(Mark One)
x
o
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2007
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
(State or other jurisdiction of
incorporation or organization)
3760 Rocky Mountain Avenue
Loveland, Colorado
(Address of principal executive offices)
77-0192527
(I.R.S. Employer
Identification Number)
80538
(Zip Code)
Registrant’s telephone number, including area code: (970) 493-7272
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, $.001 par value
(Title of Class)
Nasdaq Capital Market
(Name of Each Exchange on Which Registered)
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No x
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 o
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. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company as
defined in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
Accelerated filer x
Non-accelerated filer o (Do not check if a small reporting company)
Smaller Reporting Company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
The aggregate market value of voting common stock held by non-affiliates of the Registrant was approximately $116,055,285 as of June 30, 2007 based
upon the closing price on the Nasdaq Capital Market reported for such date. This calculation does not reflect a determination that certain persons are affiliates of
the Registrant for any other purpose.
51,476,783 shares of the Registrant’s Common Stock, $.001 par value, were outstanding at February 29, 2008.
Items 10 (as to directors), 11, 12, 13 and 14 of Part III incorporate by reference information from the Registrant’s Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the solicitation of proxies for the Registrant’s 2008 Annual Meeting of Stockholders.
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Submission of Matters to a Vote of Security Holders
Market for Registrant’s Common Equity and Related Stockholder Matters
Selected Consolidated Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors and Executive Officers of the Registrant
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management
Certain Relationships and Related Transactions
Principal Accountant Fees and Services
PART I
PART II
PART III
PART IV
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Exhibits and Financial Statement Schedules
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DRI-CHEM is a registered trademark of FUJIFILM Corporation. i-STAT is a registered trademark of Abbott Laboratories. SPOTCHEM is a
trademark of Arkray, Inc. TRI-HEART is a registered trademark of Schering-Plough Animal Health Corporation (“SPAH”) in the United States and is a
trademark of Heska Corporation in other countries. HESKA, ALLERCEPT, AVERT, E.R.D.-HEALTHSCREEN, E-SCREEN, FELINE ULTRANASAL,
SOLO STEP, THYROMED and VET/OX are registered trademarks and CBC-DIFF, ERD, G2 DIGITAL, HEMATRUE and VET/IV are trademarks of Heska
Corporation in the United States and/or other countries. This 10-K also refers to trademarks and trade names of other organizations.
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Statement Regarding Forward Looking Statements
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. For this purpose, any statements contained herein that are not statements of current or historical fact
may be deemed to be forward-looking statements. Without limiting the foregoing, 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 “Risk
Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Business” and elsewhere in this Form 10-K. Readers
are cautioned not to place undue reliance on these forward-looking statements.
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 or for statements incorporated by reference
from the 2008 definitive proxy statement on Schedule 14A, as of the date of the Schedule 14A.
Internet Site
Our Internet address is www.heska.com. Because we believe it provides useful information in a cost-effective manner to interested investors, via a
link on our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are publicly available free of charge and we believe are available as soon
as reasonably practical after we electronically file such material with, or furnish it to, the Securities Exchange Commission. Information contained on our
website is not a part of this annual report on Form 10-K.
Where You Can Find Additional Information
You may review a copy of this annual report on Form 10-K, including exhibits and any schedule filed therewith, and obtain copies of such materials
at prescribed rates, at the Securities and Exchange Commission’s Public Reference Room in Room 1580, 100 F Street, NE, Washington, D.C. 20549-0102.
You may obtain information on the operation of the Public Reference Room by calling the Securities and Exchange Commission at 1-800-SEC-0330. The
Securities and Exchange Commission maintains a website (http://www.sec.gov) that contains reports, proxy and information statements and other information
regarding registrants, such as Heska, that file electronically with the Securities and Exchange Commission.
Item 1. Business.
PART I
We develop, manufacture, market, sell and support veterinary products. Our core focus is on the canine and feline companion animal health markets
where we strive to provide high value products and advance the state of veterinary medicine.
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Our business is comprised of two reportable segments, Core Companion Animal Health and Other Vaccines, Pharmaceuticals and Products. The
Core Companion Animal Health segment (“CCA”) includes diagnostic instruments and supplies as well as single use diagnostic and other tests, vaccines and
pharmaceuticals, primarily for canine and feline use. These products are sold directly by us as well as through independent third-party distributors and other
distribution relationships. The Other Vaccines, Pharmaceuticals and Products segment (“OVP”), previously reported as Diamond Animal Health, includes
private label vaccine and pharmaceutical production, primarily for cattle but also for other animals including small mammals and fish. All OVP products are
sold by third parties under third party labels.
Our principal executive offices are located at 3760 Rocky Mountain Avenue, Loveland, Colorado 80538, our telephone number is (970) 493-7272
and our internet address is www.heska.com. We originally incorporated in California in 1988, and we subsequently incorporated in Delaware in 1997.
Background
We were incorporated as Paravax, Inc. in 1988 and conducted research on vaccines to prevent infections by parasites. In 1991, we moved our
headquarters from California to northern Colorado in order to be located closer to the research facilities of the College of Veterinary Medicine and Biomedical
Sciences of Colorado State University. In 1995, we changed our name to Heska Corporation. We completed our initial public offering in July 1997.
Between 1996 and 1998, we expanded our business, making several acquisitions and significantly increasing our sales and marketing activities. During 1999
and 2000, we restructured and refocused our business, making several divestitures. We continued to be a research and development-focused company,
devoting substantial resources to the research and development of innovative products for the companion animal health market. In 2001 and 2002, we took
further steps to lower our expense base, largely in internal research and development but also in other areas, and to rationalize and further focus our business.
In the years since 2003, we have continued to concentrate our efforts on operating improvements, such as by striving to enhance the effectiveness of our sales
and marketing efforts and pursuing cost efficiencies, and seeking new product opportunities with third parties.
Core Companion Animal Health Segment
We presently sell a variety of companion animal health products and services, among the most significant of which are the following:
Veterinary Instruments
We offer a line of veterinary diagnostic and other instruments which are described below. We also market and sell consumable supplies for these
instruments. Our line of veterinary instruments includes the following:
· Handheld Blood Analysis. The i-STAT 1 Handheld Clinical Analyzer, introduced in January 2007, and the less expensive original i-STAT
Handheld Clinical Analyzer are handheld instruments that provide quick, easy analysis of critical electrolyte, blood gas, chemistry and basic
hematology results with whole blood. We are supplied these instruments and affiliated cartridges and supplies under a contractual agreement
with i-STAT Corporation (a unit of Abbott Laboratories).
· Blood Chemistry. The DRI-CHEM Veterinary Chemistry Analyzer, introduced in November 2007, is a robust system that uses dry slide
technology for blood chemistry and electrolyte analysis and has the ability to run 21 tests at a time with a single blood sample. Test slides are
available as both pre-packaged panels as well as individual slides. The instrument has an
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additional feature allowing simple, fully automated sample dilution and results calculations. We are supplied this instrument and affiliated test
slides and supplies under a contractual agreement with FUJIFILM Corporation (“FUJIFILM”). In addition, we continue to service and support
our previous chemistry instrument for which we are supplied affiliated test strips and supplies under a contractual agreement with Arkray Global
Business, Inc. (“Arkray”).
· Hematology. The HEMATRUE Veterinary Hematology Analyzer, introduced in July 2007, 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. Boule Medical AB (“Boule”)
supplies us with this instrument and affiliated reagents and supplies. In addition, we continue to service and support our previous hematology
instrument, the HESKA CBC-DIFF Veterinary Hematology System for which we are supplied the affiliated reagents and supplies under a
contractual agreement with Boule.
· IV Pumps. 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.
Point-of-Care Diagnostic and Other Tests
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.
We currently market and sell heartworm diagnostic tests for both dogs and cats. SOLO STEP CH for dogs and SOLO STEP FH for cats are
available in point-of-care, single use formats that can be used by veterinarians on site. We also offer SOLO STEP CH Batch Test Strips, 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. We obtain SOLO STEP
CH, SOLO STEP FH and SOLO STEP Batch Test Strips under a contractual agreement with Quidel Corporation (“Quidel”).
Early Renal Damage Detection Products. Renal damage is a leading cause of death in both dogs and cats. Several inflammatory, infectious or
neoplastic diseases can damage an animal’s kidneys. It is estimated that 70% to 80% of kidney function is already destroyed before veterinarians can detect
renal damage using traditional tests. Early detection is key to eliminate the causes and to mitigate the effects of kidney damage. Identification and treatment
of the underlying cause of kidney damage can slow the progression of disease and add quality years to an animal’s life.
Our E.R.D.-HEALTHSCREEN Canine Urine Test and our E.R.D.-HEALTHSCREEN Feline Urine Test are rapid in-clinic immunoassay tests
designed to detect microalbuminuria, the most sensitive indicator of renal damage.
Veterinary Diagnostic Laboratory Products and Services
Allergy Diagnostic Products and Services. Allergy is common in companion animals, and it has been 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.
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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.
Our ALLERCEPT Definitive Allergen Panels provide the most accurate determination of which we are aware of the specific allergens to which an
animal, such as a dog, cat or horse, is reacting. The panels use a highly specific recombinant version of the natural IgE receptor to test 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 serve as the basis for prescription ALLERCEPT Allergy Treatment Sets, discussed later in this document.
Outside of the United States, we sell kits to conduct blood testing using our ALLERCEPT Definitive Allergen Panels to third-party veterinary
diagnostic laboratories. We also sell products to screen for the presence of allergen-specific IgE to third party veterinary diagnostic laboratories outside of the
United States — we sell kits to conduct preliminary blood testing using products based on our ALLERCEPT Definitive Allergen Panels as well as a similar
test requiring less technical sophistication, our ALLERCEPT E-SCREEN Test.
We have veterinary diagnostic laboratories in Loveland, Colorado and Fribourg, Switzerland which both offer blood testing using our ALLERCEPT
Definitive Allergen Panels. In our Fribourg veterinary diagnostic laboratory, we also offer preliminary blood testing to screen for the presence of allergen-
specific IgE using products based on our ALLERCEPT Definitive Allergen Panels. Animals testing positive for allergen-specific IgE are candidates for
further evaluation using our ALLERCEPT Definitive Allergen Panels.
Other Products and Services. We sell ERD Reagent Packs used to detect microalbuminuria, the most sensitive indicator of renal damage, to Antech
Diagnostics, the laboratory division of VCA Antech, Inc., for use in its veterinary diagnostic laboratories.
Our Loveland veterinary diagnostic laboratory currently also offers testing using our canine and feline heartworm, renal damage, immune status and
flea bite allergy assays as well as other diagnostic services including polymerase chain reaction, or PCR, based tests for certain infectious diseases. Our
Loveland diagnostic laboratory is currently staffed by medical technologists experienced in animal disease and several additional technical staff. We intend to
continue to use our Loveland veterinary diagnostic laboratory both as a stand-alone service center for our customers and as an adjunct to our product
development efforts.
Pharmaceuticals and Supplements
Heartworm Prevention. We have an agreement with Schering-Plough Animal Health Corporation (“SPAH”), the worldwide animal health care
business of Schering-Plough Corporation, granting SPAH the distribution and marketing rights in the United States for TRI-HEART Plus Chewable Tablets,
our canine heartworm prevention product. TRI-HEART Plus Chewable Tablets (ivermectin/pyrantel) are indicated for use as a monthly preventive treatment
of canine heartworm infection and for treatment and control of ascarid and hookworm infections. We manufacture TRI-HEART Plus Chewable Tablets at our
Des Moines, Iowa production facility.
Nutritional Supplements. We sell 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.
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Hypothyroid Treatment. We sell a chewable thyroid supplement, THYROMED Chewable Tablets, for treatment of hypothyroidism in dogs.
Hypothyroidism is one of the most common endocrine disorders diagnosed in older dogs, treatment of which requires a daily hormone supplement for the
lifetime of the animal. THYROMED Chewable Tablets contain the active ingredient Levothyroxine Sodium, which is a clinically proven replacement for the
naturally occurring hormone secreted by the thyroid gland. The chewable formulation makes this daily supplement convenient and easy to administer.
Vaccines and other Biologicals
Allergy Treatment. 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 canine, feline and equine immunotherapy treatment products.
Feline Respiratory Disease. 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. While there is one competitive
non-injectable two-way vaccine, all other competitive products are injectable formulations.
We sell the FELINE ULTRANASAL FVRCP Vaccine, a three-way modified live vaccine combination to prevent disease caused by the three most
common respiratory viruses of cats: calicivirus, rhinotracheitis virus and panleukopenia virus. Our two-way modified live vaccine combination, FELINE
ULTRANASAL FVRC, prevents disease caused by calicivirus and rhinotracheitis. These vaccines are administered without needle injection by dropping the
liquid preparation into the nostrils of cats. Our vaccines avoid injection site side effects, and we believe they are very efficacious.
Other Vaccines, Pharmaceuticals and Products Segment
We have developed our own line of bovine vaccines that are licensed by the United States Department of Agriculture (“USDA”). We have a long-
term agreement with a distributor, Agri Laboratories, Ltd., (“AgriLabs”), for the marketing and sale of certain of these vaccines which are sold primarily
under the TitaniumÒ and MasterGuardÒ brands — registered trademarks of AgriLabs. AgriLabs has rights to sell these bovine vaccines in the United States,
Africa and Mexico to December 2013. Subject to minimum purchase requirements, AgriLabs’ rights in these regions will be exclusive to December 2009.
