Tenant for damages or compensation from Landlord. Nothing herein
contained shall be construed as depriving the Tenant of the right to retain as
its sole property any compensation paid for any tangible personal property owned
by the Tenant which is taken in any such condemnation proceeding.
23. Assignment or Subletting. Tenant may not assign this Lease, or sublet the
Leased Premises or any part thereof, without the written consent of Landlord,
such consent shall not be unreasonably withheld. No such assignment or
subletting if approved by the Landlord shall relieve Tenant of any of its
obligations hereunder, and, the performance or nonperformance of any of the
covenants herein contained by subtenants shall be considered as the performance
or the nonperformance by the Tenant. In the event of an acquisition, merger, or
reorganization, the assignment of the Lease shall not be unreasonably withheld
by Landlord.
24. Warranty of Title. Subject to the provisions of the following three (3)
paragraphs hereof, Landlord covenants it has good right to lease the Leased
Premises in the manner described herein and that Tenant shall peaceably and
quietly have, hold, occupy and enjoy the Leased Premises during the term of the
Lease.
25. Access. Landlord shall provide Tenant nonexclusive access to the Leased
Premises through and across land and/or other improvements owned by Landlord.
Landlord shall have the right, during the term of this Lease, to designate, and
to change, such nonexclusive access.
26. Subordination. Tenant agrees that this Lease shall be subordinate to any
mortgages, trust deeds or ground leases that may now exist or which may
hereafter be placed upon said Leased Premises and to any and all advances to be
made thereunder, and to the interest thereon, and all renewals, replacements and
extensions thereof. Tenant shall execute and deliver whatever instruments may
be required for the above purposes, and failing to do so within ten (10) days
after demand in writing, does hereby make, constitute and irrevocably appoint
Landlord as its attorney-in-fact and in its name, place and stead so to do.
Tenant shall in the event of the sale or assignment of Landlord's interest in
the Area or in the Building of which the Leased Premises form a part, or in the
event of any proceedings brought for the foreclosure of or in the event of
exercise of the power of sale under any mortgage made by Landlord covering the
Leased Premises, attorn to the purchaser and recognize such purchaser as
Landlord under this Lease.
27. Easements. The Landlord shall have the right to grant any easement on,
over, under and above the Area for such purposes as Landlord determines,
provided that such easements do not materially interfere with Tenant's occupancy
and use of the Leased Premises.
28. Indemnification and Waiver. Except in the case of a breach or default in
the performance of any obligation under this Lease, each party shall indemnify,
defend and hold harmless the other party and nothing in this Lease shall be
construed as imposing any liability on them for any loss, costs, expense
(including reasonable attorney's fees), or any claims, suits, actions or damages
arising from the ownership, use, control or occupancy of any portion of the
Project including the Building, Common Areas and Premises unless such loss,
cost, expense, claim, suit or action is a result of or caused by the negligent
acts or omissions of such other party or its agents, servants, employees,
contractors, or invitees.
Tenant shall not indemnify Landlord for acts or failure to observe or comply
with any of the rules by any other Tenant or occupant of the Building or Project
that adversely affect Tenant's use and occupancy in which Landlord has been put
on notice of such adverse impact to Tenant.
29. Acts or Omission of Others. The Landlord, or its employees or agents, or
any of them, shall not be responsible or liable to the Tenant or to the Tenant's
guests, invitees, employees, agents or any other person or entity, for any loss
or damage that may be caused by the acts or omissions of other tenants, their
guests or invitees, occupying any other part of the Area or by persons who are
trespassers on or in the Area, or for any loss or damage caused or resulting
from the bursting, stoppage, backing up or leaking of water, gas, electricity or
sewers or caused in any other manner whatsoever, unless such loss or damage is
caused by or results from the negligent acts of the Landlord, its agents or
contractors.
30. Interest on Past Due Obligations. Any amount due to Landlord not paid when
due shall bear interest at one and one half (1-1/2%) percent per month from due
date until paid. Payment of such interest shall not excuse or cure any default
by Tenant under this Lease.
31. Holding Over-Double Last Month's Rent. If Tenant shall remain in
possession of the Leased Premises after the termination of this Lease, whether
by expiration of the Lease Term or otherwise, without a written agreement as to
such possession, then Tenant shall be deemed a month-to-month Tenant. The rent
rate during such holdover tenancy shall be equivalent to double the monthly rent
paid for the last full month of tenancy under this Lease, excluding any free
rent concessions which may have been made for the last full month of the Lease.
No holding over by Tenant shall operate to renew or extend this Lease without
the written consent of Landlord to such renewal or extension having been first
obtained. Tenant shall indemnify Landlord against loss or liability resulting
from the delay by Tenant in surrendering possession of the Leased Premises
including, without limitation, any claims made with regard to any succeeding
occupancy bounded by such holdover period.
32. Modification or Extensions. No modification or extension of this Lease
shall be binding upon the parties hereto unless in writing and unless signed by
the parties hereto.
33. Notice Procedure. All notices, demands and requests which may be or are
required to be given by either party to the other shall be in writing and such
that are to be given to Tenant shall be deemed to have been properly given if
served on Tenant or an employee of Tenant or sent to Tenant by United States
registered or certified mail, return receipt requested, properly sealed, stamped
and addressed to Tenant at 1613 Prospect Parkway, Fort Collins, CO 80525,
Attention Facilities Manager or at such other place as Tenant may from time to
time designate in a written notice to Landlord; and, such as are to be given to
Landlord shall be deemed to have been properly given if personally served on
Landlord or if sent to Landlord, United States registered or certified mail,
return receipt requested, properly sealed, stamped and addressed to Landlord at
4875 Pearl East Cr. #300, Boulder, CO 80301 or at such other place as Landlord
may from time to time designate in a written notice to Tenant. Any notice given
by mailing shall be effective as of the date of mailing.
34. Memorandum of Lease-Notice to Mortgagee. The Landlord and Tenant agree not
to place this Lease of record, but upon the request of either party to execute
and acknowledge so the same may be recorded a short form lease indicating the
names and respective addresses of the Landlord and Tenant, the Leased Premises,
the Lease Term, the dates of the commencement and termination of the Lease Term
and options for renewal, if any, but omitting rent and other terms of this
Lease. Tenant agrees to an assignment by Landlord of rents and of the
Landlord's interest in this Lease to a mortgagee, if the same be made by
Landlord. Tenant further agrees if requested to do so by the Landlord that it
will give to said mortgagee a copy of any request for performance by Landlord or
notice of default by Landlord; and in the event Landlord fails to cure such
default, the Tenant will give said mortgagee a sixty (60) day period in which to
cure the same. Said period shall begin with the last day on which Landlord
could cure such default before Tenant has the right to exercise any remedy by
reason of such default. All notices to the mortgagee shall be sent by United
States registered or certified mail, postage prepaid, return receipt requested.
35. Controlling Law. The Lease, and all terms hereunder shall be construed
consistent with the laws of the State of Colorado. Any dispute resulting in
litigation hereunder shall be resolved in court proceedings instituted in
Larimer County and in no other jurisdiction.
36. Landlord Not a Partner With the Tenant. Nothing contained in this Lease
shall be deemed, held or construed as creating Landlord as a partner, agent,
associate of or in joint venture with Tenant in the conduct of Tenants business,
it being expressly understood and agreed that the relationship between the
parties hereto is and shall at all times remain that of Landlord and Tenant.
37. Partial Invalidity. If any term, covenant or condition of this Lease or
the application thereof to any person or circumstance shall, to any extent, be
invalid or unenforceable, the remainder of this Lease or the application of
such term, covenant or condition to persons and circumstances other than those
to which it has been held invalid or unenforceable, shall not be affected
thereby, and each term, covenant and condition of this Lease shall be valid and
shall be enforced to the fullest extent permitted by law.
38. Default-Remedies of Landlord. Should Tenant be in default of rental
charges (monetary expenses to Tenant) Landlord shall give Tenant a cure period
of ten (10) days; if such default is non-monetary, a cure period of thirty (30)
days shall be given after written notice from Landlord.
A. The occurrence of any of the following events shall constitute a
default by Tenant under this Lease:
(1) Failure to make due and punctual payment of rent or any other
charges, assessments or amounts due or payable or required to be paid under this
Lease; or
(2) Neglect or failure by Tenant to perform or observe, or any other
breach of, any other term, covenant or condition of this Lease; or
(3) Adjudication of Tenant as bankrupt or insolvent, or filing by or
against Tenant of any petition in bankruptcy or for reorganization or for the
adoption of any arrangement under the Bankruptcy Code; application is made for
the appointment of receiver or conservator for Tenants business or property; or
assignment by Tenant is made of its property for the benefit of its creditors;
or Tenant's interest in this Lease or any substantial amount of Tenant's other
real or personal property is levied or executed upon by process of law; or
(4) Petition or other proceeding is made by or against Tenant for its
dissolution or liquidation; or voluntary dissolution or liquidation of Tenant;
or
(5) Abandonment of the Leased Premises, or any part thereof, by
Tenant for a period of time in excess of thirty (30) consecutive days.
B. If Tenant shall default in the payment, of rent or in the keeping of
any of the terms, covenants or conditions of this Lease to be kept and/or
performed by Tenant or shall otherwise commit any event of default as defined
above, Landlord may upon the expiration of any applicable cure, immediately, or
at any time thereafter, reenter the Leased Premises, remove all persons and
property therefrom, without being liable to indictment, prosecution for damage
therefore, or for forcible entry and detainer and repossess and enjoy the Leased
Premises, together with all additions thereto or alterations and improvements
thereof. Landlord may, at its option, at any time and from time to time
thereafter, relet the Leased Premises or any part thereof for the account of
Tenant or otherwise, and receive and collect the rents therefore and apply the
same first to the payment of such expenses as Landlord may have incurred in
recovering possession and for putting the same in good order and condition for
rerental, and expense, commissions and charges paid by Landlord in reletting the
Leased Premises. Any such reletting may be for the remainder of the term of
this Lease or for a longer or shorter period. In lieu of reletting such Leased
Premises, Landlord may occupy the same or cause the same to be occupied by
others. Whether or not the Leased Premises or any part thereof be relet, Tenant
shall pay the Landlord the rent and all other charges required to be paid by
Tenant up to the time of the expiration of this Lease or such recovered
possession, as the case may be and thereafter, Tenant, if required by Landlord,
shall pay to Landlord until the end of the term of this Lease, the equivalent of
the amount of all rent reserved herein and all other charges required to be paid
by Tenant, less the net amount received by Landlord for such reletting, if any,
unless waived by written notice from Landlord to Tenant. No action by Landlord
to obtain possession of the Leased Premises and/or to recover any amount due to
Landlord hereunder shall be taken as a waiver of Landlord's right to require
full and complete performance by Tenant of all terms hereof, including payment
of all amounts due hereunder or as an election on the part of Landlord to
terminate this Lease Agreement. If the Leased Premises shall be reoccupied by
Landlord, then, from and after the date of repossession, Tenant shall be
discharged of any obligations to Landlord under the provisions hereof for the
payment of rent. If the Leased Premises are reoccupied by the Landlord pursuant
hereto, and regardless of whether the Leased Premises shall be relet or
possessed by Landlord, all fixtures, additions, furniture, and the like then on
the Leased Premises, excluding any equipment, fixtures, and furniture that
Tenant may be leasing from a third party, may be retained by Landlord. In the
event Tenant is in default under the terms hereof and, by the sole determination
of Landlord, has abandoned the Leased Premises, Landlord shall have the right to
remove all the Tenant's property from the Leased Premises and dispose of said
property in such a manner as determined best by Landlord, at the sole cost and
expense of Tenant and without liability of Landlord for the actions so taken and
without liability on the part of Landlord for any action so taken.
C. In the event an assignment of Tenant's business or property shall be
made for the benefit of creditors, or, if the Tenants leasehold interest under
the terms of this Lease Agreement shall be levied upon by execution or seized by
virtue of any writ of any court of law, or, if application be made for the
appointment of a receiver for the business or property of Tenant, or, if a
petition in bankruptcy shall be filed by or against Tenant, then and in any such
case, at Landlord's option, with or without notice, Landlord may terminate this
Lease and immediately retake possession of the Leased Premises without the same
working any forfeiture of the obligations of Tenant hereunder.
D. [Intentionally left blank]
E. In addition to all rights and remedies granted to Landlord by the
terms hereof, Landlord shall have available any and all rights and remedies
available at law or in equity, or under the statutes of the State of Colorado.
No remedy herein or otherwise conferred upon or reserved to Landlord shall be
considered exclusive of any other remedy but shall be cumulative and shall be in
addition to every other remedy given hereunder or now or hereafter existing at
law or in equity or by statute. Further, all powers and remedies given by this
Lease to Landlord may be exercised, from time to time, and as often as occasion
may arise or as may be deemed expedient. No delay or omission of Landlord to
exercise any right or power arising from any default shall impair any such right
or power or shall be considered to be a waiver of any such default or
acquiescence thereof. The acceptance of rent by Landlord shall not be deemed to
be a waiver of any breach of any of the covenants herein contained or of any of
the rights of Landlord to any remedies herein given.
F. If Tenant shall, for any reason, vacate the Leased Premises before the
current expiration date, landlord shall have the right to accelerate rental
payments and any and all future rent payments due during the course of the Lease
Term shall become immediately payable in full to the Landlord.
G. Upon default by Landlord, Tenant shall give Landlord written notice of
said default, with particulars. The landlord shall have thirty days to cure
such default, unless the reasonable time to cure exceeds thirty days, in which
case Landlord must have taken substantial steps toward curing the default within
said thirty days. In addition, Tenant shall be entitled to all the rights and
remedies of a commercial tenant under Colorado Law.
39. Legal Proceedings-Responsibilities. In the event of proceeding at law or
in equity by either party hereto, the defaulting party shall pay all costs and
expenses, including all reasonable attorney's fees incurred by the non-
defaulting party in pursuing such remedy, if such non-defaulting party is
awarded substantially the relief requested.
40. Administrative Charges. In the event any check, bank draft or negotiable
instrument given for any money payment hereunder shall be dishonored at any time
and from time to time, for any reason whatsoever not attributable to Landlord,
Landlord shall be entitled, in addition to any other remedy that may be
available, (1) to make an administrative charge of $100.00 or three times the
face value of the check, bank draft or negotiable instrument, whichever is
smaller, and (2) at Landlord's sole option, to require Tenant to make all future
rental payments in cash or cashiers check.
41. Hazardous Materials and Environmental Considerations.
A. Tenant covenants and agrees that Tenant and its agents, employees,
contractors and invitees shall comply with all Hazardous Materials Laws (as
hereinafter defined). Without limiting the foregoing, Tenant covenants and
agrees that it will not use, generate, store or dispose of, nor permit the use,
generation, storage or disposal of Hazardous Materials (as hereinafter defined)
on, under or about the Leased Premises, nor will it transport or permit the
transportation of Hazardous Materials to or from the Leased Premises, except in
full compliance with any applicable Hazardous Materials Laws. Any Hazardous
Materials located on the Leased Premises shall be handled in an appropriately
controlled environment which shall include the use of such equipment (at
Tenant's expense) as is necessary to meet or exceed standards imposed by any
Hazardous Materials Laws and in such a way as not to interfere with any other
tenants use of its premises. Upon breach of any covenant contained herein,
Tenant shall, at Tenant's sole expense, cure such breach by taking all action
prescribed by any applicable Hazardous Materials Laws or by any governmental
authority with jurisdiction over such matters.
B. Tenant shall inform Landlord at any time of (i) any Hazardous
Materials it intends to use, generate, handle, store or dispose of, on or about
or transport from, the Leased Premises and (ii) of Tenant's discovery of any
event or condition which constitutes a violation of any applicable Hazardous
Materials Laws. Tenant shall provide to Landlord copies of all communications,
to or from any governmental authority or any other party relating to Hazardous
Materials affecting the Leased Premises.
C. Tenant shall indemnify and hold Landlord harmless from any and all
claims, judgments, damages, penalties, fines, costs, liabilities, expenses or
losses (including, without limitation, diminution on value of the Leased
Premises, damages for loss or restriction on use of all or part of the Leased
Premises, sums paid in settlement of claims, investigation of site conditions,
or any cleanup, removal or restoration work required by any federal, state or
local governmental agency, attorney's fees, consultant fees, and expert fees)
which arise as a result of or in connection with any breach of the foregoing
covenants or any other violation of any Hazardous Materials laws by Tenant. The
indemnification contained herein shall also accrue to the benefit of the
employees, agents, officers, directors and/or partners of Landlord.
D. Upon termination of this Lease and/or vacation of the Leased Premises,
Tenant shall properly remove all Hazardous Materials and shall then provide to
Landlord a Phase I environmental audit report, prepared by a professional
consultant satisfactory to Landlord and at Tenant's sole expense, certifying
that the Leased Premises have not been subjected to environmental harm caused by
Tenant's use and occupancy of the Leased Premises. Landlord shall grant to
Tenant and its agents or contractors such access to the Leased Premises as is
necessary to accomplish such removal and prepare such report.
E. "Hazardous Materials" shall mean (a) any chemical, material, substance
or pollutant which poses a hazard to the Leased Premises or to persons on or
about the Leased Premises or would cause a violation of or is regulated by any
Hazardous Materials Laws, and (b) any chemical, material or substance defined as
or included in the definitions of "hazardous substances", "hazardous wastes",
"extremely hazardous waste", "restricted hazardous waste", "toxic substances",
"regulated substance", or words of similar import under any applicable federal,
state or local law or under the regulations adopted or publications promulgated
pursuant thereto, including, but not limited to, the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Sec.
9601, et seq; the Hazardous Materials Transportation Act, as amended, 49 U.S.C.
Sec. 1801, et seq; the Resource Conservation and Recovery Act as amended, 42
U.S.C. Sec 6901, et seq; the Solid Waste Disposal Act, 42 U.S.C. Sec. 6991 et
seq; the Federal Water Pollution Control Act, as amended, 33 U.S.C. Sec. 1251,
et seq; and Sections 25-15-101, et seq; 25-16-101, et seq; 25-7-101, et seq.,
and 25-8-101, et seq., of the Colorado Revised Statutes. "Hazardous Materials
Laws" shall mean any federal state or local laws, ordinances, rules,
regulations, or policies (including, but not limited to, those laws specified
above) relating to the environment, health and safety or the use, handling,
transportation, production, disposal, discharge or storage of Hazardous
Materials, or to industrial hygiene or the environmental conditions on, under or
about the Leased Premises. Said term shall be deemed to include all such laws
as are now in effect or as hereafter amended and all other such laws as may
hereafter be enacted or adopted during the term of this Lease.
F. All obligations of Tenant hereunder shall survive and continue after
the expiration of this Lease or its earlier termination for any reason.
G. Tenant further covenants and agrees that it shall not install any
storage tank (whether above or below the ground) on the Leased Premises without
obtaining the prior written consent of the Landlord, which consent may be
conditioned upon further requirements imposed by Landlord with respect to, among
other things, compliance by Tenant with any applicable laws, rules, regulations
or ordinances and safety measures or financial responsibility requirements.
H. Should any local governmental entity having jurisdiction over the
Leased Premises require any type of environmental audit or report prior to or
during the occupancy of the Leased Premises by the Tenant, such cost of the
audit or report shall be the sole responsibility of the Tenant.
I. Notwithstanding anything to the contrary contained in this Paragraph
41, Tenant shall not be responsible for any conditions which existed prior to
its tenancy, nor shall it be responsible if conditions which are determined not
to be caused by action or inaction of Tenant.
42. Entire Agreement. It is expressly understood and agree by and between the
parties hereto that this Lease sets forth all the promises, agreements,
conditions, and understandings between Landlord and/or its agents and Tenant
relative to the Leased Premises and that there are no promises, agreements,
conditions, or understandings either oral or written, between them other than
that are herein set forth.
43. [Intentionally left blank]
44. Estoppel Certificates. Within no more than 5 days after receipt of written
request, the Tenant shall furnish to the owner a certificate, duly acknowledged,
certifying, to the extent true:
A. That this Lease is in full force and effect.
B. That the Tenant knows of no default hereunder on the part of the owner,
or if it has reason to believe that such a default exists, the nature
thereof in reasonable detail.
C. The amount of the rent being paid and the last date to which rent has
been paid.
D. That this Lease has not been modified, or if it has been modified, the
terms and dates of such modifications.
E. That the term of this Lease has commenced.
F. The commencement and expiration dates.
G. Whether all work to be performed by the owner has been completed.
H. Whether the renewal term option has been exercised if applicable.
I. Whether there exist any claims or deductions from, or defenses to, the
payment of rent.
J. Such other matters as may be reasonably requested by owner.
If the Tenant fails to execute and deliver to the owner a completed certificate
as required under this section, the Tenant hereby appoints the owner as its
Attorney-In-Fact to execute and deliver such certificate for and on behalf of
the Tenant.
45. Financial Statements. As requested by the Landlord, Tenant shall provide
copies of its most recent financial statements and shall also provide Landlord
with up to three (3) prior years of financial statements, if so requested.
46. Brokers. Tenant represents and warrants that it has dealt only with N/A
(the "Broker") in the negotiation of this Lease. Landlord shall make payment of
the commission according to the terms of a separate agreement with the Broker.
Tenant hereby agrees to Indemnify and hold Landlord harmless of an from any and
all loss, costs, damages or expenses (including, without limitation, all
attorney's fees and disbursements) by reason of any claim of, or liability to,
any other broker or person claiming through Tenant and arising out of this
Lease. Additionally, Tenant acknowledges and agrees that Landlord shall have no
obligation for payment of any brokerage fee or similar compensation to any
person with whom Tenant has dealt or may deal with in the future with respect to
leasing of any additional or expansion space in the Building or any renewals or
extensions of this Lease unless specifically provided for by separate written
agreement with Landlord. In the event any claim shall be made against Landlord
by any other broker who shall claim to have negotiated this Lease on behalf of
Tenant or to have introduced Tenant to the Building or to Landlord, Tenant
hereby indemnifies Landlord, and Tenant shall be liable for the payment of all
reasonable attorney's fees, costs, and expenses incurred by Landlord in
defending against the same, and in the event such broker shall be successful in
any such action, Tenant shall, upon demand, make payment to such broker.
47. Lease Exhibits Attached. This Lease includes the following Lease Exhibits
which are incorporated herein and made a part of this Lease Agreement:
Exhibit "A" - Site Plan Depicting Area
Exhibit "B" - [Intentionally left blank]
Exhibit "C" - Landlord and Tenants Construction Obligations
Exhibit "D" - Sign Code Obligations
48. Miscellaneous. All marginal notations and paragraph headings are for
purposes of reference and shall not affect the true meaning and intent of the
terms hereof. Throughout this Lease, wherever the words "Landlord" and "Tenant"
are used they shall include and imply to the singular, plural, persons both male
and female, companies, partnerships and corporations, and in reading said Lease,
the necessary grammatical changes required to make the provisions hereof mean
and apply as aforesaid shall be made in the same manner as though originally
included in said Lease.
IN WITNESS WHEREOF, the parties have executed this Lease as of the date hereof.
LANDLORD: GB VENTURES
By: /s/ W. W. REYNOLDS
TENANT: HESKA CORPORATION
By: /s/ R. L. HENDRICK
R. L. HENDRICK, EXECUTIVE VICE PRESIDENT & CHIEF FINANCIAL OFFICER
ENVIRONMENTAL INDEMNITY AGREEMENT
THIS INDEMNITY is given as of this 6th day of October, 1999, by Heska
Corporation ("Indemnitor," whether one or more), to and for the benefit of GB
Ventures ("Landlord").
WHEREAS, GB Ventures, is Landlord under a proposed Lease Agreement dated
October 6, 1999, ("the Lease") in which Heska Corporation a Delaware Corporation
is the proposed tenant ("Tenant"), regarding the Leased Premises commonly known
as 1601 Prospect Parkway, Suites C/D, G, H, I, & J, Fort Collins, Co 80525
("Leased Premises"); and
WHEREAS, Landlord is unwilling to enter into the Lease with Tenant unless
the Indemnitor agrees to the indemnities hereinafter provided.
NOW, THEREFORE, in consideration of the matters recited above and to induce
Landlord to enter into the Lease with Tenant, Indemnitor undertakes and agrees
as follows:
1. Indemnitor shall indemnify, defend and hold Landlord harmless from and
against any and all suits, actions, legal or administrative proceedings,
demands, claims, judgements, damages, penalties, fines, costs, liabilities,
expenses or losses which arise during or after the lease term as a result of or
in connection with the presence, use, storage, disposal, transportation or
discharge, by or on behalf of Tenant, of any Hazardous Materials (as defined in
the Lease) on, in or under or affecting all or any portion of the Leased
Premises or any surrounding areas, or the disposition or transportation of any
Hazardous Materials therefrom, or any breach by Tenant of the provisions
concerning Environmental Considerations as contained in paragraph 41 of the
Lease, or the failure of the Tenant to comply with any applicable Hazardous
Materials Laws (as defined in the Lease), or otherwise resulting from or arising
out of any action or non-action of Tenant or Tenant's operations on the Leased
Premises.
Without limiting the generality of the foregoing, it is expressly agreed by
Indemnitor that such Indemnity shall also include the following: diminution in
value of the Leased Premises, damages for loss or restriction on use of rental
or useable space or any amenity of the Leased Premises, damages arising from any
adverse impact on marketing of space or delay in delivering possession to a
subsequent tenant or purchaser, restoration of the Leased Premises to a
condition not materially different from its original contour, appearance and
condition; costs incurred in connection with any investigation of site
conditions or any clean-up, remedial, removal or restoration work required by
any federal, state or local governmental agency, political subdivision, court
order or lender of the Landlord; costs of removal and lawful disposal off site
of all Hazardous Materials; all sums paid in settlement of claims, attorneys'
fees, consultant fees and expert fees.