We have the right to sell these bovine vaccines to any party of our choosing in other regions of the world. AgriLabs has non-exclusive rights to these vaccines
in Canada to December 2008. We also manufacture other bovine products not covered under the agreement with AgriLabs.
We manufacture biological and pharmaceutical products for a number of other animal health companies. We manufacture products for animals
including small mammals and fish. Our offerings range 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 our customers as well as validation support and distribution services.
Marketing, Sales and Customer Support
We estimate that there are approximately 40,000 veterinarians in the United States whose practices are devoted principally to small animal
medicine. Those veterinarians practice in approximately 20,000
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clinics in the United States. In 2007, our products were sold to approximately 13,500 such clinics in the United States. Veterinarians may obtain our products
directly from us or indirectly from others, such as independent third-party distributors. All our Core Companion Animal Health products are predominately
sold ultimately to or through veterinarians. In many cases, veterinarians will markup their costs to the end user. The acceptance of our products by
veterinarians is critical to our success.
We currently market our Core Companion Animal Health products in the United States to veterinarians through a direct sales force, a telephone sales
force, independent third-party distributors, as well as through trade shows and print advertising and through other distribution relationships, such as SPAH in
the case of our heartworm preventive. Our direct sales force currently consists of 29 territory managers and 3 regional managers responsible for sales in
various parts of the United States. Our inside sales force consists of 25 persons.
Our independent third-party distributors in the U.S. purchase and market our Core Companion Animal Health products utilizing their direct sales
forces. We currently have agreements with 18 regional distributors with approximately 701 field representatives. We believe that one of our largest
competitors, IDEXX Laboratories, Inc. (“IDEXX”), in effect prohibits its distributors from selling competitive products, including our diagnostic instruments
and heartworm diagnostic tests. As a result, 12 of these 18 regional distributors with approximately 138 field representatives carry our full distribution
product line. We believe the IDEXX restrictions limit our ability to engage national independent third party distributors to sell our full distribution line of
products.
We have a staff dedicated to customer and product support in our Core Companion Animal Health segment including veterinarians, technical support
specialists and service technicians. Individuals from our product development group may also be used as a resource in responding to certain product
inquiries.
Internationally, we market our Core Companion Animal Health products to veterinarians primarily through third-party veterinary diagnostic
laboratories, independent third-party distributors and Novartis Agro K.K., Tokyo (“Novartis Japan”). These entities typically provide customer support.
Novartis Japan exclusively markets and distributes SOLO STEP CH and our line of E.R.D. HEALTHSCREEN urine test products.
All OVP products are marketed and sold by third parties under third party labels. AgriLabs currently has exclusive sales and marketing rights to
certain of our bovine vaccines, which are sold primarily under the TitaniumÒ and MasterGuardÒ labels, in the United States and certain international regions.
We grant third parties rights to our intellectual property as well as our products, with our compensation often taking the form of royalties and/or
milestone payments. For example, we have an agreement with Nestlé Purina PetCare Company (“Purina”), a unit of Nestlé S.A., under which Purina pays
royalties on certain pet food products it markets based on our patent-protected science.
Manufacturing
The majority of our product revenue is from proprietary products manufactured by third parties. Third parties manufacture our veterinary
instruments, including affiliated consumables and supplies, as well as other products including our heartworm point-of-care diagnostic tests, our allergy
treatment products and our E.R.D.-HEALTHSCREEN Urine Tests. Our handheld blood analysis instruments and affiliated supplies are supplied by i-STAT
Corporation (a unit of Abbott Laboratories), our chemistry instruments and affiliated supplies are supplied by FUJIFILM, test strips and supplies affiliated
with our previous chemistry instrument are supplied by Arkray and our hematology instruments and affiliated supplies are supplied by Boule. ALK-
Abelló, Inc. manufactures our immunotherapy treatment products. Genzyme Diagnostics P.E.I., Inc., formerly known as Diagnostic Chemicals Limited
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manufactures our E.R.D. Reagent Packs and our E.R.D.- HEALTHSCREEN Urine Tests. Quidel and we, at our Des Moines facility, manufacture our
heartworm point-of-care diagnostic tests.
Our facility in Des Moines, Iowa is a USDA, Food and Drug Administration (“FDA”), and Drug Enforcement Agency (“DEA”) licensed biological
and pharmaceutical manufacturing facility. This facility currently has the capacity to manufacture more than 50 million doses of vaccine each year. We
expect that we will manufacture most or all of our biological and pharmaceutical products at this facility, as well as most or all of our recombinant proteins
and other proprietary reagents for our diagnostic tests. We currently manufacture our canine heartworm prevention product, our FELINE ULTRANASAL
Vaccines and all our OVP segment products at this facility. Our OVP segment’s customers purchase products in both finished and bulk format, and we
perform all phases of manufacturing, including growth of the active bacterial and viral agents, sterile filling, lyophilization and packaging at this facility. We
manufacture our various allergy diagnostic products at our Des Moines facility, our Loveland facility and our Fribourg facility. We believe the raw materials
for products we manufacture are available from several sources.
Product Development
We are committed to providing innovative products to address latent health needs of companion animals. We may obtain such products from
external sources, external collaboration or internal research and development.
We are committed to identifying external product opportunities and creating business and technical collaborations that lead to high value veterinary
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. We have collaborated, and intend to continue to do so, with a number of companies and universities. Examples of such collaborations
include:
· Quidel for the development of SOLO STEP CH Cassettes, SOLO STEP CH Batch Test Strips and SOLO STEP FH Cassettes;
· Boule for the development of veterinary applications for the HEMATRUE Veterinary Hematology Analyzer and associated reagents.
· FUJIFILM for the development of veterinary applications for the DRI-CHEM Veterinary Chemistry Analyzer and associated slides and supplies.
Internal research and development is managed on a case-by-case basis. We employ individuals with microbiology, immunology, genetics,
biochemistry, molecular biology, parasitology as well as veterinary expertise and will form multidisciplinary product-associated teams as appropriate. We
incurred expenses of $3.7 million, $3.5 million and $2.7 million in the years ended December 31, 2005, 2006 and 2007, respectively, in support of our
research and development activities.
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. The proprietary technologies of our
OVP segment and Heska AG, our subsidiary in Switzerland, are primarily protected through trade secret protection of, for example, our manufacturing
processes in these areas.
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We actively seek patent protection both in the United States and abroad. Our issued and pending patent portfolios primarily relate to heartworm
control, flea control, allergy, infectious disease vaccines, diagnostic and detection tests, immunomodulators, instrumentation, nutrition, pain control and
vaccine delivery technologies. As of December 31, 2007, we owned, co-owned or had rights to 166 issued U.S. patents and 40 pending U.S. patent
applications expiring at various dates from February 2011 to November 2022. Applications corresponding to pending U.S. applications have been or will be
filed in other countries. Our corresponding foreign patent portfolio as of December 31, 2007 included 75 issued patents and 44 pending applications in
various foreign countries.
We have entered into a number of out-licensing agreements to realize additional value in certain of our intellectual property assets in fields outside of
our core focus. For example, in 1998 we obtained rights from ImmuLogic Pharmaceutical Corporation to an intellectual property portfolio including a
number of major allergens and the genes that encode them for use in veterinary as well as human allergy applications. In order to realize additional value
from that portfolio, we granted licenses and options for licenses to several companies for the use of those allergens in the fields of diagnosis and treatment of
human allergy. In December 2006, we sold this intellectual property portfolio to Allergopharma Joachim Ganzer KG and obtained an exclusive license to
veterinary rights for this intellectual property portfolio as part of the agreement.
We also have obtained exclusive and non-exclusive licenses for numerous other patents held by academic institutions and biotechnology and
pharmaceutical companies.
Seasonality
We expect the last six months of the year will outperform the first half of the year, both in terms of revenue and profitability. We expect to
experience less seasonality than we have in the past due to factors including increased instrument consumable revenue, which does not tend to be seasonal,
and changes in the timing of certain product promotions.
Government Regulation
Although the majority of our product revenue is from the sale of unregulated items, many of our products or products that we may develop are, or
may be, 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 to achieve and the 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 major U.S. government agencies that regulate animal
health products:
· USDA. Vaccines and certain single use, 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, single use, point-of-care diagnostics can
typically be licensed by the USDA in about two years, 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
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safety of the product in laboratory and target 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
livestock animals, as food safety issues relating to tissue residue levels are not applicable.
· 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 products, numerous regulatory requirements typically 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 products such as our E.R.D.-HEALTHSCREEN Urine Tests and our
ALLERCEPT panels, as well as other reference lab tests, are not regulated by either the USDA or FDA. Similarly, none of our veterinary instruments
requires regulatory approval to be marketed and sold in the United States. 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 subject to foreign regulatory requirements governing regulatory licensing and approval for many of our products. Licensing and
approval by comparable regulatory authorities of foreign countries must be obtained before we can market products in those countries. Product licensing
approval processes and requirements vary 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; in
Japan, which is governed by the Japanese Ministry of Agriculture, Forestry and Fisheries, or MAFF; and in certain European and other Asian countries
requiring such approval.
Core Companion Animal Health products previously discussed which have received regulatory approval in the United States and/or elsewhere are
summarized below.
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Products
E.R.D.-HEALTHSCREEN Canine Urine Test
E.R.D.-HEALTHSCREEN Feline Urine Test
FELINE ULTRANASAL FVRC Vaccine
Country
United States
EU
Canada
Japan
United States
EU
Canada
Japan
United States
Canada
Regulated
No
No-in most countries
No
Yes
No
No-in most countries
No
Yes
Yes
Yes
Agency
Status
MAFF
Licensed
MAFF
USDA
CFIA
Licensed
Licensed
Licensed
FELINE ULTRANASAL FVRCP Vaccine
SOLO STEP CH
SOLO STEP CH Batch Test Strips
SOLO STEP FH
TRI-HEART Plus Heartworm Preventive
Competition
United States
Canada
United States
EU
Canada
Japan
United States
Canada
United States
United States
Japan
South Korea
Yes
Yes
Yes
No-in most countries
Yes
Yes
Yes
Yes
Yes
Yes
Yes
Yes
USDA
CFIA
USDA
CFIA
MAFF
USDA
CFIA
USDA
FDA
MAFF
NVRQS
Licensed
Licensed
Licensed
Licensed
Licensed
Licensed
Licensed
Licensed
Licensed
Licensed
Licensed
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. We also compete with independent, third-party distributors, including distributors who sell products under their
own private labels. In the point-of-care diagnostic testing market, our major competitors include IDEXX, Abaxis, Inc. and Synbiotics Corporation. The
products manufactured by our OVP segment for sale by third parties compete with similar products offered by a number of other companies, some of which
have substantially greater financial, technical, research and other resources than us and may have more established marketing, sales, distribution and service
organizations than our OVP segment’s customers. Companies with a significant presence in the animal health market such as Bayer AG, CEVA Santé
Animale, Merial Limited, Novartis AG, Pfizer Inc., Schering-Plough Corporation, Vétoquinol S.A., Virbac S.A. and Wyeth may be marketing or developing
products that compete with our products or would compete with them if successfully developed. These and other competitors and potential competitors may
have substantially greater financial, technical, research and other resources and larger, more established marketing, sales, distribution and service
organizations than we do. Our competitors may offer broader product lines and have greater name recognition than we do. We believe that one of our largest
competitors, IDEXX, in effect prohibits its distributors from selling competitive products, including our diagnostic instruments and heartworm diagnostic
tests.
Environmental Regulation
In connection with our product development activities and manufacturing of our biological, pharmaceutical and diagnostic and detection 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
10
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, 2007, we and our subsidiaries employed 311 people, of whom 137 were focused in production and technical and logistical
services, including regulatory affairs, 106 in sales, marketing, customer support and instrumentation service, 58 in general administrative services, such as
accounting, and 10 in product development. 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.
Executive Officers
Our executive officers and their ages as of March 3, 2008 are as follows:
Name
Robert B. Grieve, Ph.D.
Jason A. Napolitano
Joseph H. Ritter, D.V.M.
Michael A. Bent
John R. Flanders
Michael J. McGinley, Ph.D.
G. Lynn Snodgrass
Nancy Wisnewski, Ph.D.
Age
56
39
59
53
51
47
38
45
Position
Chairman of the Board and Chief Executive Officer
Executive Vice President and Chief Financial Officer
Executive Vice President, Global Business Operations
Vice President, Principal Accounting Officer and Controller
Vice President, General Counsel and Corporate Secretary
Vice President, Operations and Technical Affairs and General Manager, Heska
Des Moines
Vice President, Sales
Vice President, Product Development and Technical Customer Service
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.
Jason A. Napolitano was appointed Executive Vice President and Chief Financial Officer in May 2002. He also served as our Secretary from
May 2002 to December 2006. Prior to joining us formally, he was a financial consultant. From 1990 to 2001, Mr. Napolitano held various positions at Credit
Suisse First Boston, an investment bank, including Vice President in health care investment banking and Director in mergers and acquisitions. He holds a
B.S. degree from Yale University.
Joseph H. Ritter, D.V.M. was appointed Executive Vice President, Global Business Operations in March 2006. From February 2004 to
February 2006, he was Vice President, Marketing and International Business. Also during part of 2004 Dr. Ritter was responsible for our sales force. From
October 2002 until February 2004, he was Heska’s Vice President of International Business. From 1995 until 2002 he was President and owner of Veterinary
Specialties, Inc., a veterinary products distribution company. From 1984
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to 1995, Dr. Ritter held various senior positions at Mallinckrodt Veterinary, Inc. including Group Vice President, America and Asia. He holds a Doctorate of
Veterinary Medicine from the University of Illinois and a M.B.A. with an emphasis on international finance from the American Graduate School of
International Management.