The foregoing indemnities shall survive termination or expiration of the
Lease and shall also accrue to the benefit of the employees, agents, officers,
directors and/or partners of Landlord.
2. Indemnitor agrees to pay to Landlord, from time to time, upon demand
therefor, an amount equal to any and all expenses therefore incurred by Landlord
for which Landlord is entitled to indemnification. Any sums not so paid shall
thereafter bear interest at a rate of two percent (2%) per month until paid in
full.
3. The rights and remedies of Landlord under this indemnity shall be in
addition to any rights or remedies available to Landlord under the terms of the
Lease. The obligations of Indemnitor hereunder shall not be affected or
impaired by: (i) the assertion by Landlord against Tenant of any rights or
remedies reserved to Landlord pursuant to provisions of the Lease; (ii) the
commencement of summary or any other proceedings against Tenant; (iii) failure
of the Landlord to enforce any of its rights against Tenant pursuant to the
Lease or otherwise; (iv) the granting by Landlord of any extensions of time to
Tenant; (v) the assignment or transfer of the Lease by Tenant; (vi) with release
or discharge of Tenant from its obligations under the Lease in any creditors',
receivership, bankruptcy or other proceedings or the commencement or pendency of
any such proceedings; or (vii) the impairment, limitation or modification of the
liability of Tenant or the estate of Tenant in bankruptcy, or of any remedy for
the enforcement of tenant's liability under the Lease, resulting from the
operation of any present or future bankruptcy code or other statute, or from the
decision of any court.
4. Until all Tenants obligations under the Lease are fully performed,
Indemnitor (i) waives any right of subrogation which it might have against
Tenant by reason of any payments or acts of performance by Indemnitor pursuant
to its obligations hereunder; (ii) waives any other right which Indemnitor may
have against Tenant by reason of any one or more payments or acts in compliance
with its obligations hereunder; and (iii) subordinates any liability or
indebtedness of tenant held by Indemnitor to the obligations of Tenant to
Landlord under the Lease.
5. All notices for or allowed hereunder shall be deemed given and
received with (a) personally delivered, or (b) at the time the same is deposited
in the United States mail, postage prepaid, first class mail, or addressed to
the applicable party at the address indicated below for such party, or as to
each party, at such other address as shall be designated by such party in a
written notice to the other party:
If to Indemnitor, to:
Heska Corporation
Attention: Facilities Manager
1613 Prospect Parkway
Fort Collins, CO 80525
If to Landlord, to:
GB Ventures
4875 Pearl East Circle #300
Boulder, CO 80301
6. In the event of default in its obligations hereunder, Indemnitor
agrees to reimburse Landlord for reasonable attorneys' fees and costs incurred
by Landlord in the enforcement of such obligations.
7. This Environmental Indemnity Agreement shall apply to the Lease and
any extension or renewal thereof, and any holdover term following the term
thereof, or any such extension or renewal.
8. This Environmental Indemnity Agreement shall be governed by and
construed in accordance with the laws of the State of Colorado.
9. The covenants and agreements herein contained shall extend to and be
binding upon the parties hereto and their respective successors and assigns.
IN WITNESS WHEREOF, the parties hereto have executed this Environmental
Indemnity Agreement on the day and year first above written.
/s/ R. L. HENDRICK
"Indemnitor"- HESKA CORPORATION
/s/ W. W. REYNOLDS
"Landlord" - GB VENTURES
EXHIBIT "A"
[SITE PLAN]
EXHIBIT "C"
LANDLORD AND TENANT'S CONSTRUCTION OBLIGATIONS
Tenant shall take the Premises in "as is" condition. Landlord has no
construction obligations.
EXHIBIT "D"
[SIGN CODE OBLIGATIONS]
LEASE AGREEMENT
OFFICE AND INDUSTRIAL SPACE
This Lease Agreement is made and entered into as of the 24th day of August,
1999, by and between GB Ventures ("Landlord"), whose address is 4875 Pearl East
Cr. #300, Boulder, CO 80301, and Heska Corporation ("Tenant"), whose address is
1613 Prospect Parkway, Fort Collins, CO 80525.
In consideration of the covenants, terms, conditions, agreements and payments as
herein set forth, the Landlord and Tenant hereby enter into the following Lease:
1. Definitions. Whenever the following words or phrases are used in this Lease,
said words or phrases shall have the following meaning:
A. "Area" shall mean the parcel of land depicted on Exhibit "A" attached
hereto and commonly known and referred to as Plum Tree Plaza, Fort Collins ,
Colorado. The Area includes the Leased Premises and one or more buildings. The
Area may include Common Areas.
B. "Building" shall mean a building located in the Area.
C. "Common Areas" shall mean all entrances, exits, driveways, curbs,
walkways, hallways, parking areas, landscaped areas, restrooms, loading and
service areas, and like areas or facilities which are located in the Area and
which are designated by the Landlord as areas or facilities available for the
nonexclusive use in common by persons designated by the Landlord.
D. "Leased Premises" shall mean the premises herein leased to the Tenant
by the Landlord.
E. "Tenant's Prorata Share as to the Building in which the Leased
Premises are located shall mean an amount (expressed as a percentage) equal to
the number of square feet included in the Leased Premises divided by the total
number of leasable square feet included in said Building. The Tenant's Prorata
Share as to Common Areas shall mean an amount (expressed as a percentage) equal
to the number of square feet included in the Leased Premises divided by the
total number of leasable square feet included in all Buildings located in the
Area. The Tenant's Prorata Share for Common Areas may change from time to time
as the leasable square footage in all Buildings located in the Area is increased
or decreased.
2. Leased Premises. The Landlord hereby leases unto the Tenant, and the Tenant
hereby leases from the Landlord, the following described premises:
Space D, E, F in Building 2601 Midpoint Drive
consisting of Approximately 7433 square feet, all as
depicted on Exhibit "B" attached hereto.
3. Base Term. The term of this Lease shall commence at 12:00 noon on October
4, 1999 , and, unless sooner terminated as herein provided for, shall end at
12:00 noon on October l, 2004 ("Lease Term"). Except as specifically provided
to the contrary herein, the Leased Premises shall, upon the termination of this
Lease, by virtue of the expiration of the Lease Term or otherwise, be returned
to the Landlord by the Tenant in as good or better condition than when entered
upon by the Tenant, ordinary wear and tear excepted.
4. Rent. Tenant shall pay the following rent for the Leased Premises:
A. Base Monthly Rent. Tenant shall pay to Landlord, without notice and
without setoff, at the address of Landlord as herein set forth, the following
Base Monthly Rent ("Base Monthly Rent"), said Base Monthly Rent to be paid in
advance on the first day of each month during the term hereof. In the event
that this Lease commences on a date other than the first day of a month, the
Base Monthly Rent for the first month of the Lease Term shall be prorated for
said partial month. Below is a schedule of Base Monthly Rental payments as
agreed upon:
During Lease Term
=================
For Period To Period A Base Monthly
Starting Ending Rent of
October 4, 1999 November 1, 1999 $5,035.26 NNN
November 1, 1999 October 1, 2004 $5,574.75/month NNN
with annual
CPI Adjustments on:
October 1, 2000;
October 1, 2001;
October 1, 2002; and
October 1, 2003.
B. Lease Term Adjustment. If, for any reason, other than delays caused
by the Tenant, the Leased Premises are not ready for Tenants occupancy on
October 4, 1999, the Tenant's rental obligation and other monetary expenses
(i.e. taxes, utilities, etc.) shall be abated in direct proportion to the number
of days of delay. It is hereby agreed that the premises shall be deemed ready
for occupancy on the day the Landlord receives a T.C.O. or C.O. from the
appropriate authority, or on the day the Landlord gives Tenant the keys to the
Leased Premises if a building permit has not been applied for and/or is not
required by the appropriate authority.
C. Cost of Living Adjustment. The Base Monthly Rental specified in
paragraph 4A above shall be recalculated for each Lease Year as defined
hereinafter following the first Lease Year of this Lease Agreement. The
recalculated Base Monthly Rental shall be hereinafter referred to as the
"Adjusted Monthly Rental". The Adjusted Monthly Rental for each Lease Year
after the first Lease Year shall be the greater of: (i) the amount of the
previous year's Adjusted Monthly Rental, (or the Base Monthly Rental if
calculating the Adjusted Monthly Rental for the second Lease Year), or (ii) an
amount calculated by the rent adjustment formula set forth below. In applying
the rent adjustment formula, the following definitions shall apply:
(1) "Lease Year" shall mean a period of twelve (12) consecutive full
calendar months with the first Lease Year commencing on the date of the
commencement of the term of this Lease and each succeeding Lease Year commencing
upon the anniversary date of the first Lease Year; however, if this Lease does
not commence on the first day of a month, then, the first Lease Year and each
succeeding Lease Year shall commence on the first day of the first month
following each anniversary date of this Lease;
(2) "Bureau" shall mean the Bureau of Labor Statistics of the United
States Department of Labor or any successor agency that shall issue the Price
Index referred to in this Lease Agreement.
(3) "Price Index" shall mean the "Consumer Price Index-All Urban
Consumers-All Items (CPI-U) U.S. City Average (1982-84=100)" issued from time to
time by the Bureau. In the event the Price Index shall hereafter be converted
to a different standard reference base or otherwise revised, the determination
of the increase in the Price Index shall be made with the use of such conversion
factor, formula or table as may be published by Prentice-Hall, Inc. or failing
such publication, by another nationally recognized publisher of similar
statistical information. In the event the Price Index shall cease to be
published, then, for the purposes of this paragraph 4C there shall be
substituted for the Price Index such other index as the Landlord and the Tenant
shall agree upon, and if they are unable to agree within sixty (60) days after
the Price Index ceases to be published, such matter shall be determined by
arbitration in accordance with the Rules of the American Arbitration
Association.
(4) "Base Price Index" shall mean the Price Index released to the
public during the second calendar month preceding the commencement of this Lease
Agreement.
(5) "Revised Price Index" shall mean the Price Index released to the
public during the second calendar month preceding the Lease Year for which the
Base Annual Rental is to be adjusted;
(6) "Basic Monthly Rental" shall mean the Basic Monthly Rental set
forth in subparagraph 4A above. The rent adjustment formula used to calculate
the Adjusted Monthly Rental is as follows:
Adjusted Monthly Rental = Revised Price Index X Base Monthly Rental
=========================================
Base Price Index
Notwithstanding the above formula, the Adjusted Monthly Rental shall not be less
than 103% or greater than 106% of the previous year's Adjusted Monthly Rental,
or the Basic Monthly Rental if such adjustment is for the Second Lease Year.
The Adjusted Monthly Rental as herein above provided shall continue to be
payable monthly as required in paragraph 4A above without necessity of any
further notice by the Landlord to the Tenant.
D. Total Net Lease. The Tenant understands and agrees that this Lease is
a total net lease (a "net, net, net lease"), whereby the Tenant has the
obligation to reimburse the Landlord for a share of all costs and expenses
(taxes, assessments, other charges, insurance, trash removal, Common Area
operation and maintenance and like costs and expenses), incurred by the Landlord
as a result of the Landlord's ownership and operation of the Area. Major
capital improvements, such as total replacement of the roof or parking lot are
not considered to be maintenance items as described in this Paragraph 6D.
5. Security Deposit. Landlord acknowledges receipt from the Tenant of the sum
of Five Thousand Five Hundred Seventy Five Dollars ($5,575.00) to be retained by
Landlord without responsibility for payment of interest thereon, as security for
performance of all the terms and conditions of this Lease Agreement to be
performed by Tenant, including payment of all rent due under the terms hereof.
Deductions may be made by Landlord from the amount so retained for the
reasonable cost of repairs to the Leased Premises (ordinary wear and tear
excepted), for any rent delinquent under the terms hereof and/or for any sum
used in any manner to cure any default of Tenant under the terms of this Lease.
In the event deductions are so made, the Tenant shall, upon notice from the
Landlord, redeposit with the Landlord such amounts so expended so as to maintain
the deposit in the amount as herein provided for, and failure to so redeposit
shall be deemed a failure to pay rent under the terms hereof. Nothing herein
contained shall limit the liability of Tenant as to any damage to the Leased
Premises, and Tenant shall be responsible for the total amount of any damage
and/or loss occasioned by actions of Tenant. Landlord may deliver the funds
deposited hereunder by Tenant to any purchaser of Landlord's interest in the
Leased Premises in the event such interest shall be sold, and thereupon Landlord
shall be discharged from any further liability with respect to such deposit.
6. Use of Premises. Tenant shall use the Leased Premises only for Office,
warehouse, Laboratory, Light Manufacturing, Assembly and for no other purpose
whatsoever except with the written consent of Landlord. Tenant shall not allow
any accumulation of trash or debris on the Leased Premises or within any portion
of the Area. All receiving and delivery of goods and merchandise and all
removal of garbage and refuse shall be made only by way of the rear and/or other
service door provided therefore. In the event the Leased Premises shall have no
such door, then these matters shall be handled in a manner satisfactory to
Landlord. No storage of any material outside of the Leased Premises shall be
allowed unless first approved by Landlord in writing, and then in only such
areas as are designated by Landlord. Tenant shall not commit or suffer any
waste on the Leased Premises nor shall Tenant permit any nuisance to be
maintained on the Leased Premises or permit any disorderly conduct or other
activity having a tendency to annoy or disturb any occupants of any part of the
Area and/or any adjoining property.
7. Laws and Regulations. - Tenant Responsibility. The Tenant shall, at its sole
cost and expense, comply with all laws and regulations of any governmental
entity, board, commission or agency having jurisdiction over the Leased
Premises. Tenant agrees not to install any electrical equipment that overloads
any electrical paneling, circuitry or wiring and further agrees to comply with
the requirements of the insurance underwriter or any governmental authorities
having jurisdiction thereof.
8. Landlord's Rules and Regulations. Landlord reserves the right to adopt and
promulgate rules and regulations applicable to the Leased Premises and from time
to time amend or supplement said rules or regulations. Notice of such rules and
regulations and amendments and supplements thereto shall be given to Tenant, and
Tenant agrees to comply with and observe such rules and regulations and
amendments and supplements thereto provided that the same apply uniformly to all
Tenants of the Landlord in the Area.
9. Parking. If the Landlord provides off street parking for the common use of
Tenants, employees and customers of the Area, the Tenant shall park all vehicles
of whatever type used by Tenant and/or Tenant's employees only in such areas
thereof as are designated by Landlord for this purpose, and Tenant accepts the
responsibility of seeing that Tenant's employees park only in the areas so
designated. Tenant shall, upon the request of the Landlord, provide to the
Landlord license numbers of the Tenant's vehicles and the vehicles of Tenant's
employees.
10. Control of Common Areas. - Exclusive control of the Landlord. All Common
Areas shall at all times be subject to the exclusive control and management of
Landlord, notwithstanding that Tenant and/or Tenant's employees and/or customers
may have a nonexclusive right to the use thereof. Landlord shall have the right
from time to time to establish, modify and enforce rules and regulations with
respect to the use of said facilities and Common Areas.
11. Taxes.
A. Real Property-Taxes and Assessments. The Tenant shall pay to the
Landlord on the first day of each month, as additional rent, the Tenant's
Prorata Share of all real estate taxes and special assessments levied and
assessed against the Building in which the Leased Premises are located and the
Common Areas. If the first and last years of the Lease Term are not calendar
years, the obligations of the Tenant hereunder shall be prorated for the number
of days during the calendar year that this Lease is in effect. The monthly
payments for such taxes and assessments shall be $935.00 until the Landlord
receives the first tax statement for the referred to properties. Thereafter,
the monthly payments shall be based upon 1/12th of the prior year's taxes and
assessments. Once each year the Landlord shall determine the actual Tenant's
Prorata Share of taxes and assessments for the prior year and if the Tenant has
paid less than the Tenant's Prorata Share for the prior year the Tenant shall
pay the deficiency to the Landlord with the next payment of Base Monthly Rent,
or, if the Tenant has paid in excess of the Tenant's Prorata Share for the prior
year the Landlord shall forthwith refund said excess to the Tenant.
Additionally, upon Lease expiration or termination Landlord shall also determine
Tenant's Prorata Share of taxes and assessments for the calendar year in which
the Lease expires or terminates based on the most recent valuation and estimate
of taxes provided by Boulder County. If the Tenant has paid less than the
Tenant's prorated Prorata Share for the current year the Tenant shall pay the
deficiency, or, if the Tenant has paid in excess of the Tenant's prorated
Prorata Share for the current year the Landlord shall forthwith refund the
excess to the Tenant.
B. Personal Property Taxes. Tenant shall be responsible for, and shall
pay promptly when due, any and all taxes and/or assessments levied and/or
assessed against any furniture, fixtures, equipment and items of a similar
nature installed and/or located in or about the Leased Premises by Tenant.
C. Rent Tax. If a special tax, charge or assessment is imposed or levied
upon the rents paid or payable hereunder or upon the right of the Landlord to
receive rents hereunder (other than to the extent that such rents are included
as a part of the Landlord's income for the purpose of an income tax), the Tenant
shall reimburse the Landlord for the amount of such tax within fifteen (15) days
after demand therefore is made upon the Tenant by the Landlord.
D. Other Taxes, Fees and Charges. Tenant shall pay to Landlord, on the
first day of each month, as additional rent, Tenant's Pro Rata Share of any
"Other Charges" (as hereinafter defined) levied, assessed, charged or imposed
against the Area, as a whole. Unless paid directly by Tenant to the authority
levying, assessing, charging or imposing same, Tenant shall also pay to
Landlord, on the first day of the month following payment of same by Landlord,
the entire costs of any such "Other Charges" levied, assessed, charged or
imposed against the Leased Premises, Tenant's use of same, or Tenant's conduct
of business thereon. For purposes of this provision, "Other Charges" shall mean
and refer to any and all taxes, assessments, impositions, user fees, impact
fees, utility fees, transportation fees, infrastructure fees, system fees,
license fees, and any other charge or assessment imposed by any governmental
authority or applicable subdivision on the Area, the Leased Premises or the
ownership or use of the Area or Leased Premises, or the business conducted
thereon, whether or not formally denominated as a tax, assessment, charge, or
other nominal description, whether now in effect or hereafter enacted or imposed
(excluding, however, Landlord's income taxes).
E. Should Landlord protest and win a reduction in the real estate taxes
for the Building and Area, Tenant shall be obligated to pay its Prorata Share of
the cost of such protest, if the protest is handled by a party other than the
Landlord.
12. Insurance.
A. Landlord's Insurance. Landlord shall obtain and maintain such fire
and casualty insurance on the core and shell of the Building in which the Leased
Premises are located and the Common Areas, as well as such loss of rents,
business interruption, liability or any other insurance, as it deems
appropriate, with such companies and on such terms and conditions as Landlord
deems acceptable. Such insurance shall not be required to cover any of Tenant's
inventory, furniture, furnishings, fixtures, equipment or tenant improvements
(whether or not installed on the Leased Premises by or for Tenant and whether or
not included within the tenant finish provided by Landlord), and Landlord shall
not be obligated to repair any damage thereto or replace any of same, and Tenant
shall have no interest in any proceeds of Landlord's insurance.
B. Tenants Insurance. Tenant shall, at its sole cost and expense, obtain
and maintain throughout the term of this Lease, on a full replacement cost
basis, "all risk" insurance covering all of Tenants inventory, furniture,
furnishings, fixtures, equipment and all tenant improvements or tenant finish
(whether or not installed by Landlord) and betterments located on or within the
Leased Premises. In addition, Tenant shall obtain and maintain, at its sole
cost and expense, comprehensive general public liability insurance providing
coverage from and against any loss or damage occasioned by an accident or
casualty on, about or adjacent to the Leased Premises, including protection
against death, personal injury and property damage. Such liability coverage
shall be written on an "occurrence" basis, with limits of not less than
$1,000,000.00 combined single limit coverage.
All policies of insurance required to be carried by Tenant hereunder shall
be written by an insurance company licensed to do business in the State of
Colorado, and shall name Landlord as an additional named insured and/or loss
payee, as Landlord may direct. Each such policy shall provide that same shall
not be changed or modified without at least thirty (30) days' prior written
notice to Landlord and any mortgagee of Landlord. Certificates evidencing the
extent and effectiveness of all Tenant's insurance shall be delivered to
Landlord. The limits of such insurance shall not, under any circumstances, limit
the liability of Tenant under this Lease.
In the event that Tenant fails to maintain any of the insurance required of
it pursuant to this provision, Landlord shall have the right (but not the
obligation) at Landlord's election, to pay Tenant's premiums or to arrange
substitute insurance with an insurance company of Landlord's choosing, in which
event any premiums advanced by Landlord shall constitute additional rent payable
under this Lease and shall be payable by Tenant to Landlord immediately upon
demand for same. Landlord shall also have the right, but no the obligation,
whether or not Tenant maintains coverage to carry any such insurance as Landlord
may elect in order to provide coverage in the event Tenant fails to properly
maintain such insurance.
The rights of Landlord hereunder shall be in addition to, and not in lieu
of, of any other rights or remedies available to Landlord under this Lease or
provided by law or in equity. Without limiting the foregoing, in the event that
coverage of any risk for which Tenant is responsible pursuant to this Section 12
is ultimately provided by coverage maintained by Landlord, whether due to
Tenant's failure to provided or maintain such insurance or otherwise, Tenant
shall promptly reimburse Landlord for an amount equal to any deductible
incurred, immediately upon demand for same.
C. Tenant's High Pressure Steam Boiler Insurance. If Tenant makes use of
any kind of steam or other high pressure boiler or other apparatus which
presents a risk of damage to the Leased Premises or to the Building or other
improvements of which the Leased Premises are a part or to the life or limb of
persons within such premises, Tenant shall secure and maintain appropriate
boiler insurance in an amount satisfactory to Landlord. The Landlord shall be
named insured in any such policy or policies. Certificates for such insurance
shall be delivered to Landlord and shall provide that said insurance shall not
be changed, modified, reduced or canceled without thirty (30) days prior written
notice thereof being given to Landlord.
D. Tenant's Share of Landlord Insurance. Tenant shall pay the Landlord
as additional rent Tenant's Prorata Share of the insurance secured by the
Landlord pursuant to "12A" above. Payment shall be made on the first day of
each month as additional rent. The monthly payments for such insurance shall be
$19.00 until changed by Landlord as a result of an increase or decrease in the
cost of such insurance.
E. Mutual Subrogation Waiver. Landlord and Tenant hereby grant to each
other, on behalf of any insurer providing fire and extended coverage to either
of them covering the Leased Premises, Buildings or other improvements thereon or
contents thereof, a waiver of any right of subrogation any such insurer of one
party may acquire against the other or as against the Landlord or Tenant by
virtue of payments of any loss under such insurance. Such a waiver shall be
effective so long as the Landlord and Tenant are empowered to grant such waiver
under the terms of their respective insurance policy or policies and such
waiver shall stand mutually terminated as of the date either Landlord or Tenant
gives notice to the other that the power to grant such waiver has been so
terminated.
13. Utilities.
A. Tenant shall be solely responsible for and promptly pay all charges
for heat, water, gas, electric, sewer service and any other utility service used
or consumed on the Leased Premises. For all utility services used or consumed
on the Leased Premises which are included in utility services to an area larger
than the Leased Premises, Tenant shall pay monthly, commencing with the first
month of the Lease Term, as additional rent due under the
terms hereof, a sum equal to Tenant's Prorata Share of the estimated costs for
said twelve (12) month period, divided by 12. The estimated initial monthly
costs are $31.00 for water. Once each year the Landlord shall determine the
actual costs of the foregoing expenses for the prior year and if the actual
costs are greater than the estimated costs, the Tenant shall pay its Tenant's
Prorata Share of the difference between the estimated costs and the actual costs
to the Landlord with the next payment of Base Monthly Rent, or, if the actual
costs are less than the estimated costs, the Landlord shall forthwith refund the
amount of the Tenant's excess payment to the Tenant. Additionally, upon Lease
expiration or termination Landlord shall also determine Tenant's Prorata Share
of the annualized actual costs of the foregoing expenses for the number of days
the Lease is in effect during the calendar year in which the Lease expires or
terminates. If the annualized actual costs are greater than the estimated
costs, the Tenant shall pay its Tenant's Prorata Share of the difference between
the estimated costs and the annualized actual costs to the Landlord, or, if the
annualized actual costs are less than the estimated costs, the Landlord shall
forthwith refund the excess payment to the Tenant. For purposes of calculating
Tenant's share of expenses under this paragraph, annualized actual costs shall
be the sum of actual costs for the year at the time of reconciliation plus the
total estimated costs prorated for the number of days from the date the last
actual cost was paid to the end of the year. For all utility services used or
consumed on the Leased Premises in which the utility service is used solely on
the Leased Premises, the Tenant shall forthwith upon taking occupancy of the
Leased Premises make arrangements with the Public Service Company, U.S. West or
other appropriate utility company to pay the utilities used on the Leased
Premises and to have the same billed to the Tenant at the address designated by
the Tenant. Should there be a time where the Landlord remains responsible for
utilities supplied to the Leased Premises, the Landlord shall bill the Tenant
therefore and the Tenant shall promptly reimburse the Landlord therefore. In no
event shall Landlord be liable for any interruption or failure in the supply of
any such utility to the Leased Premises.