Michael A. Bent was appointed Vice President, Principal Accounting Officer and Controller in May 2002. From September 1999 until April 2002,
he was Corporate Controller. From November 1993 until September 1999, Mr. Bent was Director, Accounting Operations at Coors Brewing Company.
Mr. Bent holds a B.S. in accounting from the University of Wyoming. Mr. Bent is a CPA in Colorado and Wyoming.
John R. Flanders was appointed Vice President, General Counsel and Corporate Secretary in December 2006. Prior to joining Heska, Mr. Flanders
held the same title at Orange Glo International, Inc., a privately held consumer products company, from 2002 to 2006. Mr. Flanders held various positions at
Coors Brewing Company from 1988 to 2002, including Vice President, Deputy General Counsel. Mr. Flanders holds a Juris Doctor from the University of
Denver, College of Law and a B.A. from Colorado State University. Mr. Flanders is admitted to practice law in the State and Federal courts of Colorado.
Michael J. McGinley, Ph.D. was appointed Vice President, Operations and Technical Affairs and General Manager, Heska Des Moines in
January 2002. He was Vice President, Scientific Affairs for our Diamond Animal Health, Inc. subsidiary from January 1999 to January 2002 and also served
as Director, Research and Development from June 1997 to January 1999. Prior to joining Heska, Dr. McGinley held positions with Bayer Animal Health and
Fort Dodge Laboratories. He holds both a Doctorate and M.S. degree in Immunobiology from Iowa State University.
G. Lynn Snodgrass was appointed Vice President, Sales in January 2007. From January 2005 to December 2006, he was Senior Director, Sales for
Heska Corporation. He held various sales positions at Heska from August 1999 through December 2004. Prior to joining Heska, he held various sales
positions with Luitpold Pharmaceuticals, GPC Incorporated, Merck and Company and TV Fanfare, Inc. Mr. Snodgrass holds a B.S. in Biomedical Science
from Texas A&M University.
Nancy Wisnewski, Ph.D., was appointed Vice President, Product Development and Technical Customer Service in December 2006. From
January 2006 to November 2006, Dr. Wisnewski was Vice President, Research and Development. She served as Senior Director, Research and Development
from April 2001 until December 2005. Dr. Wisnewski held various positions in Heska’s Research and Development organization between 1993 and 2001.
She received a Doctorate in Parasitology/Biochemistry from the University of Notre Dame and a B.S. in Biology from Lafayette College.
Item 1A. Risk Factors
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 rely substantially on third-party suppliers. The loss of products or delays in product availability from one or more third-party supplier could
substantially harm our business.
To be successful, we must contract for the supply of, or manufacture ourselves, current and future products of appropriate quantity, quality and cost.
Such products must be available on a timely basis and be in compliance with any regulatory requirements. Failure to do so could substantially harm our
business.
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We rely on third party suppliers to manufacture those products we do not manufacture ourselves. Proprietary products provided by these suppliers
represent a majority of our product revenue. We currently rely on these suppliers for our veterinary instruments and consumable supplies for these
instruments, for our point-of-care diagnostic and other tests, for the manufacture of our allergy immunotherapy treatment products as well as for the
manufacture of other products. Major suppliers who sell us proprietary products which are responsible for more than 5% of our trailing 12-month product
revenue are Arkray, Boule, i-STAT Corporation (a unit of Abbott Laboratories) and Quidel. None of these suppliers sell us proprietary products which are
responsible for more than 20% of our trailing 12-month product revenue, although the proprietary products of one is responsible for more than 15% of our
revenue and two others are responsible for more than 10% of our revenue. We often purchase products from our suppliers under agreements that are of
limited duration or potentially can be terminated on an annual basis. In the case of our veterinary diagnostic instruments, we are typically entitled to non-
exclusive access to consumable supplies for a defined period upon expiration of exclusive rights, which could subject us to competitive pressures in the
period of non-exclusive access. Although we believe we have arrangements to ensure supply of our major product offerings in the marketplace through at
least the end of 2008, there can be no assurance that our suppliers will meet their obligations under any agreements we may have in place with them or that
we will be able to compel them to do so. Risks of relying on suppliers include:
· Loss of exclusivity. In the case of our veterinary diagnostic instruments, if we are entitled to non-exclusive access to consumable supplies for a
defined period upon expiration of exclusive rights, we may face increased competition from a third party with similar non-exclusive access or
our former supplier, which could cause us to lose customers and/or significantly decrease our margins and could significantly affect our financial
results. In addition, current agreements, or agreements we may negotiate in the future, with suppliers may require us to meet minimum annual
sales levels to maintain our position as the exclusive distributor of these products. We may not meet these minimum sales levels and maintain
exclusivity over the distribution and sale of these products. If we are not the exclusive distributor of these products, competition may increase
significantly, reducing our revenues and/or decreasing our margins.
· The loss of product rights upon expiration or termination of an existing agreement. Unless we are able to find an alternate supply of a similar
product, we would not be able to continue to offer our customers the same breadth of products and our sales and operating results would likely
suffer. In the case of an instrument supplier, we could also potentially suffer the loss of sales of consumable supplies, which would be
significant in cases where we have built a significant installed base, further harming our sales prospects and opportunities. Even if we were able
to find an alternate supply for a product to which we lost rights, we would likely face increased competition from the product whose rights we
lost being marketed by a third party or the former supplier and it may take us additional time and expense to gain the necessary approvals and
launch an alternative product.
· High switching costs. In our diagnostic instrument products we could face significant competition and lose all or some of the consumable
revenues from the installed base of those instruments if we were to switch to a competitive instrument. If we need to change to other
commercial manufacturing contractors for certain of our regulated products, additional regulatory licenses or approvals must be obtained for
these contractors prior to our use. This would require new testing and compliance inspections prior to sale thus resulting in potential delays.
Any new manufacturer would have to be educated in, or develop substantially equivalent processes necessary for the production of our
products. We likely would have to train our sales force, distribution network employees and customer support organization on the new product
and spend significant funds marketing the new product to our customer base.
13
· Inability to meet minimum obligations. Current agreements, or agreements we may negotiate in the future, may commit us to certain minimum
purchase or other spending obligations. It is possible we will not be able to create the market demand to meet such obligations, which could
create a drain on our financial resources and liquidity. Some such agreements may require minimum purchases and/or sales to maintain product
rights and we may be significantly harmed if we are unable to meet such requirements and lose product rights.
· The involuntary or voluntary discontinuation of a product line. Unless we are able to find an alternate supply of a similar product in this or
similar circumstances with any product, we would not be able to continue to offer our customers the same breadth of products and our sales
would likely suffer. Even if we are able to identify an alternate supply, it may take us additional time and expense to gain the necessary
approvals and launch an alternative product, especially if the product is discontinued unexpectedly. An example of such a situation arose in
2006 when Dolphin Medical Inc. (a majority-owned subsidiary of OSI Systems, Inc.) discontinued production of our VET/OX G2 DIGITAL
Monitor as part of an agreement with Masimo Corporation to settle a patent dispute.
· Inconsistent or inadequate quality control. We may not be able to control or adequately monitor the quality of products we receive from our
suppliers. Poor quality items could damage our reputation with our customers.
· Limited capacity or ability to scale capacity. If market demand for our products increases suddenly, our current suppliers 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. If we consistently generate more demand for a product than a given supplier is capable of handling, it could lead to large
backorders and potentially lost sales to competitive products that are readily available. This could require us to seek or fund new sources of
supply, which may be difficult to find unless it is under terms that are less advantageous.
· Regulatory risk. Our manufacturing facility and those of some of our third party suppliers 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 suppliers’ compliance with these
regulations and standards. Violations could potentially lead to interruptions in supply that could cause us to lose sales to readily available
competitive products.
· Developmental delays. We may experience delays in the scale-up quantities needed for product development that could delay regulatory
submissions and commercialization of our products in development, causing us to miss key opportunities.
· Limited intellectual property rights. We typically do not have intellectual property rights, or may have to share intellectual property rights, to the
products themselves and any improvements to the manufacturing processes or new manufacturing processes for our products.
Potential problems with suppliers such as those discussed above could substantially decrease sales, lead to higher costs, damage our reputation with
our customers due to factors such as poor quality goods or delays in order fulfillment, resulting in our being unable to effectively sell our products and
substantially harm our business.
14
We may be unable to successfully market and sell our products.
We may not successfully develop and maintain marketing and/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 sales strategy is unsuccessful, our ability to sell our products will be negatively
impacted and our revenues will decrease.
The market for companion animal healthcare products is highly fragmented. Because our Core Companion Animal Health proprietary products are
generally available only to veterinarians or by prescription and our medical instruments require technical training to operate, we ultimately sell our Core
Companion Animal Health products predominantly to or through veterinarians. The acceptance of our products by veterinarians is critical to our success.
Changes in our ability to obtain or maintain such acceptance or changes in veterinary medical practice could significantly decrease our anticipated sales.
We currently sell most of our Core Companion Animal Health products in the United States to veterinarians through an outside sales force of
approximately 29 individuals, an inside sales force of approximately 25 individuals, approximately 12 independent third-party distributors who carry our full
distribution product line and approximately 6 independent third-party distributors who carry portions of our distribution product line. To be successful in
these endeavors, we will have to effectively market our products and continue to develop and train our direct sales force as well as the sales personnel of our
independent third-party distributors.
Independent third-party distributors may be effective in increasing sales of our products to veterinarians, although we would expect a corresponding
lower gross margin as such distributors typically buy products from us at a discount to end user prices. It is possible new or existing independent third-party
distributors could cannibalize our direct sales efforts and lower our total gross margin. For us to be effective when working with an independent third-party
distributor, the distributor must agree to market and/or sell our products and we must provide proper economic incentives to the distributor as well as contend
effectively for the distributor’s time and focus given other products the distributor may be carrying, potentially including those of our competitors. If we fail
to be effective with new or existing independent third-party distributors, our financial performance may suffer. In addition, most of our independent third-
party distributor agreements can be terminated on 60 days notice and we believe that IDEXX, one of our largest competitors, in effect prohibits its distributors
from selling competitive products, including our diagnostic instruments and heartworm diagnostic tests. We believe this restriction limits our ability to
engage national independent third-party distributors to sell our full distribution line of products. In the second quarter of 2005, our largest distributor
purchased an IDEXX distributor and subsequently informed us that they no longer would carry our instruments and heartworm diagnostic tests. We believe
IDEXX in effect prohibits this distributor from carrying our diagnostic instruments and heartworm diagnostic tests as a condition for having access to buy the
IDEXX product line.
Our future revenues depend on successful product development, commercialization and/or market acceptance, any of which can be slower than
we expect or may not occur.
The product development and regulatory approval process for many of our potential products is extensive and may take substantially longer than we
anticipate. Research projects may fail. New products that we are developing for the veterinary marketplace may not perform up to our expectations.
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 other product candidates. If we fail to
successfully develop new products and bring them to market in a timely manner, our ability to generate additional revenue will decrease.
15
Even if we are successful in the development of a product or obtain rights to a product from a third-party supplier, we may experience delays in
commercialization and/or market acceptance of the product. For example, veterinarians may be slow to adopt a product or there may be delays in producing
large volumes of a product. The former is particularly likely where there is no comparable product available or historical use of such a product. For example,
while we believe our E.R.D.-HEALTHSCREEN urine tests for dogs and cats represent a significant scientific breakthrough in companion animal annual
health examinations, these products have achieved significantly lower market acceptance than we anticipated. The ultimate adoption of a new product by
veterinarians, the rate of such adoption and the extent veterinarians choose to integrate such a product into their practice are all important factors in the
economic success of one of our new products and are factors that we do not control to a large extent. If our products do not achieve a significant level of
market acceptance, demand for our products will not develop as expected and our revenues will be lower than we anticipate.
Many of our expenses are fixed and if factors beyond our control cause our revenue to fluctuate, this fluctuation could cause greater than
expected losses, cash flow and liquidity shortfalls.
We believe that our future operating results will fluctuate on a quarterly basis due to a variety of factors which are generally beyond our control,
including:
· supply of products from third-party suppliers or termination, cancellation or expiration of such relationships;
· the introduction of new products by our competitors or by us;
· competition and pricing pressures from competitive products;
· our ability to maintain relationships with independent third-party distributors;
· large customers failing to purchase at historical levels, including changes in independent third-party distributor purchasing patterns and inventory
levels;
· fundamental shifts in market demand;
· manufacturing delays;
· shipment problems;
· information technology problems, which may prevent us from conducting our business effectively, or at all, and may also raise our costs;
· regulatory and other delays in product development;
· product recalls or other issues which may raise our costs;
· changes in our reputation and/or market acceptance of our current or new products; and
· changes in the mix of products sold.
We have high operating expenses for personnel 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.
16
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 maintain sustained profitability.