In the event the utility company supplying water and/or sewer to the Leased
Premises determines that an additional service fee, impact fee, and/or.
assessment, or any other type of payment or penalty is necessary due to Tenant's
use and occupancy of the Building, nature of operation and/or consumption of
utilities, said expense shall be borne solely by the Tenant. Said expense shall
be paid promptly and any repairs requested by the utility company shall be
performed by Tenant immediately and without any delay.
B. Landlord Controls Selection. Landlord has advised Tenant that
presently Public Service Company of Colorado ("Utility Service Provider") is the
utility company selected by Landlord to provide electricity and gas service for
the Building. Notwithstanding the foregoing, if permitted by Law, Landlord
shall have the right at any time and from time to time during the Lease Term to
either contract for service from a different company or companies providing
electricity and/or gas service (each such company shall hereinafter be referred
to as an ("Alternative Service Provider") or continue to contract for service
from the Utility Service Provider.
C. Tenant Shall Give Landlord Access. Tenant shall cooperate with
Landlord, Utility Service Provider, and any Alternative Service Provider at all
times and, as reasonably necessary, shall allow Landlord, Utility Service.
Provider, and any Alternative Service Provider reasonable access to the
Building's electric lines, feeders, risers, wiring, gas lines, and any other
machinery within the Premises.
D. Landlord Not Responsible for Interruption of Service. Landlord shall
in no way be liable or responsible for any loss, damage, or expense that Tenant
may sustain or incur by reason of any change, failure, interference, disruption,
or defect in the supply or character of the electrical and/or gas energy
furnished to the Premises, or if the quantity or character of the electric
and/or gas energy supplied by the Utility Service Provider or any Alternate
Service Provider is no longer available or suitable for Tenant's 'requirements,
and no such change, failure, defect, unavailability, or unsuitability shall
constitute an actual or constructive eviction, in whole or in part, or entitle
Tenant to any abatement or diminution of rent, or relieve Tenant from any of its
obligations under the Lease.
14. Maintenance 0bligations of Landlord. Except as herein otherwise
specifically provided for, and not including capital improvement. Landlord
shall keep and maintain the roof and exterior of the Building of which the
Leased Premises are a part in good repair and condition. Tenant shall repair
and pay for any damage to roof, foundation and external walls caused by Tenant's
action, negligence or fault.
15. Maintenance Obligations of the Tenant. Subject only to the maintenance
obligations of the Landlord as herein provided for, the Tenant shall, during the
entire Lease Term, including all extensions thereof, at the Tenant's sole cost
and expense, keep and maintain the Leased Premises in good condition and repair,
including specifically the following:
A. Electrical Systems. Tenant agrees to maintain in good working order
and to make all required repairs and replacements to the electrical systems for
the Leased Premises. Tenant upon signing this Lease acknowledges that Tenant
has inspected the existing electrical systems and all such systems are in good
repair and working order.
B. Plumbing Systems. Tenant agrees to maintain in good working order and
to make all required repairs or replacements to the plumbing systems for the
Leased Premises. Tenant upon signing this Lease acknowledges that Tenant has
inspected the existing plumbing systems and all such systems are in good repair
and working order.
C. Inspections and Service. Upon termination of Lease Agreement, Tenant
agrees, before vacating premises, to employ at Tenant's sole cost and expense, a
licensed contractor to inspect, service and write a written report on the
systems referred to in "A" and "B" of this Paragraph. Landlord shall have the
right to order such an inspection if Tenant fails to provide evidence of such
inspection, and, to follow the recommendations of such reports and to charge the
expense thereof to the Tenant.
D. Tenant's Responsibility for Building and Area Repairs. Tenant shall
be responsible for any repairs required for any part of the Building or Area of
which the Leased Premises are a part if such repairs are necessitated by the
actions or inactions of Tenant.
E. Cutting Roof. Tenant must obtain in writing the Landlord's approval
prior to making any roof penetrations. Failure by Tenant to obtain written
permission to penetrate a roof shall relieve Landlord of any roof repair
obligations as set forth in Paragraph "14" hereof. Tenant further agrees to
repair, at its sole cost and expense, all roof penetrations made by the Tenant
and to use, if so requested by Landlord, a licensed contractor selected by the
Landlord to make such penetrations and repairs.
F. Glass and Doors. The repair and replacement of all glass and doors on
the Leased Premises shall be the responsibility of the Tenant. Any such
replacements or repairs shall be promptly completed at the expense of the
Tenant.
G. Liability for Overload. Tenant shall be responsible for the repair or
replacement of any damage to the Leased Premises, the Building or the Area which
result from the Tenant's movement of heavy articles therein or thereon. Tenant
shall not overload the floors of any part of the Leased Premises.
H. Liability for Overuse and Overload of Operating Systems. Tenant shall
be responsible for the repair, upgrade, modification, and/or replacement of any
operating systems servicing the Leased Premises and/or all or part of the
Building which is necessitated by Tenant's change or increase in use of or
non-disclosed use of all or a part of the Leased Premises. Operating systems
include, but are not limited to, electrical systems; plumbing systems (both
water and natural gas); heating, ventilating, and air conditioning systems;
telecommunications systems; computer and network systems; lighting systems, fire
sprinkler systems; security systems; and building control systems, if any.
I. Inspection of Leased Premises - "As Is" Conditions. Tenant has
inspected the Leased Premises and accepts the Leased Premises in the condition
that they exist as of the date of this Lease, including, but not limited to, all
mechanical, plumbing, and electrical systems and the conditions of the interior
except: Except as shown on Exhibit "B".
J. Failure of Tenant to Maintain Premises. Should Tenant neglect to keep
and maintain the Leased Premises as required herein, the Landlord shall have the
right, but not the obligation, to have the work done and any reasonable costs
plus a ten percent (10%) overhead charge therefore shall be charged to Tenant as
additional rental and shall become payable by Tenant with the payment of the
rental next due.
16. Common Area Maintenance. Tenant shall be responsible for Tenant's Prorata
share of the total costs incurred for the operation, maintenance and repair of
the Common Areas, including, but not limited to, the costs and expenses incurred
for the operation, maintenance and repair of parking areas (including restriping
and repaving); removal of snow; utilities for common lighting and signs; normal
HVAC maintenance and elevator maintenance (if applicable); trash removal;
security to protect and secure the Area; common entrances, exits, and lobbies of
the Building; all common utilities, including water to maintain landscaping;
replanting in order to maintain a smart appearance of landscape areas; supplies;
depreciation on the machinery and equipment used in such operation, maintenance
and repair; the cost of personnel to implement such services; the cost of
maintaining in good working condition tile HVAC system(s) for the Leased
premises; the cost of maintaining in good working condition the elevator(s) for
the Leased Premises, if applicable; costs to cover Landlord's management fees
paid for the property. These costs shall be estimated on an annual basis by the
Landlord and shall be adjusted upwards or downwards depending on the actual
costs for the preceding twelve months. Tenant shall pay monthly, commencing with
the first month of the Lease Term, as additional rent due under the terms
hereof, a sum equal to Tenant's Prorata Share of the estimated costs for said
twelve (12) month period, divided by 12. The estimated initial monthly costs
are $496.00. Once each year the Landlord shall determine the actual costs of
the foregoing expenses for the prior year and if the actual costs are greater
than the estimated costs, the Tenant shall pay its Tenant's Prorata Share of the
difference between the estimated costs and the actual costs to the Landlord with
the next payment of Base Monthly Rent, or, if the actual costs are less than the
estimated costs, the Landlord shall forthwith refund the amount of the Tenant's
excess payment to the Tenant.
Additionally, upon Lease expiration or termination Landlord shall also determine
Tenant's prorated Prorata Share of the annualized actual costs of the foregoing
expenses for the number of days the Lease is in effect during the calendar year
in which the Lease expires or terminates. If the annualized actual costs are
greater than the estimated costs, the Tenant shall pay its prorated Tenant's
Prorata Share of the difference between the estimated costs and the annualized
actual costs to the Landlord, or, if the annualized actual costs are less than
the estimated costs, the Landlord shall forthwith refund the excess to the
Tenant. For purposes of calculating Tenant's share of expenses under this
paragraph, annualized actual costs shall be the sum of actual costs for the year
at the time of reconciliation plus the total estimated costs prorated for the
number of days from the date the last actual cost was paid to the end of the
year.
17. Inspection of and Right of Entry to Leased Premises--Regular, Emergency,
Reletting. Landlord and/or Landlord's agents and employees, shall have the right
to enter the Leased Premises at all times during regular business hours and, at
all times during emergencies, to examine the Leased Premises, to make such
repairs, alterations, improvements or additions as Landlord deems necessary, and
Landlord shall be allowed to take all materials into and upon said Leased
Premises that may be required therefore without the same constituting an
eviction of Tenant in whole or in part, and the rent reserved shall in no way
abate while such repairs, alterations, improvements or additions are being made,
by reason of loss or interruption of business of Tenant or otherwise. During
the six months prior to the expiration of the term of this Lease or any renewal
thereof, Landlord may exhibit the Leased Premises to prospective tenants and/or
purchasers and may place upon the Leased Premises the usual notices indicating
that the Leased Premises are for lease and/or sale.
18. Alteration-Changes and Additions-Responsibility. Unless the Landlord's
approval is first secured in writing, the Tenant shall not install or erect
inside partitions, add to existing electric power service, add telephone
outlets, add light fixtures, install additional heating and/or air conditioning
or make any other changes or alterations to the interior or exterior of the
Leased Premises. Any such changes or alterations shall be made at the sole cost
and expense of the Tenant. At the end of this Lease, all such fixtures,
equipment, additions, changes and/or alterations (except trade fixtures
installed by Tenant) shall be and remain the property of Landlord; provided,
however, Landlord shall have the option to require Tenant to remove any or all
such fixtures, equipment, additions and/or alterations and restore the Leased
Premises to the condition existing immediately prior to such change and/or
installation, normal wear and tear excepted, all at Tenant's cost and expense.
All such work shall be done in a good and workmanlike manner and shall consist
of new materials unless agreed to otherwise by Landlord. Any and all repairs,
changes and/or modifications thereto shall be the responsibility of, and at the
cost of, Tenant. Landlord may require adequate security from Tenant assuring no
mechanics' liens on account of work done on the Leased Premises by Tenant and
may post the Leased Premises, or take such other action as is then permitted by
law, to protect the Landlord and the Leased Premises against mechanics' liens.
Landlord may also require adequate security to assure Landlord that the Leased
Premises will be restored to their original condition upon termination of this
Lease.
19. Sign Approval. Except for signs which are located inside of the Leased
Premises and which are not attached to any part of the Leased Premises, the
Landlord must approve in writing any sign to be placed in or on the interior or
exterior of the Leased Premises, regardless of size or value. Specifically,
signs attached to windows of the Leased Premises must be so approved by the
Landlord. As a condition to the granting of such approval, Landlord shall have
the right to require Tenant to furnish a bond or other security acceptable to
Landlord sufficient to insure completion of and payment for any such sign work
to be so performed. Tenant shall, during the entire Lease Term, maintain
Tenant's signs in good condition and repair at Tenant's sole cost and expense.
Tenant shall, remove all signs at the termination of this Lease, at Tenant's
sole risk and expense and shall in a workmanlike manner properly repair any
damage and close any holes caused by the installation and/or removal of Tenant's
signs. Tenant shall give Landlord prior notice of such removal so that a
representative of Landlord shall have the opportunity of being present when the
signage is removed, or shall pre-approve the manner and materials used to repair
damage and close the holes caused by removal.
20. Right of Landlord to Make Changes and Additions. Landlord reserves the
right at any time to make alterations or additions to the Building or Area of
which the Leased Premises are a part. Landlord also reserves the right to
construct other buildings and/or improvements in the Area and to make
alterations or additions thereto, all as Landlord shall determine. Easements
for light and air are not included in the leasing of the Leased Premises to
Tenant. Landlord further reserves the exclusive right to the roof of the
Building of which the Leased Premises are a part. Landlord also reserves the
right at any time to relocate, vary and adjust the size of any of the
improvements or Common Areas located in the Area, provided, however, that all
such changes shall be in compliance with the requirements of governmental
authorities having jurisdiction over the Area. Nothing in this Lease will
require Tenant to indemnify, hold harmless or release Landlord for any claim,
loss, expense, cost judgement and/or demand, or fees, arising from the
negligence or willful misconduct of Landlord, its agents, employees or
contractors, or a breach of the obligations of the Landlord hereunder.
21. Damage or Destruction of Leased Premises. In the event the Leased Premises
and/or the Building of which the Leased Premises are a part shall be totally
destroyed by fire or other casualty or so badly damaged that, in the opinion of
Landlord and Tenant, it is not feasible to repair or rebuild same, Landlord
shall have the right to terminate this Lease upon written notice to Tenant. If
the Leased Premises are partially damaged by fire or other casualty, except if
caused by Tenant's negligence, and said Leased Premises are not rendered
untenable thereby, as determined by Landlord and Tenant, appropriate reduction
of the rent shall be allowed for the unoccupied portion of the Leased Premises
until repair thereof shall be substantially completed. If the Landlord elects to
exercise the right herein vested in it to terminate this Lease as a result of
damage to or destruction of the Leased Premises or the Building in which the
Leased Premises are located, said election shall be made by giving notice
thereof to the Tenant within thirty (30) days after the date of said damage or
destruction.
22. Governmental Acquisition of Property. The parties agree that Landlord
shall have complete freedom of negotiation and settlement of all matters
pertaining to the acquisition of the Leased Premises, the Building, the Area, or
any part thereof, by any governmental body or other person or entity via the
exercise of the power of eminent domain, it being understood and agreed that any
financial settlement made or compensation paid respecting said land or
improvements to be so taken, whether resulting from negotiation and agreement or
legal proceedings, shall be the exclusive property of Landlord, there being no
sharing whatsoever between Landlord and Tenant of any sum so paid. In the event
of any such taking, Landlord shall have the right to terminate this Lease on the
date possession is delivered to the condemning person or authority. Such taking
of the property shall not be a breach of this Lease by Landlord nor give rise to
any claims in Tenant for damages or compensation from Landlord. Nothing herein
contained shall be construed as depriving the Tenant of the right to retain as
its sole property any compensation paid for any tangible personal property owned
by the Tenant which is taken in any such condemnation proceeding.
23. Assignment or Subletting. Tenant may not assign this Lease, or sublet the
Leased Premises or any part thereof, without the written consent of Landlord,
such consent shall not be unreasonably withheld. No such assignment or
subletting if approved by the Landlord shall relieve Tenant of any of its
obligations hereunder, and, the performance or nonperformance of any of the
covenants herein contained by subtenants shall be considered as the performance
or the nonperformance by the Tenant. In the event of an acquisition, merger, or
reorganization, the assignment of the Lease shall not be unreasonably withheld
by Landlord.
24. Warranty of Title. Subject to the provisions of the following three (3)
paragraphs hereof, Landlord covenants it has good right to lease the Leased
Premises in the manner described herein and that Tenant shall peaceably and
quietly have, hold, occupy and enjoy the Leased Premises during the term of the
Lease.
25. Access. Landlord shall provide Tenant nonexclusive access to the Leased
Premises through and across land and/or other improvements owned by Landlord.
Landlord shall have the right, during the term of this Lease, to designate, and
to change, such nonexclusive access.
26. Subordination. Tenant agrees that this Lease shall be subordinate to any
mortgages, trust deeds or ground leases that may now exist or which may
hereafter be placed upon said Leased Premises and to any and all advances to be
made thereunder, and to the interest thereon, and all renewals, replacements and
extensions thereof. Tenant shall execute and deliver whatever instruments may
be required for the above purposes, and failing to do so within ten (10) days
after demand in writing, does hereby make, constitute and irrevocably appoint
Landlord as its attorney-in-fact and in its name, place and stead so to do.
Tenant shall in the event of the sale or assignment of Landlord's interest in
the Area or in the Building of which the Leased Premises form a part, or in the
event of any proceedings brought for the foreclosure of or in the event of
exercise of the power of sale under any mortgage made by Landlord covering the
Leased Premises, attorn to the purchaser and recognize such purchaser as
Landlord under this Lease.
27. Easements. The Landlord shall have the right to grant any easement on,
over, under and above the Area for such purposes as Landlord determines,
provided that such easements do not materially interfere with Tenants occupancy
and use of the Leased Premises.
28. Indemnification and Waiver. Except in the case of a breach or default in
the performance of any obligation under this Lease, each party shall indemnify,
defend and hold harmless the other party and nothing in this Lease shall be
construed as imposing any liability on them for any loss, costs, expense
(including reasonable attorney's fees), or any claims, suits, actions or damages
arising from the ownership, use, control or occupancy of any portion of the
Project including the Building, Common Areas and Premises unless such loss,
cost, expense, claim, suit or action is a result of or caused by the negligent
acts or omissions of such other party or its agents, servants, employees,
contractors, or invitees.
Tenant shall not indemnify Landlord for acts or failure to observe or comply
with any of the rules by any other Tenant or occupant of the Building or Project
that adversely affect Tenant's use and occupancy in which Landlord has been put
on notice of such adverse impact to Tenant.
29. Acts or Omission of Others. The Landlord, or its employees or agents, or
any of them, shall not be responsible or liable to the Tenant or to the Tenant's
guests, invitees, employees, agents or any other person or entity, for any loss
or damage that may be caused by the acts or omissions of other tenants, their
guests or invitees, occupying any other part of the Area or by persons who are
trespassers on or in the Area, or for any loss or damage caused or resulting
from the bursting, stoppage, backing up or leaking of water, gas, electricity or
sewers or caused in any other manner whatsoever, unless such loss or damage is
caused by or results from the negligent acts of the Landlord, its agents or
contractors.
30. Interest on Past Due Obligations. Any amount due to Landlord not paid when
due shall bear interest at one and one half (1-1/2%) percent per month from due
date until paid. Payment of such interest shall not excuse or cure any default
by Tenant under this Lease.
31. Holding Over-Double Last Month's Rent. If Tenant shall remain in
possession of the Leased Premises after the termination of this Lease, whether
by expiration of the Lease Term or otherwise, without a written agreement as to
such possession, then Tenant shall be deemed a month-to-month Tenant. The rent
rate during such holdover tenancy shall be equivalent to double the monthly rent
paid for the last full month of tenancy under this Lease, excluding any free
rent concessions which may have been made for the last full month of the Lease.
No holding over by Tenant shall operate to renew or extend this Lease without
the written consent of Landlord to such renewal or extension having been first
obtained. Tenant shall indemnify Landlord against loss or liability resulting
from the delay by Tenant in surrendering possession of the Leased Premises
including, without limitation, any claims made with regard to any succeeding
occupancy bounded by such holdover period.
32. Modification or Extensions. No modification or extension of this Lease
shall be binding upon the parties hereto unless in writing and unless signed by
the parties hereto.
33. Notice Procedure. All notices, demands and requests which may be or are
required to be given by either party to the other shall be in writing and such
that are to be given to Tenant shall be deemed to have been properly given if
served on Tenant or an employee of Tenant or sent to Tenant by United States
registered or certified mail, return receipt requested, properly sealed, stamped
and addressed to Tenant at 1613 Prospect Parkway, Fort Collins, CO 80525,
Attention Facilities Manager or at such other place as Tenant may from time to
time designate in a written notice to Landlord; and, such as are to be given to
Landlord shall be deemed to have been properly given if personally served on
Landlord or if sent to Landlord, United States registered or certified mail,
return receipt requested, properly sealed, stamped and addressed to Landlord at
4875 Pearl East Cr. #300, Boulder, CO 80301 or at such other place as Landlord
may from time to time designate in a written notice to Tenant. Any notice given
by mailing shall be effective as of the date of mailing.
34. Memorandum of Lease-Notice to Mortgagee. The Landlord and Tenant agree not
to place this Lease of record, but upon the request of either party to execute
and acknowledge so the same may be recorded a short form lease indicating the
names and respective addresses of the Landlord and Tenant, the Leased Premises,
the Lease Term, the dates of the commencement and termination of the Lease Term
and options for renewal, if any, but omitting rent and other terms of this
Lease. Tenant agrees to an assignment by Landlord of rents and of the
Landlord's interest in this Lease to a mortgagee, if the same be made by
Landlord. Tenant further agrees if requested to do so by the Landlord that it
will give to said mortgagee a copy of any request for performance by Landlord or
notice of default by Landlord; and in the event Landlord fails to cure such
default, the Tenant will give said mortgagee a sixty (60) day period in which to
cure the same. Said period shall begin with the last day on which Landlord
could cure such default before Tenant has the right to exercise any remedy by
reason of such default. All notices to the mortgagee shall be sent by United
States registered or certified mail, postage prepaid, return receipt requested.
35. Controlling Law. The Lease, and all terms hereunder shall be construed
consistent with the laws of the State of Colorado. Any dispute resulting in
litigation hereunder shall be resolved in court proceedings instituted in
Larimer County and in no other jurisdiction.
36. Landlord Not a Partner With the Tenant. Nothing contained in this Lease
shall be deemed, held or construed as creating Landlord as a partner, agent,
associate of or in joint venture with Tenant in the conduct of Tenant's
business, it being expressly understood and agreed that the relationship between
the parties hereto is and shall at all times remain that of Landlord and Tenant.
37. Partial Invalidity. If any term, covenant or condition of this Lease or
the application thereof to any person or circumstance shall, to any extent, be
invalid or unenforceable, the remainder of this Lease or the application of
such term, covenant or condition to persons and circumstances other than those
to which it has been held invalid or unenforceable, shall not be affected
thereby, and each term, covenant and condition of this Lease shall be valid and
shall be enforced to the fullest extent permitted by law.
38. Default-Remedies of Landlord. Should Tenant be in default of rental
charges (monetary expenses to Tenant) Landlord shall give Tenant a cure period
of ten (10) days; if such default is non-monetary, a cure period of thirty (30)
days shall be given after written notice from Landlord.
A. The occurrence of any of the following events shall constitute a
default by Tenant under this Lease:
(1) Failure to make due and punctual payment of rent or any other
charges, assessments or amounts due or payable or required to be paid under this
Lease; or
(2) Neglect or failure by Tenant to perform or observe, or any other
breach of, any other term, covenant or condition of this Lease; or
(3) Adjudication of Tenant as bankrupt or insolvent, or filing by or
against Tenant of any petition in bankruptcy or for reorganization or for the
adoption of any arrangement under the Bankruptcy Code; application is made for
the appointment of receiver or conservator for Tenant's business or property; or
assignment by Tenant is made of its property for the benefit of its creditors;
or Tenant's interest in this Lease or any substantial amount of Tenant's other
real or personal property is levied or executed upon by process of law; or
(4) Petition or other proceeding is made by or against Tenant for its
dissolution or liquidation; or voluntary dissolution or liquidation of Tenant;
or
(5) Abandonment of the Leased Premises, or any part thereof, by
Tenant for a period of time in excess of thirty (30) consecutive days.
B. If Tenant shall default in the payment, of rent or in the keeping of
any of the terms, covenants or conditions of this Lease to be kept and/or
performed by Tenant or shall otherwise commit any event of default as defined
above, Landlord may upon the expiration of any applicable cure, immediately, or
at any time thereafter, reenter the Leased Premises, remove all persons and
property therefrom, without being liable to indictment, prosecution for damage
therefore, or for forcible entry and detainer and repossess and enjoy the Leased
Premises, together with all additions thereto or alterations and improvements
thereof. Landlord may, at its option, at any time and from time to time
thereafter, relet the Leased Premises or any part thereof for the account of
Tenant or otherwise, and receive and collect the rents therefore and apply the
same first to the payment of such expenses as Landlord may have incurred in
recovering possession and for putting the same in good order and condition for
rerental, and expense, commissions and charges paid by Landlord in reletting the
Leased Premises. Any such reletting may be for the remainder of the term of
this Lease or for a longer or shorter period. In lieu of reletting such Leased
Premises, Landlord may occupy the same or cause the same to be occupied by
others. Whether or not the Leased Premises or any part thereof be relet, Tenant
shall pay the Landlord the rent and all other charges required to be paid by
Tenant up to the time of the expiration of this Lease or such recovered
possession, as the case may be and thereafter, Tenant, if required by Landlord,
shall pay to Landlord until the end of the term of this Lease, the equivalent of
the amount of all rent reserved herein and all other charges required to be paid
by Tenant, less the net amount received by Landlord for such reletting, if any,
unless waived by written notice from Landlord to Tenant. No action by Landlord
to obtain possession of the Leased Premises and/or to recover any amount due to
Landlord hereunder shall be taken as a waiver of Landlord's right to require
full and complete performance by Tenant of all terms hereof, including payment
of all amounts due hereunder or as an election on the part of Landlord to
terminate this Lease Agreement. If the Leased Premises shall be reoccupied by
Landlord, then, from and after the date of repossession, Tenant shall be
discharged of any obligations to Landlord under the provisions hereof for the
payment of rent. If the Leased Premises are reoccupied by the Landlord pursuant
hereto, and regardless of whether the Leased Premises shall be relet or
possessed by Landlord, all fixtures, additions, furniture, and the like then on
the Leased Premises, excluding any equipment, fixtures, and furniture that
Tenant may be leasing from a third party, may be retained by Landlord. In the
event Tenant is in default under the terms hereof and, by the sole determination
of Landlord, has abandoned the Leased Premises, Landlord shall have the right to
remove all the Tenant's property from the Leased Premises and dispose of said
property in such a manner as determined best by Landlord, at the sole cost and
expense of Tenant and without liability of Landlord for the actions so taken and
without liability on the part of Landlord for any action so taken.