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. We also compete with independent, third-party distributors, including distributors who sell products under their
own private labels. In the point-of-care diagnostic testing market, our major competitors include IDEXX, Abaxis, Inc. and Synbiotics Corporation. The
products manufactured by our OVP segment for sale by third parties compete with similar products offered by a number of other companies, some of which
have substantially greater financial, technical, research and other resources than us and may have more established marketing, sales, distribution and service
organization’s than our OVP segment’s customers. Competitors may have facilities with similar capabilities to our OVP segment, which they may operate
and sell at a lower unit price to customers than our OVP segment does, which could cause us to lose customers. Companies with a significant presence in the
companion animal health market, such as Bayer AG, CEVA Santé Animale, Merial Limited, Novartis AG, Pfizer Inc., Schering-Plough Corporation,
Vétoquinol S.A., Virbac S.A. and Wyeth, may be marketing or developing products that compete with our products or would compete with them if
developed. These and other competitors and potential competitors may have substantially greater financial, technical, research and other resources and larger,
more established marketing, sales and service organizations than we do. Our competitors may 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 health care
market. Moreover, we may not have the financial resources, technical expertise or marketing, sales or support capabilities to compete successfully. We
believe that one of our largest competitors, IDEXX, in effect prohibits its distributors from selling competitive products, including our diagnostic instruments
and heartworm diagnostic tests. If we fail to compete successfully, our ability to achieve sustained profitability will be limited and sustained profitability, or
profitability at all, may not be possible.
If the third parties to whom we granted substantial marketing rights for certain of our existing products or future products under development
are not successful in marketing those products, then our sales and financial position may suffer.
Our agreements with our corporate marketing partners generally contain no or small minimum purchase requirements in order for them to maintain
their exclusive or co-exclusive marketing rights. We are party to an agreement with SPAH which grants distribution and marketing rights in the U.S. for our
canine heartworm preventive product, TRI-HEART Plus Chewable Tablets. AgriLabs has the exclusive right to sell certain of our bovine vaccines in the
United States, Africa and Mexico. Novartis Japan markets and distributes our SOLO STEP CH heartworm test and our E.R.D. Healthscreen urine test
products in Japan under an exclusive arrangement. One or more of these marketing partners may not devote sufficient resources to marketing our products.
Furthermore, there may be nothing to prevent these partners from pursuing alternative technologies or products that may compete with our products in current
or future agreements. 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. In addition, both our agreements with SPAH and AgriLabs require us to potentially pay
penalties if we are unable to supply product over an extended period of time.
17
We have historically not consistently generated positive cash flow from operations, may need additional capital and any required capital may not
be available on reasonable terms or at all.
If our actual performance deviates from our operating plan, which anticipates we will be profitable in 2008, we may be required to raise additional
capital in the future. If necessary, we expect to raise these additional funds by the sale of equity securities or refinancing loans currently outstanding on assets
with historical appraised values in excess of related debt. There is no guarantee that additional capital will be available from these sources on reasonable
terms, if at all, and certain of these sources may require approval by existing lenders. The public markets may be unreceptive to equity financings and we
may not be able to obtain additional private equity or debt financing. Any equity financing would likely be dilutive to stockholders and additional debt
financing, if available, may include restrictive covenants and increased interest rates that would limit our currently planned operations and strategies. If we
relinquish rights to certain of our intellectual property, or sell certain of our assets, products or marketing rights it may limit our future prospects.
Additionally, funds we expect to be available under our existing revolving line of credit may not be available and other lenders could refuse to provide us with
additional debt financing. Furthermore, even if additional capital is available, it may not be of the magnitude required to meet our needs under these or other
scenarios. If additional funds are required and are not available, it would likely have a material adverse effect on our business, financial condition and our
ability to continue as a going concern.
Our stock price has historically experienced high volatility, which may increase in the future, and which could 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 microcap and
smallcap companies have in the past been, and can in the future be expected to be, especially volatile. During the past 12 months, our closing stock price has
ranged from a low of $1.48 to a high of $2.90. 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:
· stock sales by large stockholders or by insiders;
· our quarterly operating results, including as compared to our revenue, earnings or other guidance and in comparison to historical results;
· termination, cancellation or expiration of our third-party supplier relationships;
· announcements of technological innovations or new products by our competitors or by us;
· litigation;
· regulatory developments, including delays in product introductions;
· developments or disputes concerning patents or proprietary rights;
· availability of our revolving line of credit and compliance with debt covenants;
· releases of reports by securities analysts;
· changes in regulatory policies;
· 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, it is likely
18
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.
We often depend on third parties for products we intend to introduce in the future. If our current relationships and collaborations are not
successful, we may not be able to introduce the products we intend to in the future.
We are often dependent on third parties and collaborative partners to successfully and timely perform research and development activities to
successfully develop new products. For example, we jointly developed point-of-care diagnostic products with Quidel Corporation. In other cases, we have
discussed Heska marketing in the veterinary market an instrument being developed by a third party for use in the human health care market. In the future, one
or more of these third parties or collaborative partners may not complete research and development activities in a timely fashion, or at all. Even if these third
parties are successful in their research and development activities, we may not be able to come to an economic agreement with them. If these third parties or
collaborative partners fail to complete research and development activities, fail to complete them in a timely fashion, or if we are unable to negotiate
economic agreements with such third parties or collaborative partners, our ability to introduce new products will be impacted negatively and our revenues
may decline.
We may not be able to continue to achieve sustained profitability or increase profitability on a quarterly or annual basis.
Prior to 2005, we incurred net losses on an annual basis since our inception in 1988 and, as of December 31, 2007, we had an accumulated deficit of
$173.2 million. We have achieved only one quarter with income before income taxes greater than $1.5 million. Accordingly, relatively small differences in
our performance metrics may cause us to lose money in future periods. Our ability to continue to be profitable in future periods will depend, in part, on our
ability to increase sales in our Core Companion Animal Health segment, including maintaining and growing our installed base of instruments and related
consumables, to maintain or increase gross margins and to limit the increase in our operating expenses to a reasonable level as well as avoid or effectively
manage any unanticipated issues. We may not be able to sustain or increase profitability on a quarterly or annual basis. If we cannot achieve or sustain
profitability for an extended period, we may not be able to fund our expected cash needs, including the repayment of debt as it comes due, or continue our
operations.
Our common stock is listed on the Nasdaq Capital Market and we may not be able to maintain that listing, which may make it more difficult for
you to sell your shares.
Our common stock is listed on the Nasdaq Capital Market. The Nasdaq has several quantitative and qualitative requirements companies must
comply with to maintain this listing, including a $1.00 minimum bid price. While we believe we are currently in compliance with all Nasdaq requirements,
we have not always been able to maintain compliance in the past and there can be no assurance we will maintain compliance in the future. If we are delisted
from the Nasdaq Capital Market, our common stock may be considered a penny stock under the regulations of the SEC and would therefore be subject to
rules that impose additional sales practice requirements on broker-dealers who sell our securities. The additional burdens imposed upon broker-dealers may
discourage broker-dealers from effecting transactions in our common stock, which could severely limit market liquidity of the common stock and your ability
to sell our securities in the secondary market. This lack of liquidity would also make it more difficult for us to raise capital in the future.
19
Interpretation of existing legislation, regulations and rules or implementation of future legislation, regulations and rules could cause our costs to
increase or could harm us in other ways.
The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) has increased our required administrative actions as a public company. The increase in general
and administrative costs of complying with Sarbanes-Oxley will depend on how it is interpreted over time. Of particular concern are the level and timing of
standards for internal control evaluation and reporting adopted under Section 404 of Sarbanes-Oxley. If our regulators and/or auditors adopt or interpret more
stringent standards than we are anticipating, we and/or our auditors may be unable to conclude that our internal controls over financial reporting are designed
and operating effectively, which could adversely affect investor confidence in our financial statements. Even if we and our auditors are able to conclude that
our internal controls over financial reporting are designed and operating effectively in such a circumstance, our general and administrative costs are likely to
increase. Thus, our general and administrative costs increased in 2007 from what they would have been in the absence of Sarbanes-Oxley and may increase
in the future. In addition, actions by other entities, such as enhanced rules to maintain our listing on the Nasdaq Capital Market, could also increase our
general and administrative costs or have other adverse effects on us, as could further legislative, regulatory or rule-making action or more stringent
interpretations of existing legislation, regulations and rules.
The loss of significant customers could harm our operating results.
Sales to no single customer accounted for more than 10% of total revenue for the years ended December 31, 2007, 2006 or 2005. No single
customer accounted for more than 10% of our consolidated accounts receivable as of December 31, 2007. SPAH accounted for approximately 13% of our
consolidated accounts receivable at December 31, 2006. The loss of significant customers who, for example, are historically large purchasers or who are
considered leaders in their field could damage our business and financial results.
We may face costly legal disputes, including related to our intellectual property or technology or that of our suppliers or collaborators.
We may face legal disputes related to our business. Even if meritless, these disputes may require significant expenditures on our part and could
entail a significant distraction to members of our management team or other key employees. A legal dispute leading to an unfavorable ruling or settlement
could have significant material adverse consequences on our business.
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 likely to be costly, time-consuming and distracting. As
is typical in our industry, from time to time we and our collaborators and suppliers have received, and may in the future receive, notices from third parties
claiming infringement and invitations to take licenses under third party patents. Any legal action against us or our collaborators or suppliers may require us
or our collaborators or suppliers to obtain one or more licenses in order to market or manufacture affected products or services. However, we or our
collaborators or suppliers may not be able to obtain licenses for technology patented by others on commercially reasonable terms, or at all, may not be able to
develop alternative approaches if unable to obtain licenses or current and future licenses may not be adequate, any of which could substantially harm our
business. An example of such a situation arose in 2006 when Dolphin Medical Inc. (a majority-owned subsidiary of OSI Systems, Inc.) discontinued
production of our VET/OX G2 DIGITAL Monitor as part of an agreement with Masimo Corporation to settle a patent dispute.
20
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 likely 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.
Obtaining and maintaining regulatory approvals in order to market our regulated products may be costly and delay the marketing and sales of
our products.
Many of the products we develop, market or manufacture are subject to extensive regulation by one or more of the USDA, the FDA, the EPA and
foreign and other regulatory authorities. These regulations govern, among other things, the development, testing, manufacturing, labeling, storage, pre-
market approval, advertising, promotion and sale of some 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.
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. Such delays in approval may cause us to forego a significant portion of a
new product’s sales in its first year due to seasonality and advanced booking periods associated with certain products. 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 facilities and/or the facilities of our third party manufacturers
conform to current Good Manufacturing Practices and other requirements. 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, but not limited to, warning letters, manufacturing suspensions, 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. In addition, certain of our agreements require us to pay
penalties if we are unable to supply products, including for failure to maintain regulatory approvals. Any of these events, alone or in unison, could damage
our business.
If we are unable to maintain various financial and other covenants under our credit facility agreement we will be unable to borrow any funds
under the agreement and fund our operations.
Under our credit and security agreement with Wells Fargo Bank, National Association (“Wells Fargo”) we are required to comply with various
financial and non-financial covenants in order to borrow under the agreement. The availability of borrowings under this agreement is essential to continue to
fund our operations. Among the financial covenants is a requirement to maintain minimum liquidity (cash plus excess borrowing base) of $1.5 million.
Additional requirements include covenants for minimum capital monthly and minimum net income quarterly. Although we believe we will be able to
maintain compliance with all these covenants and any covenants we may negotiate in the future, there can be no assurance thereof. We have not always been
able to maintain compliance with all covenants under our credit and security agreement in the past. Although Wells Fargo granted us a waiver of non-
compliance in each case, there can be no
21
assurance we will be able to obtain similar waivers or other modifications if needed in the future on economic terms, if at all.
Failure to comply with any of the covenants, representations or warranties, or failure to modify them to allow future compliance, could result in our
being in default and could cause all outstanding borrowings under our credit and security agreement to become immediately due and payable, or impact our
ability to borrow under the agreement. We intend to rely on available borrowings under the credit and security agreement to fund our operations in the
future. If we are unable to borrow funds under this agreement, we will need to raise additional capital from other sources to continue our operations, which
capital may not be available on acceptable terms, or at all.
Changes to financial accounting standards may affect our results of operations and cause us to change our business practices.
We prepare our financial statements in conformance with United States generally accepted accounting principles, or GAAP. These accounting
principles are established by and are subject to interpretation by the SEC, the Financial Accounting Standards Board, the American Institute of Certified
Public Accountants, and others who interpret and create accounting policies. A change in those policies can have a significant effect on our reported results
and may affect our reporting of transactions completed before a change is made effective. Changes to those rules may adversely affect our reported financial
results or the way we conduct our business.
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 other key personnel. The loss of the services of members
of our senior management or other key personnel may significantly delay or prevent the achievement of our business objectives. Although we have an
employment agreement with many of these individuals, all are at-will employees, which means that either the employee or Heska may terminate employment
at any time without prior notice. If we lose the services of, or fail to recruit, key personnel, the growth of our business could be substantially impaired. We
do not maintain key person life insurance for any of our senior management or key personnel.
We may face product returns and product liability litigation in excess of or not covered by our insurance coverage or indemnities and/or
warranties from our suppliers. 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 substantially 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, be required to make substantial payments which
could exceed our financial capacity and/or lose or fail to achieve market acceptance.
22
We may be held liable for the release of hazardous materials, which could result in extensive clean up costs or otherwise harm our business.
Certain of our products and development programs produced at our Des Moines, Iowa facility involve the controlled use of hazardous and
biohazardous materials, including chemicals and infectious disease agents. 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, significant remediation
costs and potential legal liability. In addition, we may incur substantial costs to comply with environmental regulations if we choose to expand our
manufacturing capacity.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 2. Properties.
Our principal administrative and research and development activities are located in Loveland, Colorado. We currently lease approximately 60,000
square feet at a facility in Loveland, Colorado under an 18-year lease agreement which expires in 2023. Our principal production facility 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 testing
products, located in Carlisle, Iowa. Our European facility in Fribourg, Switzerland is leased under an agreement which expires in 2012.
Item 3. Legal Proceedings.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of stockholders during the fourth quarter ended December 31, 2007.
23
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock is quoted on the Nasdaq Capital Market under the symbol “HSKA.” The following table sets forth the high and low closing
prices for our common stock as reported by the Nasdaq Capital Market for the periods indicated below.
2006
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2007
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
2008
First Quarter (through February 29)
High
$
1.71
1.18
1.86
1.78
1.73
2.54
2.90
2.34
2.10
Low
$
1.13
1.02
1.01
1.50
1.56
1.67
1.88
1.57
1.48
As of February 29, 2008, there were approximately 296 holders of record of our common stock and approximately 2,980 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 than dividends payable solely in stock, under the terms of our credit facility. We currently intend to retain future
earnings, if any, for the development of our business.
Equity Compensation Plan Information
The following table sets forth information about our common stock that may be issued upon exercise of options and rights under all of our equity
compensation plans as of December 31, 2007, including the 1988 Stock Option Plan, the 1997 Stock Incentive Plan, the 2003 Stock Incentive Plan and the
1997 Employee Stock Purchase Plan. Our stockholders have approved all of these plans.
Plan Category
Equity Compensation Plans
Approved by Stockholders
Equity Compensation Plans Not
Approved by Stockholders
Total
(a) Number of Securities
to be Issued Upon
Exercise of Outstanding
Options and Rights
(b) Weighted-Average
Exercise Price of
Outstanding Options
and Rights
(c) Number of Securities
Remaining Available for Future
Issuance Under Equity
Compensation Plans (excluding
securities reflected in column (a))
12,118,417
None
12,118,417
$
$
24
1.40
None
1.40
STOCK PRICE PERFORMANCE GRAPH
4,478,553
None
4,478,553
The following graph provides a comparison over the five-year period ended December 31, 2007 of the cumulative total stockholder return from a
$100 investment in the Company’s common stock with the Center for Research in Securities Prices Total Return Index for Nasdaq Medical Devices,
Instruments and Supplies, Manufacturers and Distributors Stocks (the “Nasdaq Medical Devices Index”), the CRSP Total Return Index for Nasdaq
Pharmaceutical Stocks (the “Nasdaq Pharmaceutical Index”) and the CRSP Total Return Index for the Nasdaq Stock Market (U.S. and Foreign) (the “Nasdaq
U.S. & Foreign Index”).
Comparison of Cumulative Total Return Among Heska Corporation,
the Nasdaq Medical Devices Index, the Nasdaq Pharmaceutical Index and the Nasdaq U.S. and
Foreign Index
25
Item 6. Selected Consolidated Financial Data.
The following consolidated statement of operations and consolidated 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.
Consolidated Statement of Operations Data:
Revenue:
Products, net of sales returns and allowances
Research, development and other
Total revenue
Cost of revenue:
Cost of products sold
Cost of research, development and other
Total cost of revenue
Gross profit
Operating expenses:
Selling and marketing
Research and development
General and administrative
Restructuring expenses, (gain) on sale of assets and other
Total operating expenses
Income (loss) from operations
Interest and other expense, net
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Basic net income (loss) per share
Diluted net income (loss) per share
Shares used for basic net income (loss) per share
Shares used for diluted net income (loss) per share
Consolidated Balance Sheet Data:
2003
Year Ended December 31,
2006
2005
2004
(in thousands, except per share amounts)
2007
$
$
64,033
1,292
65,325
$
65,687
2,004
67,691
$
67,549
1,888
69,437
$
71,815
3,245
75,060
80,807
1,528
82,335
38,399
626
39,025
42,253
729
42,982
42,515
1,095
43,610
43,000
1,414
44,414
48,874
274
49,148
26,300
24,709
25,827
30,646
33,187
15,750
6,146
7,083
515
29,494
(3,194 )
214
(3,408 )
51
(3,459 ) $
(0.07 ) $
(0.07 ) $
48,115
48,115
15,616
5,891
7,442
—
28,949
(4,240 )
575
(4,815 )
—
(4,815 ) $
(0.10 ) $
(0.10 ) $
49,029
49,029
14,020
3,749
7,187
—
24,956
871
774
97
(185 )
282
0.01
0.01
49,650
50,438
$
$
$
14,356
3,483
9,887
(155 )
27,571
3,075
1,041
2,034
206
1,828
0.04
0.03
50,347
52,932
$
$
$
16,109
2,679
8,925
(47 )
27,666
5,521
588
4,933
(29,875 )
34,808
0.68
0.63
51,097
55,509
$
$
$
Cash and cash equivalents
Total current assets
Total assets
Line of credit
Current portion of long-term debt and capital leases
Total current liabilities
Long-term debt and capital leases
Long-term deferred revenue and other
Total stockholders’ equity
$
4,877
28,717
38,896
7,528
783
18,516
1,746
11,978
6,656
$
4,982
28,442
38,724
10,375
302
23,269
1,466
11,410
2,579
$
5,231
26,845
36,784
9,453
1,263
20,722
2,703
10,126
3,233
$
5,275
30,652
38,495
8,022
1,275
21,980
1,927
7,840
6,748
5,524
35,127
75,591
12,614
776
25,195
1,151
6,362
42,883
$
26
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 profit margins, selling and marketing expenses, research and development 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 Item 1A. “Risk Factors,” 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 March 3, 2008, and we undertake no duty to update this
information.
Overview
We develop, manufacture, market, sell and support veterinary products. Our business is comprised of two reportable segments, Core Companion
Animal Health, which represented 82% of 2007 product revenue, and Other Vaccines, Pharmaceuticals and Products, previously reported as Diamond Animal
Health, which represented 18% of 2007 product revenue.
The Core Companion Animal Health segment (“CCA”) includes diagnostic and other instruments and supplies as well as single use diagnostic and
other tests, pharmaceuticals and vaccines, primarily for canine and feline use.
Diagnostic and other instruments and supplies represented approximately 46% of our 2007 product revenue. Many products in this area involve
placing an instrument in the field and generating future revenue from consumables, including items such as supplies and service, as that instrument is used.
Approximately 32% of our 2007 product revenue resulted from the sale of such consumables to an installed base of instruments and approximately 14% of
our product revenue was from new hardware sales. A loss of or disruption in supply of consumables we are selling to an installed base of instruments could
substantially harm our business. All products in this area are supplied by third parties, who typically own the product rights and supply the product to us
under marketing and/or distribution agreements. In many cases, we have collaborated with a third party to adapt a human instrument for veterinary use.
Major products in this area include our handheld blood analysis instrument, our chemistry instrument and our hematology instrument and their affiliated
operating consumables. Revenue from products in these three areas, including revenue from consumables, represented approximately 41% of our 2007
product revenue.
Single use diagnostic and other tests, pharmaceuticals and vaccines and other products represented approximately 35% of our 2007 product revenue.
Since items in this area are single use by their nature, our aim is to build customer satisfaction and loyalty for each product, generate repeat annual sales from
existing customers and expand our customer base in the future. Products in this area are both supplied by third parties and provided by us. Major products in
this area include our heartworm diagnostic tests, our heartworm preventive, our allergy test kits, our allergy immunotherapy and our allergy diagnostic tests.
Combined revenue from heartworm-related products and allergy-related products represented approximately 32% of 2007 product revenue.
We consider the Core Companion Animal Health segment to be our core business and devote most of our management time and other resources to
improving the prospects for this segment. Maintaining a
27
continuing, reliable and economic supply of products we currently obtain from third parties is critical to our success in this area. Virtually all of our sales and
marketing expenses are in the Core Companion Animal Health segment. The majority of our research and development spending is dedicated to this
segment, as well. We strive to provide high value products and advance the state of veterinary medicine.
All our Core Companion Animal Health products are predominately sold ultimately to or through veterinarians. In many cases, veterinarians will
mark up their costs to the end user. The acceptance of our products by veterinarians is critical to our success. Core Companion Animal Health products are
sold directly by us as well as through independent third-party distributors and other distribution relationships, such as corporate agreements. Revenue from
direct sales, independent third-party distributors and other distribution relationships represented approximately 49%, 28% and 23% of Core Companion
Animal Health 2007 product revenue, respectively.
Independent third-party distributors may be effective in increasing sales of our products to veterinarians, although we would expect a corresponding
lower gross margin as such distributors typically buy products from us at a discount to end user prices. To be effective when working with an independent
third-party distributor, the distributor must agree to market and/or sell our products and we must provide proper economic incentives to the distributor as well
as contend effectively for the distributor’s time and focus given other products the distributor may be carrying, potentially including those of our competitors.
We believe that one of our largest competitors, IDEXX, in effect prohibits its distributors from selling competitive products, including our diagnostic
instruments and heartworm diagnostic tests. We believe the IDEXX restrictions limit our ability to engage national distributors to sell our full distribution
line of products.
We intend to sustain profitability through a combination of revenue growth, gross margin improvement and expense control. Accordingly, we
closely monitor product revenue growth trends in our Core Companion Animal Health segment. Product revenue in this segment grew 10% in 2007 as
compared to 2006 and has grown at a compounded annual growth rate of 18% since 1998, our first full year as a public company.
The Other Vaccines, Pharmaceuticals and Products segment (“OVP”) includes our 168,000 square foot USDA- and FDA-licensed production facility
in Des Moines, Iowa. We view this facility as a strategic asset which will allow us to control our cost of goods on any vaccines and pharmaceuticals that we
may commercialize in the future. We are increasingly integrating this facility with our operations elsewhere. For example, virtually all our U.S. inventory is
now stored at this facility and fulfillment logistics are managed there. CCA segment products manufactured at this facility are transferred at cost and are not
recorded as revenue for our OVP segment. We view OVP reported revenue as revenue primarily to cover the overhead costs of the facility and to generate
incremental cash flow to fund our Core Companion Animal Health segment.
Our OVP segment includes private label vaccine and pharmaceutical production, primarily for cattle but also for other animals including small
mammals and fish. All OVP products are sold by third parties under third party labels.
We have developed our own line of bovine vaccines that are licensed by the USDA. We have a long-term agreement with a distributor, Agri
Laboratories, Ltd., (“AgriLabs”), for the marketing and sale of certain of these vaccines which are sold primarily under the TitaniumÒ and MasterGuardÒ
brands which are registered trademarks of AgriLabs. This agreement generates a significant portion of our OVP segment’s revenue. Subject to certain
purchase minimums, under our long term agreement, AgriLabs has the exclusive right to sell the aforementioned bovine vaccines in the United States, Africa
and Mexico until December 2009. Our OVP segment also produces vaccines and pharmaceuticals for other third parties.
28
Additionally, we generate non-product revenues from licensing of technology, royalties and sponsored research and development projects for third
parties. We perform these sponsored research and development projects for both companion animal and livestock product purposes.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon the consolidated financial statements, which have been
prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and
liabilities as of the date of the financial statements, and the reported amounts of revenue and expense during the periods. These estimates are based on
historical experience and various other assumptions that we believe to be reasonable under the circumstances. We have identified those critical accounting
policies used in reporting our financial position and results of operations based upon a consideration of those accounting policies that involve the most
complex or subjective decisions or assessment. We consider the following to be our critical policies.
Revenue Recognition
We generate our revenue through the sale of products, licensing of technology product rights, royalties and sponsored research and
development. Our 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 recognized after both the goods are shipped to the customer and acceptance has been received, if required,
with an appropriate provision for estimated returns and allowances. We do not permit general returns of products sold. Certain of our products
have expiration dates. Our policy is to exchange certain outdated, expired product with the same product. We record an accrual for the
estimated cost of replacing the expired product expected to be returned in the future, based on our historical experience, adjusted for any known
factors that reasonably could be expected to change historical patterns, such as regulatory actions which allow us to extend the shelf life of our
products. Revenue from both direct sales to veterinarians and sales to independent third-party distributors are generally recognized when goods
are shipped. Our products are shipped complete and ready to use by the customer. 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. We reduce our product revenue
by the estimated cost of any rebates, allowances or similar programs, which are used as promotional programs.
Recording revenue from the sale of products involves the use of estimates and management judgment. We must make a determination at the
time of sale whether the customer has the ability to make payments in accordance with arrangements. While we do utilize past payment history,
and, to the extent available for new customers, public credit information in making our assessment, the determination of whether collectibility is
reasonably assured is ultimately a judgment decision that must be made by management. We must also make estimates regarding our future
obligation relating to returns, rebates, allowances and similar other programs.
29
License revenue under arrangements to sell or license product rights or technology rights is recognized as obligations under the agreement are
satisfied, which generally occurs over a period of time. Generally, licensing revenue is deferred and recognized over the estimated life of the
related agreements, products, patents or technology. Nonrefundable licensing fees, marketing rights and milestone payments received under
contractual arrangements are deferred and recognized over the remaining contractual term using the straight-line method. Revenue from
licensing technology and product rights is reported in our research, development and other revenue line item. An example of the former, i.e.
licensing technology, is a patent we own under which we have granted a third-party exclusive rights to the human healthcare market for the life
of the patent in exchange for an upfront payment and royalty payments on sales of any product based on the patent. The upfront payment will
be amortized over the life of the patent and reported along with any affiliated royalty payments in our research, development and other revenue
line item. An example of the latter, i.e. product rights, is our July 2002 agreement to license Intervet Inc. certain rights to patents, trademarks
and know-how for our Flu AVERT I.N. equine influenza vaccine, the world’s first intranasal influenza vaccine for horses. As we had no further
rights to manufacture, market or sell this vaccine without Intervet Inc.’s permission under this agreement, we are reporting the amortization of
the upfront payment we received in this agreement along with any affiliated royalty payments in our research, development and other revenue
line item. The upfront payment is being amortized over the estimated life of the product.