C. In the event an assignment of Tenant's business or property shall be
made for the benefit of creditors, or, if the Tenant's leasehold interest under
the terms of this Lease Agreement shall be levied upon by execution or seized by
virtue of any writ of any court of law, or, if application be made for the
appointment of a receiver for the business or property of Tenant, or, if a
petition in bankruptcy shall be filed by or against Tenant, then and in any such
case, at Landlord's option, with or without notice, Landlord may terminate this
Lease and immediately retake possession of the Leased Premises without the same
working any forfeiture of the obligations of Tenant hereunder.
D. [Intentionally left blank]
E. In addition to all rights and remedies granted to Landlord by the
terms hereof, Landlord shall have available any and all rights and remedies
available at law or in equity, or under the statutes of the State of Colorado.
No remedy herein or otherwise conferred upon or reserved to Landlord shall be
considered exclusive of any other remedy but shall be cumulative and shall be in
addition to every other remedy given hereunder or now or hereafter existing at
law or in equity or by statute. Further, all powers and remedies given by this
Lease to Landlord may be exercised, from time to time, and as often as occasion
may arise or as may be deemed expedient. No delay or omission of Landlord to
exercise any right or power arising from any default shall impair any such right
or power or shall be considered to be a waiver of any such default or
acquiescence thereof. The acceptance of rent by Landlord shall not be deemed to
be a waiver of any breach of any of the covenants herein contained or of any of
the rights of Landlord to any remedies herein given.
F. If Tenant shall, for any reason, vacate the Leased Premises before the
current expiration date, landlord shall have the right to accelerate rental
payments and any and all future rent payments due during the course of the Lease
Term shall become immediately payable in full to the Landlord.
G. Upon default by Landlord, Tenant shall give Landlord written notice of
said default, with particulars. The landlord shall have thirty days to cure
such default, unless the reasonable time to cure exceeds thirty days, in which
case Landlord must have taken substantial steps toward curing the default within
said thirty days. In addition, Tenant shall be entitled to all the rights and
remedies of a commercial tenant under Colorado Law.
39. Legal Proceedings-Responsibilities. In the event of proceeding at law or
in equity by either party hereto, the defaulting party shall pay all costs and
expenses, including all reasonable attorney's fees incurred by the non-
defaulting party in pursuing such remedy, if such non-defaulting party is
awarded substantially the relief requested.
40. Administrative Charges. In the event any check, bank draft or negotiable
instrument given for any money payment hereunder shall be dishonored at any time
and from time to time, for any reason whatsoever not attributable to Landlord,
Landlord shall be entitled, in addition to any other remedy that may be
available, (1) to make an administrative charge of $100.00 or three times the
face value of the check, bank draft or negotiable instrument, whichever is
smaller, and (2) at Landlord's sole option, to require Tenant to make all future
rental payments in cash or cashiers check.
41. Hazardous Materials and Environmental Considerations.
A. Tenant covenants and agrees that Tenant and its agents, employees,
contractors and invitees shall comply with all Hazardous Materials Laws (as
hereinafter defined). Without limiting the foregoing, Tenant covenants and
agrees that it will not use, generate, store or dispose of, nor permit the use,
generation, storage or disposal of Hazardous Materials (as hereinafter defined)
on, under or about the Leased Premises, nor will it transport or permit the
transportation of Hazardous Materials to or from the Leased Premises, except in
full compliance with any applicable Hazardous Materials Laws. Any Hazardous
Materials located on the Leased Premises shall be handled in an appropriately
controlled environment which shall include the use of such equipment (at
Tenant's expense) as is necessary to meet or exceed standards imposed by any
Hazardous Materials Laws and in such a way as not to interfere with any other
tenant's use of its premises. Upon breach of any covenant contained herein,
Tenant shall, at Tenant's sole expense, cure such breach by taking all action
prescribed by any applicable Hazardous Materials Laws or by any governmental
authority with jurisdiction over such matters.
B. Tenant shall inform Landlord at any time of (i) any Hazardous
Materials it intends to use, generate, handle, store or dispose of, on or about
or transport from, the Leased Premises and (ii) of Tenant's discovery of any
event or condition which constitutes a violation of any applicable Hazardous
Materials Laws. Tenant shall provide to Landlord copies of all communications,
to or from any governmental authority or any other party relating to Hazardous
Materials affecting the Leased Premises.
C. Tenant shall indemnify and hold Landlord harmless from any and all
claims, judgments, damages, penalties, fines, costs, liabilities, expenses or
losses (including, without limitation, diminution on value of the Leased
Premises, damages for loss or restriction on use of all or part of the Leased
Premises, sums paid in settlement of claims, investigation of site conditions,
or any cleanup, removal or restoration work required by any federal, state or
local governmental agency, attorney's fees, consultant fees, and expert fees)
which arise as a result of or in connection with any breach of the foregoing
covenants or any other violation of any Hazardous Materials laws by Tenant. The
indemnification contained herein shall also accrue to the benefit of the
employees, agents, officers, directors and/or partners of Landlord.
D. Upon termination of this Lease and/or vacation of the Leased Premises,
Tenant shall properly remove all Hazardous Materials and shall then provide to
Landlord a Phase I environmental audit report, prepared by a professional
consultant satisfactory to Landlord and at Tenant's sole expense, certifying
that the Leased Premises have not been subjected to environmental harm caused by
Tenant's use and occupancy of the Leased Premises. Landlord shall grant to
Tenant and its agents or contractors such access to the Leased Premises as is
necessary to accomplish such removal and prepare such report.
E. "Hazardous Materials" shall mean (a) any chemical, material, substance
or pollutant which poses a hazard to the Leased Premises or to persons on or
about the Leased Premises or would cause a violation of or is regulated by any
Hazardous Materials Laws, and (b) any chemical, material or substance defined as
or included in the definitions of "hazardous substances", "hazardous wastes",
"extremely hazardous waste", "restricted hazardous waste", "toxic substances",
"regulated substance", or words of similar import under any applicable federal,
state or local law or under the regulations adopted or publications promulgated
pursuant thereto, including, but not limited to, the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Sec.
9601, et seq: the Hazardous Materials Transportation Act, as amended, 49 U.S.C.
Sec. 1801, et seq; the Resource Conservation and Recovery Act as amended, 42
U.S.C. Sec 6901, et seq; the Solid Waste Disposal Act, 42 U.S.C. Sec. 6991, et
seq; the Federal Water Pollution Control Act, as amended, 33 U.S.C. Sec. 1251,
et seq; and Sections 25-15-101, et seq., 25-16-101, et seq., 25-7-101, et seq.,
and 25-8-101, et seq., of the Colorado Revised Statutes. "Hazardous Materials
Laws" shall mean any federal state or local laws, ordinances, rules,
regulations, or policies (including, but not limited to, those laws specified
above) relating to the environment, health and safety or the use, handling,
transportation, production, disposal, discharge or storage of Hazardous
Materials, or to industrial hygiene or the environmental conditions on, under or
about the Leased Premises. Said term shall be deemed to include all such laws
as are now in effect or as hereafter amended and all other such laws as may
hereafter be enacted or adopted during the term of this Lease.
F. All obligations of Tenant hereunder shall survive and continue after
the expiration of this Lease or its earlier termination for any reason.
G. Tenant further covenants and agrees that it shall not install any
storage tank (whether above or below the ground) on the Leased Premises without
obtaining the prior written consent of the Landlord, which consent may be
conditioned upon further requirements imposed by Landlord with respect to, among
other things, compliance by Tenant with any applicable laws, rules, regulations
or ordinances and safety measures or financial responsibility requirements.
H. Should any local governmental entity having jurisdiction over the
Leased Premises require any type of environmental audit or report prior to or
during the occupancy of the Leased Premises by the Tenant, such cost of the
audit or report shall be the sole responsibility of the Tenant.
I. Notwithstanding anything to the contrary contained in this Paragraph
41, Tenant shall not be responsible for any conditions which existed prior to
its tenancy, nor shall it be responsible if conditions which are determined not
to be caused by action or inaction of Tenant.
42. Entire Agreement. It is expressly understood and agree by and between the
parties hereto that this Lease sets forth all the promises, agreements,
conditions, and understandings between Landlord and/or its agents and Tenant
relative to the Leased Premises and that there are no promises, agreements,
conditions, or understandings either oral or written, between them other than
that are herein set forth.
43. [Intentionally left blank]
44. Estoppel Certificates. Within no more than 5 days after receipt of written
request, the Tenant shall furnish to the owner a certificate, duly acknowledged,
certifying, to the extent true:
A. That this Lease is in full force and effect.
B. That the Tenant knows of no default hereunder on the part of the owner,
or if it has reason to believe that such a default exists, the nature
thereof in reasonable detail.
C. The amount of the rent being paid and the last date to which rent has
been paid.
D. That this Lease has not been modified, or if it has been modified, the
terms and dates of such modifications.
E. That the term of this Lease has commenced.
F. The commencement and expiration dates.
G. Whether all work to be performed by the owner has been completed.
H. Whether the renewal term option has been exercised if applicable.
I. Whether there exist any claims or deductions from, or defenses to, the
payment of rent.
J. Such other matters as may be reasonably requested by owner.
If the Tenant fails to execute and deliver to the owner a completed certificate
as required under this section, the Tenant hereby appoints the owner as its
Attorney-In-Fact to execute and deliver such certificate for and on behalf of
the Tenant.
45. Financial Statements. As requested by the Landlord, Tenant shall provide
copies of its most recent financial statements and shall also provide Landlord
with up to three (3) prior years of financial statements, if so requested.
46. Brokers. Tenant represents and warrants that it has dealt only with N/A
(the "Broker") in the negotiation of this Lease. Landlord shall make payment of
the commission according to the terms of a separate agreement with the Broker.
Tenant hereby agrees to Indemnify and hold Landlord harmless of an from any and
all loss, costs, damages or expenses (including, without limitation, all
attorney's fees and disbursements) by reason of any claim of, or liability to,
any other broker or person claiming through Tenant and arising out of this
Lease. Additionally, Tenant acknowledges and agrees that Landlord shall have no
obligation for payment of any brokerage fee or similar compensation to any
person with whom Tenant has dealt or may deal with in the future with respect to
leasing of any additional or expansion space in the Building or any renewals or
extensions of this Lease unless specifically provided for by separate written
agreement with Landlord. In the event any claim shall be made against Landlord
by any other broker who shall claim to have negotiated this Lease on behalf of
Tenant or to have introduced Tenant to the Building or to Landlord, Tenant
hereby indemnifies Landlord, and Tenant shall be liable for the payment of all
reasonable attorney's fees, costs, and expenses incurred by Landlord in
defending against the same, and in the event such broker shall be successful in
any such action, Tenant shall, upon demand, make payment to such broker.
47. Lease Exhibits Attached. This Lease includes the following Lease Exhibits
which are incorporated herein and made a part of this Lease Agreement:
Exhibit "A" - Site Plan Depicting Area
Exhibit "B" - Interior Space Plan
Exhibit "C" - Landlord and Tenant's Construction Obligations
Exhibit "D" - Sign Code Obligations
48. Miscellaneous. All marginal notations and paragraph headings are for
purposes of reference and shall not affect the true meaning and intent of the
terms hereof. Throughout this Lease, wherever the words "Landlord" and "Tenant"
are used they shall include and imply to the singular, plural, persons both male
and female, companies, partnerships and corporations, and in reading said Lease,
the necessary grammatical changes required to make the provisions hereof mean
and apply as aforesaid shall be made in the same manner as though originally
included in said Lease.
IN WITNESS WHEREOF, the parties have executed this Lease as of the date hereof.
LANDLORD: GB VENTURES
By: /s/ W.W. REYNOLDS
TENANT: HESKA CORPORATION
By: /s/ R. L. HENDRICK
R. L. HENDRICK, EXECUTIVE VICE PRESIDENT & CHIEF FINANCIAL OFFICER
ENVIRONMENTAL INDEMNITY AGREEMENT
THIS INDEMNITY is given as of this 24th day of August, 1999, by Heska
Corporation ("Indemnitor," whether one or more), to and for the benefit of GB
Ventures ("Landlord").
WHEREAS, GB Ventures is Landlord under a proposed Lease Agreement dated
August 24, 1999, ("the Lease") in which Heska Corporation, a Delaware
Corporation is the proposed tenant ("Tenant"), regarding the Leased Premises
commonly known as 2601 Midpoint Drive, Suite D, E, & F, Fort Collins, Co 80525
("Leased Premises"); and
WHEREAS, Landlord is unwilling to enter into the Lease with Tenant unless
the Indemnitor agrees to the indemnities hereinafter provided.
NOW, THEREFORE, in consideration of the matters recited above and to induce
Landlord to enter into the Lease with Tenant, Indemnitor undertakes and agrees
as follows:
1. Indemnitor shall indemnify, defend and hold Landlord harmless from and
against any and all suits, actions, legal or administrative proceedings,
demands, claims, judgements, damages, penalties, fines, costs, liabilities,
expenses or losses which arise during or after the lease term as a result of or
in connection with the presence, use, storage, disposal, transportation or
discharge, by or on behalf of Tenant, of any Hazardous Materials (as defined in
the Lease) on, in or under or affecting all or any portion of the Leased
Premises or any surrounding areas, or the disposition or transportation of any
Hazardous Materials therefrom, or any breach by Tenant of the provisions
concerning Environmental Considerations as contained in paragraph 41 of the
Lease, or the failure of the Tenant to comply with any applicable Hazardous
Materials Laws (as defined in the Lease), or otherwise resulting from or arising
out of any action or non-action of Tenant or Tenant's operations on the Leased
Premises.