Recording revenue from license arrangements involves the use of estimates. The primary estimate made by management is determining the
useful life of the related agreement, product, patent or technology. We evaluate all of our licensing arrangements by estimating the useful life of
either the product or the technology, the length of the agreement or the legal patent life and defer the revenue for recognition over the
appropriate period.
Occasionally we enter into arrangements that include multiple elements. Such arrangements may include the licensing of technology and
manufacturing of product. In these situations we must determine whether the various elements meet the criteria to be accounted for as separate
elements. If the elements cannot be separated, revenue is recognized once revenue recognition criteria for the entire arrangement have been met
or over the period that our obligations to the customer are fulfilled, as appropriate. If the elements are determined to be separable, the revenue is
allocated to the separate elements based on relative fair value and recognized separately for each element when the applicable revenue
recognition criteria have been met. In accounting for these multiple element arrangements, we must make determinations about whether
elements can be accounted for separately and make estimates regarding their relative fair values.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts receivable based on client-specific allowances, as well as a general allowance. Specific
allowances are maintained for clients which are determined to have a high degree of collectibility risk based on such factors, among others, as:
(i) the aging of the accounts receivable balance; (ii) the client’s past payment experience; (iii) a deterioration in the client’s financial condition,
evidenced by weak financial condition and/or continued poor operating results, reduced credit ratings, and/or a bankruptcy filing. In addition to
the specific allowance, the Company maintains a general allowance for credit risk in its accounts receivable which is not covered by a specific
allowance. The general allowance is established based on such factors, among others, as: (i) the total balance of the outstanding accounts
receivable, including considerations of the aging categories of those accounts receivable; (ii) past history of uncollectible accounts receivable
write-offs; and (iii) the overall creditworthiness of the client base. A considerable amount of judgment is required in assessing the realizability
of
30
accounts receivable. Should any of the factors considered in determining the adequacy of the overall allowance change, an adjustment to the
provision for doubtful accounts receivable may be necessary.
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 of an inventory item is less than its recorded value. We review the carrying cost of our inventories by product
each quarter to determine the adequacy of our reserves for obsolescence. In accounting for inventories we must make estimates regarding the
estimated net realizable value of our inventory. This estimate is based, in part, on our forecasts of future sales and shelf life of product.
Capitalized Patent Costs
In the years ended December 31, 2006 and 2005, we deferred and capitalized certain costs, including payments to third-party law firms for
patent prosecution to expand the scope of our patents, related to the technology or patents underlying a variety of long-term licensing
agreements. We owned a portfolio of patents not then utilized in our product development or manufacture. Several entities paid upfront
licensing fees to utilize the technology supported by these patents in their own product development and commercialization efforts. Because we
believed that we had an obligation to protect the underlying patents, we deferred the revenue associated with these long-term agreements and the
direct and incremental costs of prosecuting the patents that supported the agreements. We use the term “patent prosecution” in this context in
the narrow sense often used by intellectual property professionals — to describe activities where we seek to expand the scope of existing patents
such as geographically, where we may look to expand patent protection into new countries, or for broader applications, such as for newly
contemplated uses or expanded claim breadth coverage of the technology defined by those licensing our technology within existing
geographies. A situation where a third party has violated our intellectual property rights by using our patented technology without permission
and we have filed a corresponding lawsuit would not meet this definition of “patent prosecution” and we would therefore expense the
corresponding legal expenses as incurred. In accordance with SFAS No. 95, paragraph 17(c), we classified patent prosecution expenditures
which were capitalized as cash used for investing activities since, like a capital expenditure to improve a building or add a piece of equipment,
the cost is a necessary investment into a productive asset to maintain our future revenue process. No internal costs were capitalized. These
capitalized costs were amortized over the same period as the licensing revenue related to those patents was recognized. Costs in excess of the
amount of remaining related deferred licensing revenue were not capitalized, but expensed as incurred. We capitalized approximately
$292 thousand, and $187 thousand for the years ended December 31, 2006 and 2005, respectively, and amortized approximately $334 thousand
and $157 thousand for the same periods, respectively. In December 2006, we sold all patents for which we had capitalized patent costs and,
accordingly, we have no capitalized patent costs on our balance sheet as of December 31, 2007 and 2006. We do not expect to capitalize any
patent costs in the future.
31
Deferred Tax Assets — Valuation Allowance
Our deferred tax assets, such as a net operating loss carryforward (“NOL”), are reduced by an offsetting valuation allowance based on
judgmental assessment of available evidence if we are unable to conclude that it is more likely than not that some or all of the related deferred
tax assets will be realized. If we are able to conclude it is more likely than not that we will realize a future benefit from a deferred tax asset, we
will reduce the related valuation allowance by an amount equal to the estimated quantity of income taxes we would pay in cash if we were not to
utilize the deferred tax asset in the future. The first time this occurs in a given jurisdiction, it will result in a net deferred tax asset on our
balance sheet and an income tax benefit of equal magnitude in our statement of operations at the time we make the determination. In future
periods, we will then recognize as income tax expense the estimated quantity of income taxes we would have paid in cash had we not utilized
the related deferred tax asset. The corresponding journal entry will be a reduction of our deferred tax asset. If there is a change regarding our
tax position in the future, we will make a corresponding adjustment to the related valuation allowance.
Results of Operations
The following table summarizes our results of operations for the three most recent fiscal years.
32
Consolidated Statement of Operations Data:
Revenue:
Product revenue, net:
Core companion animal health
Other vaccines, pharmaceuticals and products
Total product revenue
Research, development and other
Total revenue, net
Cost of revenue:
Cost of products sold
Cost of research, development and other
Total cost of revenue
Gross profit
Operating expenses:
Selling and marketing
Research and development
General and administrative
(Gain) on sale of assets
Total operating expenses
Income from operations
Interest and other expense, net
Income before income taxes
Income tax expense (benefit):
Current
Net operating loss usage
Valuation allowance adjustment
Total income tax expense (benefit)
Net income
Basic net income per share
Diluted net income per share
Revenue
2005
Year Ended December 31,
2006
(in thousands except per share amounts)
2007
$
$
$
$
54,716
12,833
67,549
1,888
69,437
42,515
1,095
43,610
25,827
14,020
3,749
7,187
—
24,956
871
774
97
—
—
(185 )
(185 )
282
0.01
0.01
$
$
$
$
59,936
11,879
71,815
3,245
75,060
43,000
1,414
44,414
30,646
14,356
3,483
9,887
(155 )
27,571
3,075
1,041
2,034
58
79
69
206
1,828
0.04
0.03
$
$
$
$
65,910
14,897
80,807
1,528
82,335
48,874
274
49,148
33,187
16,109
2,679
8,925
(47 )
27,666
5,521
588
4,933
108
17
(30,000 )
(29,875 )
34,808
0.68
0.63
Total revenue, which includes product revenue, research and development and other revenue, increased 10% to $82.3 million in 2007 compared to
$75.1 million in 2006. Total revenue for 2006 increased 8% to $75.1 million from $69.4 million in 2005. Product revenue increased 13% to $80.8 million in
2007 compared to $71.8 million in 2006. Product revenue increased 6% to $71.8 million in 2006 compared to $67.5 million in 2005.
Core Companion Animal Health segment product revenue increased 10% to $65.9 million in 2007 compared to $59.9 million in 2006. Key factors
in the increase were higher sales of our instrument consumables, our hematology instruments, our handheld blood analysis instruments, our IV pumps,
international sales of our heartworm preventive, our microalbumin laboratory packs and our allergy diagnostic kits.
2006 product revenue from our Core Companion Animal Health segment increased 10% to $59.9 million compared to $54.7 million in 2005. Key
factors in the increase were higher sales of our instrument consumables, our heartworm preventive, our heartworm diagnostic tests and our IV pumps,
somewhat offset by lower sales of our hematology instruments.
33
Other Vaccines, Pharmaceuticals and Products segment (“OVP”) product revenue increased 25% to $14.9 million in 2007 compared to $11.9 million
in 2006. A key factor for the increase was greater sales of fish vaccines. Another key factor in the increase was approximately $1.6 million in revenue
recognized (the “United Revenue”) upon receipt of a payment for product previously shipped and “take or pay” minimums for 2005 and 2006 which
previously had not been paid as part of a now settled dispute with United Vaccines, Inc. (“UV”), a former customer. As UV has ceased operations, we do not
expect to generate any future revenue from UV. Another key factor was an increase in sales of bovine vaccines under our contract with AgriLabs. Decreases
in sales of our bulk bovine biologicals and our equine influenza vaccine somewhat offset increased sales in other areas. We licensed Intervet Inc. exclusive
rights to our equine influenza vaccine in July 2002, and our last shipment of this product prior to Intervet Inc. producing the product themselves occurred in
the third quarter of 2006.
2006 product revenue from OVP decreased 7% to $11.9 million compared from $12.8 million in 2005. A key factor in the decline was lower sales
of our bovine vaccines under our contract with AgriLabs, including purchases under this contract by Intervet Inc. which occurred in the first quarter of 2005
but not 2006, somewhat offset by increased sales of our bulk bovine biologicals. Intervet Inc. launched a line of bovine vaccines competitive with ours in
2005.
Revenue from research and development and other revenue decreased by 53% to $1.5 million in 2007 from $3.2 million in 2006. The decrease is
primarily due to the non-recurring revenue from the acceleration of approximately $1.5 million in previously deferred licensing fees recognized upon
completion of the sale of a worldwide patent portfolio covering a number of major allergens and the genes that encode them (the “Allergopharma Portfolio”)
in December 2006.
Revenue from research and development and other revenue increased by 72% to $3.2 million in 2006 from $1.9 million in 2005 primarily due to the
acceleration of approximately $1.5 million in previously deferred licensing fees recognized upon completion of the sale of the Allergopharma Portfolio in
December 2006. We recognized approximately $2.1 million in licensing revenue related to the Allergopharma Portfolio in 2006, including revenue from the
amortization of previous upfront payments and other payments from third parties.
In 2008, we expect continued growth in our Core Companion Animal Health segment. We anticipate 2008 OVP revenue to increase by about $1
million as compared to 2007. We expect research, development and other revenue to be approximately $1 million in 2008, a decline when compared to 2007.
Cost of Revenue
Cost of revenue consists of two components: 1) cost of products sold and 2) cost of research, development and other revenue, both of which
correspond to their respective revenue categories. Cost of revenue totaled $49.1 million for the twelve months ended December 31, 2007, an 11% increase as
compared to $44.4 million for the corresponding period in 2006. Gross profit increased 8% to $33.2 million for 2007 as compared to $30.6 million in 2006.
Gross Margin, i.e. gross profit divided by total revenue, decreased to 40.3% for 2007 as compared to 40.8% in 2006. Cost of revenue totaled $44.4 million
for 2006, a 2% increase as compared to $43.6 million for 2005. Gross profit increased 19% to $30.6 million for 2006 as compared to $25.8 million in 2005.
Gross Margin increased to 40.8% for 2006 as compared to 37.2% in 2005.
Cost of products sold increased 14% to $48.9 million in the twelve months ended December 31, 2007 from $43.0 million in 2006. Gross profit on
product revenue increased 11% to $31.9 million for 2007 from $28.8 million in the prior year. Product Gross Margin, i.e. gross profit on product revenue
divided by product revenue, decreased to 39.5% in 2007 as compared to 40.1% in 2006. Product mix was a key factor in the decrease, including sales of our
diagnostic instruments, which represented a larger share of overall sales than
34
in 2006. Our diagnostic instruments tend to be relatively lower margin sales and certain instruments experienced lower gross margins in 2007 than in 2006
due to aggressive sales and marketing programs in 2007. This was somewhat offset by recognition of the United Revenue for which the affiliated cost of
products sold had been recognized in prior periods. Cost of products sold increased 1% to $43.0 million in 2006 as compared to $42.5 million in 2005. Gross
profit on product revenue increased 15% to $28.8 million for 2006 from $25.0 million in 2005. Product Gross Margin increased to 40.1% in 2006 as
compared to 37.1% in 2005. Key factors in the improvement were higher sales and margins in our heartworm preventive product, where we took in house
certain manufacturing operations which were previously outsourced; higher sales and margins in our heartworm diagnostic tests, where agreements under
which we paid certain royalties expired in 2005 and 2006; and a greater proportion of product sales from instrument consumables, which typically have a
higher than average gross margin.
Cost of research, development and other revenue decreased 81% to $274 thousand in the twelve months ended December 31, 2007 as compared to
$1.4 million in 2006. Gross profit on research, development and other revenue decreased 32% to $1.3 million for 2007 from $1.8 million in 2006. Other
Gross Margin, i.e. gross profit on research, development and other revenue divided by research, development and other revenue, increased to 82.1% for 2007
as compared to 56.4% in 2006. The primary reason for the increase in gross margin was revenue related to the Allergopharma Portfolio from deferred
licensing fees for which a corresponding capitalized patent cost was amortized, which occurred in 2006, but not in 2007. This was somewhat offset by the
acceleration of certain previously deferred upfront licensing fees which were recognized in 2006 due to the sale of the Allergopharma Portfolio in
December 2006.