Without limiting the generality of the foregoing, it is expressly agreed by
Indemnitor that such Indemnity shall also include the following: diminution in
value of the Leased Premises, damages for loss or restriction on use of rental
or useable space or any amenity of the Leased Premises, damages arising from any
adverse impact on marketing of space or delay in delivering possession to a
subsequent tenant or purchaser, restoration of the Leased Premises to a
condition not materially different from its original contour, appearance and
condition; costs incurred in connection with any investigation of site
conditions or any clean-up, remedial, removal or restoration work required by
any federal, state or local governmental agency, political subdivision, court
order or lender of the Landlord; costs of removal and lawful disposal off site
of all Hazardous Materials; all sums paid in settlement of claims, attorneys'
fees, consultant fees and expert fees.
The foregoing indemnities shall survive termination or expiration of the
Lease and shall also accrue to the benefit of the employees, agents, officers,
directors and/or partners of Landlord.
2. Indemnitor agrees to pay to Landlord, from time to time, upon demand
therefor, an amount equal to any and all expenses therefore incurred by Landlord
for which Landlord is entitled to indemnification. Any sums not so paid shall
thereafter bear interest at a rate of two percent (2%) per month until paid in
full.
3. The rights and remedies of Landlord under this indemnity shall be in
addition to any rights or remedies available to Landlord under the terms of the
Lease. The obligations of Indemnitor hereunder shall not be affected or
impaired by: (i) the assertion by Landlord against Tenant of any rights or
remedies reserved to Landlord pursuant to provisions of the Lease; (ii) the
commencement of summary or any other proceedings against Tenant; (iii) failure
of the Landlord to enforce any of its rights against Tenant pursuant to the
Lease or otherwise; (iv) the granting by Landlord of any extensions of time to
Tenant; (v) the assignment or transfer of the Lease by Tenant; (vi) with release
or discharge of Tenant from its obligations under the Lease in any creditors',
receivership, bankruptcy or other proceedings or the commencement or pendency of
any such proceedings; or (vii) the impairment, limitation or modification of the
liability of Tenant or the estate of Tenant in bankruptcy, or of any remedy for
the enforcement of tenant's liability under the Lease, resulting from the
operation of any present or future bankruptcy code or other statute, or from the
decision of any court.
4. Until all Tenants obligations under the Lease are fully performed,
Indemnitor (i) waives any right of subrogation which it might have against
Tenant by reason of any payments or acts of performance by Indemnitor pursuant
to its obligations hereunder; (ii) waives any other right which Indemnitor may
have against Tenant by reason of any one or more payments or acts in compliance
with its obligations hereunder; and (iii) subordinates any liability or
indebtedness of tenant held by Indemnitor to the obligations of Tenant to
Landlord under the Lease.
5. All notices for or allowed hereunder shall be deemed given and
received with (a) personally delivered, or (b) at the time the same is deposited
in the United States mail, postage prepaid, first class mail, or addressed to
the applicable party at the address indicated below for such party, or as to
each party, at such other address as shall be designated by such party in a
written notice to the other party:
If to Indemnitor, to:
Heska Corporation
Attention: Facilities Manager
1613 Prospect Parkway
Fort Collins, CO 80525
If to Landlord, to:
GB Ventures
4875 Pearl East Circle #300
Boulder, CO 80301
6. In the event of default in its obligations hereunder, Indemnitor
agrees to reimburse Landlord for reasonable attorneys' fees and costs incurred
by Landlord in the enforcement of such obligations.
7. This Environmental Indemnity Agreement shall apply to the Lease and
any extension or renewal thereof, and any holdover term following the term
thereof, or any such extension or renewal.
8. This Environmental Indemnity Agreement shall be governed by and
construed in accordance with the laws of the State of Colorado.
9. The covenants and agreements herein contained shall extend to and be
binding upon the parties hereto and their respective successors and assigns.
IN WITNESS WHEREOF, the parties hereto have executed this Environmental
Indemnity Agreement on the day and year first above written.
/s/ R. L. HENDRICK
"Indemnitor"- HESKA CORPORATION
/s/ W. W. REYNOLDS
"Landlord" - GB VENTURES
EXHIBIT "A"
[SITE PLAN]
For almost 25 years, the W.W. Reynolds Companies has provided Colorado
businesses with premium quality facilities In which to grow and prosper. Plum
Tree Plaza, located In Fort Collins' Prospect East Business Park with easy
access to 1-25 and the Denver metropolitan area, is built around the FlexSpace
Concept, providing maximum adaptability for space planning.
This four-building, 72,800 square-foot project reflects an unyielding
dedication to quality with such benefits as:
* FlexSpace concept from 2,400 to 23,000 square feet, with customized
finishes at affordable rates
* Two minutes to 1-25; no more than five minutes from downtown and South
College shopping and most of Fort Collins' finest residential areas;
immediate access to Poudre River Trail
* Upscale appearance with lush landscaping, generous window area with
mountain views, and plenty of parking
* On-site property management providing immediate, high-quality, and
convenient management services
* Child care facility within the business park
* Proven location for many fine companies, Including Advanced Energy,
Chemagnetics, Hewlett-Packard, Otsuka Electronics, and Vipont
Pharmaceuticals.
The W.W. Reynolds Companies is committed to the long-term success of our
clients. We are more than a developer - we are a partner you can depend upon
year after year. Whether yours is a small company taking its first big step
toward growth, or an established firm looking for a permanent home in which to
continue growth and prosperity, The W.W. Reynolds Companies is the name to
remember.
EXHIBIT "B"
[INTERIOR SPACE PLAN]
EXHIBIT "C"
LANDLORD AND TENANT'S CONSTRUCTION OBLIGATIONS
Tenant shall take the Premises in "as is" condition with the following
exceptions:
Landlord shall be responsible for:
1 Repair and repaint all interior walls, including the new walls to be
installed.
2. Repaint warehouse floors.
3. Re-carpet where carpet exists, except for one room, highlighted in
Pink, on Exhibit "B".
4. Add demising walls to separate Suite C & Suite D, these walls are in
red on Exhibit "B".
5. Remove one wall (approximately 10') highlighted in green on Exhibit
"B".
6. Remove and replace all rubber base.
7. Stub existing copper above ceiling.
8. Replace laminate in kitchen and bathrooms.
9. Replace damaged and missing ceiling tiles.
10. Add carpet to the area highlighted in yellow, as shown on Exhibit "B".
Tenant shall be responsible for the costs associated with:
1. Installation of VCT in the room, highlighted in Pink, as shown on
Exhibit "B". This is the room where the carpet is to be pulled.
2. Tenant shall contract with Rincon to remove and reinstall lab cabinets
and countertops from 1825 Sharp Point Drive, Fort Collins, Colorado to
2601 Midpoint Drive, Suite D, E, & F, Fort Collins, Colorado. Heska to
pay Rincon directly for labor and any expense involved with this
relocation of the cabinets and countertops.
3. Tenant shall be responsible for the repair, upgrade, modification,
and/or replacement of any operating systems servicing the Leased
Premises and/or all or part of the Premises which is necessitated by
Tenant's change or increase use in of or non-disclosed use of all or
part of the Leased Premises. Operating systems include, but are not
limited to, electrical systems, plumbing systems, heating, ventilating
and air conditioning systems; telecommunications systems, computer and
network systems; lighting systems, fire sprinkler systems, security
systems and building control systems, if any.
4. Tenant shall be responsible for any change orders which may occur
during tenant finish. Payment shall be made upon occupancy of the
Premises.
In order for Landlord to have the space ready for occupancy by October 4, 1999,
Landlord must have signed off plans, and an executed Lease Agreement by August
20, 1999.
EXHIBIT "D"
[SIGN CODE OBLIGATIONS]
LEASE ADDENDUM #1
THIS LEASE ADDENDUM #1 is made and entered this 6th day of October, 1999.
LANDLORD: The Landlord is GB Ventures.
TENANT: The Tenant is Heska Corporation.
LEASE AGREEMENT: That certain Lease Agreement dated August 24,1999.
PREMISES: The Leased Premises presently consist of Suites D, E, F in
Building 2601 Midpoint Drive of Plum Tree Plaza, Fort
Collins, Colorado, comprised of approximately 7,433 square
feet.
The new Leased Premises shall consist of approximately
11,628 square feet and are comprised of Suites B, C, D, E, &
F in Building 2601 Midpoint Drive of Plum Tree Plaza, Fort
Collins, Colorado.
To further clarify, Tenant shall rent an additional 4195
square feet (Suite B,C) adjacent to its present Premises at
2601 Midpoint. Tenant shall be leasing a total of 11,628
square feet at 2601 Midpoint Drive.
Tenant shall begin paying for the additional square footage
on October 4, 1999, and continue through the end of the
Lease Term, i.e. October 1, 2004.
TENANT IMPROVEMENTS: Tenant leases the additional 4195 square feet located
at 2601 Midpoint Drive, Suite B/C, Fort Collins, Colorado in
"as is" condition. Landlord shall remove the walls and
carpeting as indicated on Exhibit A. Landlord shall also
replace the floor tile and counter-top laminate in the
kitchen area (highlighted in orange). Tenant will be given a
$16,177 allowance to be used towards Tenant Improvements for
Suite B/C. Tenant Finish shall be contracted by Rincon
Development and completed prior to December 31, 1999. Any
change orders exceeding the allowance shall be payable by
Tenant within 30 days of receiving a billing from Rincon
Development. All space plans must be approved by Landlord,
prior to construction.
CURRENT LEASE EXPIRATION: October 1, 2004
BASE RENTAL RATE: The Monthly Base Rental Rate shall be as follows:
October 4, 1999 to November 1, 1999 $7,877.03 NNN
November 1, 1999 to October 1, 2004 $8,721.00 NNN with annual
CPI's on
October 1, 2000;
October 1, 2001;
October 1, 2002; and
October 1, 2003
ADDITIONAL SECURITY DEPOSIT: Tenant shall deposit an additional Three Thousand
One Hundred Forty Six Dollars ($3,146.00). This additional
Security Deposit shall be added to the existing Five
Thousand Five Hundred Seventy Five Dollars ($5,575.00) for a
total of Eight Thousand Seven Hundred Twenty One Dollars
($8,721.00) to be held with Landlord.
TERMS AND CONDITIONS: All other terms and conditions of the Lease Agreement
dated August 24, 1999 shall not be superseded by this Lease
Addendum #1 shall remain the same.
OFFER PERIOD: This offer shall remain effect through October 6, 1999.
LANDLORD TENANT
GB VENTURES HESKA CORPORATION
/S/ W. W. REYNOLDS /S/ R. L. HENDRICK
SUBSIDIARIES OF COMPANY
CMG-Heska Allergy Products S.A., a corporation incorporated under the laws of
Switzerland
Diamond Animal Health, Inc., an Iowa corporation
Heska AG, a corporation incorporated under the laws of Switzerland
Heska Holding AG, a corporation incorporated under the laws of Switzerland
Sensor Devices, Inc., a Wisconsin corporation
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report included in this Annual Report on Form 10-K, into Heska
Corporation's previously filed Registration Statement File No. 333-30951,
Registration Statement File No. 333-34111, Registration Statement File No. 333-
47129, Registration Statement File No. 333-72155, Registration Statement File
No. 333-39448, Registration Statement File No. 333-55112, Registration Statement
File No. 333-55602, Registration Statement File No. 333-82096 and Registration
Statement File No. 333-76374.
/s/ ARTHUR ANDERSEN LLP
Denver, Colorado
April 1, 2002
EXHIBIT 99.1
April 1, 2002
Securities and Exchange Commission
Washington, D.C. 20549
Ladies and Gentlemen:
Arthur Andersen LLP made the following representation to Heska Corporation
and subsidiaries pursuant to Temporary Note 3T to Section 210.2-02 of Regulation
S-X on April 1, 2002:
"We have audited the consolidated financial statements of Heska Corporation
and Subsidiaries as of December 31, 2001 and for the year then ended and have
issued our report dated February 1, 2002, except with respect to the matters
discussed in Note 15, as to which the date is March 13, 2002. We represent that
this audit was subject to our quality control system for the U.S. accounting and
auditing practice to provide reasonable assurance that the engagement was
conducted in compliance with professional standards, that there was appropriate
continuity of Arthur Andersen personnel working on the audit, availability of
national office consultation, and availability of personnel at foreign
affiliates of Arthur Andersen to conduct the relevant portions of the audit."
Very truly yours,
Ronald L. Hendrick
Executive Vice President &
Chief Financial Officer