Cost of research, development and other revenue increased 29% to $1.4 million in 2006 as compared to $1.1 million in 2005. Gross profit on
research, development and other revenue increased 131% to $1.8 million for the twelve months ended December 31, 2006 from $793 thousand in 2005.
Other Gross Margin increased to 56.4% for 2006 as compared to 42.0% in 2005. The primary reason for the increase in gross margin was the acceleration of
certain previously deferred upfront licensing fees which were recognized in 2006 due to the sale of the Allergopharma Portfolio in December 2006.
We expect Gross Margin to be down slightly for 2008 as a whole compared to 2007.
Operating Expenses
Selling and marketing expenses increased by 12% to $16.1 million in 2007 compared to $14.4 million in 2006. A key factor in the increase was cost
related to new product launches. Selling and marketing expenses increased by 2% to $14.4 million in 2006 as compared to $14.0 million in 2005 primarily
due to increased expenditures on marketing programs.
Research and development expenses decreased by $804 thousand to $2.7 million in 2007 from $3.5 million in 2006. A factor in the decline was a
decrease in accrual expenses related to our Management Incentive Program (“MIP”) recognized in 2007 as compared to 2006. Research and development
expenses decreased by $266 thousand to $3.5 million in 2006 from $3.7 million in 2005. A key factor in the decline was lower personnel costs.
General and administrative expenses decreased by 10% to $8.9 million in 2007 from $9.9 million in 2006. Key factors in the decline were lower
incentive compensation, including compensation related to our MIP, in 2007 as compared to 2006, and lower legal fees, primarily related to our litigation with
UV in 2006. General and administrative expenses increased by 38% to $9.9 million in 2006 from $7.2 million in 2005. Key factors in the increase include
increased compensation expense, primarily related to the accrual of our 2006 Management Incentive Plan (“MIP”) payouts and options granted to
management which were expensed
35
for accounting purposes in 2006 but not 2005, increased legal fees, primarily related to litigation with UV, and increased rent expense.
In 2007, we recognized a gain of approximately $47 thousand on the sale of certain patents we held net of costs. In 2006, we recognized a gain of
approximately $155 thousand on the sale of the Allergopharma Portfolio. The gain is equal to the sales price less the net book value of the Allergopharma
Portfolio, which included all of our unamortized capitalized patent costs. We had no similar transactions in 2005.
In 2008, we expect total operating expenses to increase as compared to 2007. We expect operating expenses generally will increase more slowly
than increases in revenue from existing operations.
Interest and Other Expense, Net
Interest and other expense, net was $588 thousand in 2007, as compared to $1.0 million in 2006 and $774 thousand in 2005. This line item includes
interest expense, interest income and foreign currency gains and losses. The largest factor in the decrease from 2006 to 2007 was lower borrowings under our
credit and security agreement with Wells Fargo along with the fact that we repaid $500 thousand in subordinated debt in May 2007. Another factor was lower
interest rate spreads to Prime on our borrowings with Wells Fargo resulting from our achievement of negotiated milestones. The increase from 2005 to 2006
was primarily a result of increased interest on borrowings under our credit and security agreement with Wells Fargo due to increases in Wells Fargo’s prime
rate.
We expect interest and other expense, net to decrease in 2008 as compared to 2007 based on the currently lower Prime rate of interest from Wells
Fargo.
Income Tax Expense (Benefit)
Current income tax expense consists of taxes payable on tax returns for a given year. These primarily relate to domestic federal alternative minimum
tax payments required. We have typically not had to pay much in cash taxes when we have generated taxable income due to our NOL in Switzerland and in
the United States.
Net operating loss usage represents the tax we would have paid had we not had an NOL in a given jurisdiction that we did not pay as a result of that
NOL. This consists solely of net operating loss usage in Switzerland in all periods reported.
A valuation allowance adjustment is due to a change in circumstances that causes a change in judgment about the realizability of the related deferred
tax asset in future years. Based on the profitable operating performance of our subsidiary in Switzerland, in the fourth quarter of 2005 we concluded that our
NOL in Switzerland was realizable on a more-likely-than-not basis. We reduced the related valuation allowance in the fourth quarter of 2005, resulting in an
income tax benefit of approximately $185 thousand, reported as a valuation allowance adjustment income tax benefit. This resulted in a net deferred tax asset
of $185 thousand - equal to the estimated quantity of income taxes we would have recognized in our future statements of operations as income tax expense
that we would not have to actually pay in cash assuming our estimate of our NOL in Switzerland was exactly correct.
We subsequently obtained agreements from the tax authorities in the canton of Fribourg regarding the determination of our taxable income which
reduced our taxable income in Switzerland in 2005 and 2006 from previous estimates for financial reporting purposes and we expect to reduce our taxable
income, and thus our tax obligation, in future years as compared to prior expectations. Given our corresponding lower income
36
expectations in Switzerland, we no longer believed we would utilize all of our NOL in Switzerland before it fully expires at the end of 2008. Accordingly, we
reduced our net deferred tax asset related to this NOL via an increase in the related valuation allowance which is reported as a valuation allowance adjustment
income tax expense of $69 thousand in the fourth quarter of 2006.
In the fourth quarter of 2007, based on the Company’s profitable domestic operating performance, we concluded that a portion of our domestic
deferred tax assets, which primarily consist of our domestic NOL, was realizable on a more-likely-than-not basis and the related valuation allowance was,
resulting in an income tax benefit of $30 million, reported as a valuation allowance adjustment income tax benefit. This resulted in a net deferred tax asset of
$30 million for our domestic deferred tax assets.
In 2008, we expect current income tax expense to increase compared to 2007 primarily due to greater domestic federal alternative minimum tax
payments resulting from greater domestic taxable income in 2008 compared to 2007. We expect net operating loss usage income tax expense to increase
significantly in 2008 as compared to 2007 as we expect to report domestic net operating loss usage, which we expect to be much greater than the net
operating loss usage income tax expense in Switzerland we have reported to date, on this line item for the first time. We do not expect to have any valuation
allowance adjustment income tax expense or benefit in 2008 and expect to record valuation allowance adjustment income tax expense or benefit infrequently,
if at all, in future years.
Net Income (Loss)
In 2007, we recorded the third consecutive year of profitability in our history. Our 2007 net income was $34.8 million as compared to $1.8 million
in 2006 and $282 thousand in 2005. A large valuation allowance income tax benefit was the primary reason for the increase from 2006 to 2007, although
increased revenue also contributed to the improvement. The 2006 improvement over 2005 was due to higher revenue and higher Gross Margin, somewhat
offset by increased operating expenses.
Liquidity, Capital Resources and Financial Condition
We have incurred net cumulative negative cash flow from operations since inception in 1988. For the year ended December 31, 2007, we had total
revenue of $82.3 million and net income of $34.8 million. In 2007, net cash used by operations was $1.7 million. At December 31, 2007, we had $5.5
million of cash and cash equivalents, working capital of $9.9 million, $12.6 million of outstanding borrowings under our revolving line of credit, discussed
below, and $1.9 million of other debt and capital leases.
Net cash flows from operating activities used cash of $1.7 million in 2007 as compared to providing cash of $1.1 million in 2006 and $148 thousand
in 2005. The major factors in the use of cash in 2007 as compared to providing cash in 2006 were increased inventories of $5.4 million due primarily to the
non-cash transfer of inventory to property and equipment related to 2007 rental programs on certain of our diagnostic instruments as well as greater overall
inventory levels, decreases in accrued liabilities and other related items of $3.7 million primarily due to decreases in accrued management incentive plan
payouts, somewhat offset by a $33.0 million improvement in our net income which was mostly offset by a corresponding $30.1 million deferred tax benefit
change, a $2.5 million improvement in cash provided by accounts receivable resulting from a lower days outstanding accounts receivable balance and a $1.2
million improvement in cash provided by accounts payable related to increased spending. The major factors in the improvement in our cash provided from
operations in 2006 as compared to 2005 was a $3.7 million increase in cash from accrued liabilities, the largest component of which was approximately $1.5
million in anticipated payouts under our MIP which were accrued at year end 2006 as compared to no such anticipated payouts in 2005, a $1.5 million
improvement in our net income, a $1.1 million improvement in cash used for accounts payable and an approximately $700 thousand increase in stock-based
compensation recognized for accounting purposes but not paid in cash. The latter primarily relates to the adoption of a new accounting standard related to the
expensing of stock options. These factors were somewhat offset by a $3.8 million greater usage of cash from accounts
37
receivable, primarily related to our revenue growth, an approximately $1.5 million greater usage of cash for inventory purchases and an approximately $1.0
million greater usage of cash related to deferred revenue and other long-term liabilities, primarily related to our recognition of approximately $1.5 million in
previously deferred licensing fees upon completion of the sale of the Allergopharma Portfolio in December 2006.
Net cash flows from investing activities used cash of $2.3 million in 2007 as compared to providing cash of $159 thousand in 2006 and using $1.5
million in 2005. Expenditures for property and equipment totaled approximately $2.4 million, $1.2 million and $1.4 million in 2007, 2006 and 2005,
respectively. The cash used in 2007 was entirely for purchases of property and equipment, which increased from 2006 due to the purchases of demonstration
units for the three new diagnostic instruments we launched in 2007 and increased purchases related to our Des Moines manufacturing operations in 2007 as
compared to 2006. In 2006, the sale of certain intellectual property generated cash, after related costs, of approximately $1.6 million which was slightly
larger than approximately $1.5 million in capital expenditures and capitalized patent costs. In 2005, approximately $1.6 million in capital expenditures and
capitalized patent costs were somewhat offset by $100 thousand of proceeds from the repayment of a loan.
Net cash flows from financing activities provided cash of $4.2 million in 2007 as compared to using $1.4 million in 2006 and providing $1.8 million
in 2005. In 2007, we increased our line of credit borrowings by $4.6 million and received $851 thousand from the issuance of common stock upon option
exercises and in our Employee Stock Purchase Plan. These cash inflows were somewhat offset by the repayment of principal on term debt of $1.3 million. In
2006, we reduced our line of credit borrowings by $1.4 million and repaid principal on term debt of $763 thousand which was somewhat offset by $766
thousand in proceeds from the issuance of common stock upon option exercises and in our Employee Stock Purchase Plan. In 2005, the primary source of
cash was $2.5 million in new term debt from Wells Fargo, somewhat offset by $922 thousand repayment of borrowings under our revolving line of credit with
Wells Fargo.
At December 31, 2007, we had a $15.0 million asset-based revolving line of credit with Wells Fargo which has a maturity date of June 30, 2009 as a
result of a December 2007 amendment to our credit and security agreement with Wells Fargo which increased the line of credit to $15.0 million from $12.0
million previously. At December 31, 2007, $12.6 million was outstanding under this line of credit. Our ability to borrow under this line of credit varies based
upon available cash, eligible accounts receivable and eligible inventory. On December 31, 2007, interest was charged at a stated rate of prime plus 0% and
was payable monthly. We are required to comply with various financial and non-financial covenants, and we have made various representations and
warranties. Among the financial covenants is a requirement to maintain a minimum liquidity (cash plus excess borrowing base) of $1.5 million. Additional
requirements include covenants for minimum capital monthly and minimum net income quarterly. Failure to comply with any of the covenants,
representations or warranties could result in our being in default on the loan and could cause all outstanding amounts payable to Wells Fargo, including those
discussed above, as well as our other borrowings, to become immediately due and payable or impact our ability to borrow under the agreement. Any default
under the Wells Fargo agreement could also accelerate the repayment of our other borrowings. We were in compliance with all financial covenants as of
December 31, 2007. At December 31, 2007, our remaining available borrowing capacity based upon eligible accounts receivable and eligible inventory under
our revolving line of credit was approximately $1.6 million.
At December 31, 2007, we also had outstanding obligations for long-term debt and capital leases totaling approximately $1.9 million primarily
related to three term loans with Wells Fargo. One term loan is secured by real estate in Iowa and had an outstanding balance at December 31, 2007 of
approximately $481 thousand due in monthly installments of $17,658 plus interest, with a balloon payment of approximately $163 thousand due on June 30,
2009. The term loan had a stated interest rate of prime plus 0% on December 31, 2007. The other two term loans are secured by machinery and equipment at
our Des Moines,
38
Iowa and Loveland, Colorado locations (the “Equipment Notes”). The Equipment Notes had a stated interest rate of prime plus 0% on December 31, 2007.
Principal payments on the Equipment Notes of $46,296 plus interest are due monthly with a balloon payment of approximately $602 thousand due upon
maturity of the credit facility agreement on June 30, 2009. Our capital lease obligations totaled approximately $11 thousand at December 31, 2007.
At December 31, 2007, we had property and equipment, net, of approximately $10.7 million, an increase of approximately $3.7 million as compared
to the level on December 31, 2006. This increase was primarily related to instruments used by our customers on a rental basis which were accounted for as a
non-cash transfer from property and equipment at the time of purchase.
At December 31, 2007, we had deferred revenue and other long term liabilities, net of current portion, of approximately $6.3 million. Included in
this total is approximately $5.4 million of deferred revenue related to up-front fees that have been received for certain product rights and technology rights
out-licensed. These deferred amounts are being recognized on a straight-line basis over the remaining lives of the agreements, products, patents or
technology.
Our primary short-term need for capital, which is subject to change, is to fund our operations, which consist of continued sales and marketing,
general and administrative and research and development efforts, working capital associated with increased product sales and capital expenditures relating to
maintaining and developing our manufacturing operations. Our future liquidity and capital requirements will depend on numerous factors, including the
extent to which our marketing, selling and distribution efforts, as well as those of third parties who market, sell and distribute our products, are successful in
increasing revenue, the extent of the market acceptance of any new products, the extent to which currently planned products and/or technologies under
development are successfully developed, changes required by us by regulatory bodies to maintain our operations and other factors.
Our financial plan for 2008 indicates that our available cash and cash equivalents, together with cash from operations and borrowings expected to be
available under our revolving line of credit, will be sufficient to fund our operations through 2008 and into 2009. Our financial plan for 2008 expects that we
will have positive cash flow from operations, primarily through increased revenue. However, our actual results may differ from this plan, and we may be
required to consider alternative strategies. We may be required to raise additional capital in the future. If necessary, we expect to raise these additional funds
through the sale of equity securities or refinancing loans currently outstanding on assets with historical appraised values significantly in excess of related
debt. There is no guarantee that additional capital will be available from these sources on acceptable terms, if at all, and certain of these sources may require
approval by existing lenders. 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 through actions such as delaying or canceling budgeted research activities or
marketing plans. These actions would likely extend the then available cash and cash equivalents, and then available borrowings to some degree. See “Risk
Factors” In Item 1A.
39
A summary of our contractual obligations at December 31, 2007 is shown below.
Contractual Obligations
Long-term debt
Capital lease obligations
Interest payments on debt
Line of credit
Operating leases
Unconditional purchase obligations
Total contractual cash obligations
Total
1,916
11
155
12,614
29,018
2,674
46,388
$
$
Payments Due by Period (in thousands)
1-3
Years
Less Than
1 Year
4-5
Years
$
$
767
9
115
12,614
1,824
2,674
18,003
$
$
1,149
2
40
—
5,086
—
6,277
$
$
—
—
—
—
3,465
—
3,465
After
5 Years
—
—
—
—
18,643
—
18,643
$
$
In addition to those agreements considered above where our contractual obligation is fixed, we are party to commercial agreements which may
require us to make milestone payments under certain circumstances. All milestone obligations which we believe are likely to be triggered but are not yet paid
are included in “Unconditional Purchase Obligations” in the table above. We do not believe other potential milestone obligations, some of which we consider
to be of remote likelihood of ever being triggered, will have a material impact on our liquidity, capital resources or financial condition in the foreseeable
future.
Net Operating Loss Carryforwards
As of December 31, 2007, we had a net domestic operating loss carryforward, or NOL, of approximately $164.6 million, a domestic alternative
minimum tax credit of approximately $146 thousand and a domestic research and development tax credit carryforward of approximately $307 thousand. Our
NOL is scheduled to expire in various years beginning in 2010 and ending in 2025, with the majority scheduled to expire in 2018 or later. The NOL and tax
credit carryforwards are subject to alternative minimum tax limitations and to examination by the tax authorities. In addition, we had a “change of
ownership” as defined under the provisions of Section 382 of the Internal Revenue Code of 1986, as amended (an “Ownership Change”). We believe the
latest Ownership Change occurred at the time of our initial public offering in July 1997. We do not believe this Ownership Change will place a significant
restriction on our ability to utilize our NOLs in the future. We also have net operating loss carryforwards in Switzerland of approximately $920 thousand
related to losses previously recorded by Heska AG which are scheduled to expire at the end of 2008.
Recent Accounting Pronouncements
As of January 1, 2007, we adopted FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes - an interpretation of
FASB Statement No. 109,” which establishes that the financial statement effects of a tax position taken or expected to be taken in a tax return are to be
recognized in the financial statements when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. The
adoption of FIN 48 had no material impact on our results of operations or our financial position for the year ended December 31, 2007.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 is
effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The adoption of
SFAS No. 157 is not expected to have a material impact on our results of operations or our financial position.
40
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities — including an amendment of FASB
Statement No. 115”. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. This statement
will be effective for us January 1, 2008. We have not yet determined the impact, if any, that adopting this standard may have on our financial statements.
In June 2007, the FASB issued EITF Issue No. 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in
Future Research and Development Activities,” which is effective for fiscal years beginning after December 15, 2007. The EITF concluded that
nonrefundable advance payments for goods and services that will be used or rendered for future research and development activities should be deferred and
capitalized. Such amounts should be recognized as an expense as the related goods are delivered or the services are performed, or when goods or services are
no longer expected to be provided. We are currently assessing the impact of implementing this standard but we do not expect it will have a material impact
on our results of operations or our financial position.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (SFAS 141R), which replaces SFAS No. 141
“Business Combinations”. Under the provisions of SFAS 141R, acquisition costs will generally be expensed as incurred; noncontrolling interests will be
valued at fair value at the acquisition date; in-process research and development will be recorded at fair value as an indefinite-lived intangible asset at the
acquisition date; restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and changes in
deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. SFAS 141(R) will be
effective, on a prospective basis, for all business combinations for which the acquisition date is after the beginning of our fiscal year 2009, with the exception
of the accounting for valuation allowances on deferred taxes and acquired tax contingencies for which the adoption is retrospective. We are currently
evaluating the impact, if any, that SFAS 141R may have on our financial statements.
SFAS No. 123R, “Share-Based Payment” (Revised 2004)
Statement of Financial Accounting Standards No. 123 (revised 2004) “Share-Based Payments” (“SFAS No. 123R”) was revised and promulgated in
December 2004. We adopted this standard when required on January 1, 2006. On April 14, 2005, the SEC issued a release amending the compliance dates
for SFAS No. 123R. Under the SEC’s new rule, companies in our position could implement SFAS No. 123R at the beginning of their next fiscal year, instead
of the next reporting period as originally required under SFAS No. 123R, that begins after June 15, 2005. We originally intended to adopt SFAS No. 123R
beginning on July 1, 2005 but based on the SEC’s action on April 14, 2005, we decided to adopt this standard effective on January 1, 2006. We adopted
SFAS No. 123R under the modified prospective method of adoption. Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based
Compensation” (“SFAS No. 123”), which became effective in 1996, allowed for the continued measurement of compensation cost for
41
stock-based compensation using the intrinsic value based method under Accounting Principles Board Opinion No. 25 “Accounting for Stock Issued to
Employees” (“APB No. 25”), provided that pro forma disclosures were made of net income or loss, assuming the fair value based method of SFAS No. 123
had been applied. We have elected to account for our stock-based compensation plans under APB No. 25 in 2004 and 2005. Upon adoption of SFAS
No. 123R, we were required to recognize compensation expense using the fair value-based model for options that vest after the effective date of SFAS
No. 123R adoption, including those that were granted prior to the effective date of SFAS No. 123R adoption. This resulted in us recording compensation
expense for periods after the effective date of SFAS No. 123R adoption. Historically, under APB No. 25, we have recorded minimal amounts of stock-based
compensation. On February 24, 2005, our Board of Directors considered the significant impact that the use of fair values, rather than intrinsic values, would
have on our future results of operations, as well as factors including that the management team had requested that their salaries be frozen for 2005, many non-
management employees’ 2005 raises were to be below market levels, no management bonus payouts were made for 2004 and the 2005 management incentive
plan calls for a performance in excess of our internal budget before any bonus payments are made, and authorized our Stock Option Committee, which
consisted solely of our Chief Executive Officer, to immediately vest all options granted from that date through June 30, 2005 and to accelerate the vesting of
any outstanding but unvested stock options with a strike price that is not “in-the-money” at its discretion (the aggregate authorization to the Stock Option
Committee to be known as the “Vesting Authorization”) through June 30, 2005; for similar reasons and understanding the SEC had issued a release amending
the compliance date for SFAS No. 123R, on May 9, 2005 our Board of Directors approved the extension of the Vesting Authorization to our Stock Option
Committee from June 30, 2005 to December 31, 2005. On March 30, 2005 our Stock Option Committee exercised its discretion and accelerated the vesting
of outstanding but unvested stock options with a strike price greater than or equal to $0.82. These options were not “in-the-money” at that time, and
therefore, there was no compensation expense recorded in accordance with APB No. 25 as a result of this modification. However, for pro forma purposes, in
accordance with SFAS No. 123, the remaining unamortized compensation related to these options was reported in the footnotes to our financial statements.
This action effected options to purchase approximately 750 thousand shares, approximately 55 thousand of which were shares underlying options held by our
Directors and Executive Officers. This follows a similar action for similar reasons in December 2004 under which unvested options to purchase
approximately 2.2 million shares were immediately vested. We also have an employee stock purchase plan under which we expect to recognize compensation
expense under SFAS No. 123R beginning on January 1, 2006.
42
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.
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, 2007, approximately $14.5 million was outstanding on these lines of credit and other borrowings with a
weighted average interest rate of 7.25%. We also had approximately $5.5 million of cash and cash equivalents at December 31, 2007, the majority of which
was invested in liquid interest bearing accounts. We had no interest rate hedge transactions in place on December 31, 2007. We completed an interest rate
risk sensitivity analysis based on the above and an assumed one-percentage point increase/decrease in interest rates. If market rates increase/decrease by one
percentage point, we would experience an increase/decrease in annual interest expense of approximately $90 thousand based on our outstanding balances as
of December 31, 2007.
Foreign Currency Risk
Our investment in foreign assets consists primarily of our investment in our European subsidiary. Foreign currency risk may impact our results of
operations. In cases where we purchase inventory in one currency and sell corresponding products in another, our gross margin percentage is typically at risk
based on foreign currency exchange rates. In addition, in cases where we may be generating operating income in foreign currencies, the magnitude of such
operating income when translated into U.S. dollars will be at risk based on foreign currency exchange rates. Our agreements with suppliers and customers
vary significantly in regard to the existence and extent of currency adjustment and other currency risk sharing provisions. We had no foreign currency hedge
transactions in place on December 31, 2007.
We have a wholly-owned subsidiary in Switzerland which uses the Swiss Franc as its functional currency. We purchase inventory in foreign
currencies, primarily Japanese Yen and Euros, and sell corresponding products in U.S. dollars. We also sell products in foreign currencies, primarily Japanese
Yen and Euros, where our inventory costs are in U.S. dollars. Based on our 2007 results of operations, if foreign currency exchange rates were to
strengthen/weaken by 25% against the dollar, we would expect a resulting pre-tax loss/gain of approximately $1.1 million.
43
Item 8. Financial Statements and Supplementary Data.
HESKA CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2006 and 2007
Consolidated Statements of Operations for the years ended December 31, 2005, 2006 and 2007
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2005, 2006 and 2007
Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2006 and 2007
Notes to Consolidated Financial Statements
44
Page
45
47
48
49
50
51
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Heska Corporation:
We have audited the accompanying consolidated balance sheets of Heska Corporation and its subsidiaries as of December 31, 2006 and 2007, and
the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2007. In
connection with our audit of these consolidated financial statements, we also have audited the financial statement schedule of valuation and qualifying
accounts for the years ended December 31, 2005, 2006 and 2007. We also have audited the Company’s internal control over financial reporting based on
criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the
“COSO Criteria”). The Company’s management is responsible for these financial statements and schedule, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying management’s report.
Our responsibility is to express an opinion on these financial statements and the effectiveness of the Company’s internal control over financial reporting based
on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and
whether effective internal control over financial reporting was maintained in all material respects. Our audit of the financial statements included examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation. Our audit of internal control included obtaining an understanding of
internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Heska
Corporation and its subsidiaries as of December 31, 2006 and 2007, and the results of their operations and their cash flows for each of the three years in the
period ended
45
December 31, 2007 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related
consolidated financial statement schedule of valuation and qualifying accounts, for the years ended December 31, 2005, 2006 and 2007, when considered in
relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. Also in our opinion, Heska
Corporation and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007 based on the
COSO Criteria.
Denver, Colorado
March 3, 2008
/S/ Ehrhardt Keefe Steiner & Hottman PC
46
HESKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
Current assets:
Cash and cash equivalents
Accounts receivable, net of allowance for doubtful accounts
ASSETS
of $98 and $96, respectively
Inventories, net
Deferred tax asset, current
Other current assets
Total current assets
Property and equipment, net
Goodwill
Deferred tax asset, net of current portion
Other assets
Total assets
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued liabilities
Accrued compensation
Income taxes payable
Current portion of deferred revenue
Line of credit
Current portion of capital lease obligations
Current portion of long-term debt
Total current liabilities
Capital lease obligations, net of current portion
Long-term debt, net of current portion
Deferred revenue, net of current portion, and other
Total liabilities
Commitments and contingencies
December 31,
2006
2007
$
5,275
$
5,524
$
$
$
$
11,372
13,090
17
898
30,652
6,948
771
32
92
38,495
4,849
2,489
2,006
58
3,281
8,022
8
1,267
21,980
11
1,916
7,840
31,747
11,064
16,395
1,260
884
35,127
10,669
834
28,776
185
75,591
5,653
2,309
866
—
2,977
12,614
9
767
25,195
2
1,149
6,362
32,708
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;
50,764,273 and 51,447,663 shares issued and outstanding, respectively
Additional paid-in capital
Accumulated other comprehensive income
Accumulated deficit
Total stockholders’ equity
Total liabilities and stockholders’ equity
—
—
51
214,601
92
(207,996 )
6,748
38,495
$
51
215,685
335
(173,188 )
42,883
75,591
$
See accompanying notes to consolidated financial statements.
47
HESKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Revenue:
Product revenue, net:
Core companion animal health
Other vaccines, pharmaceuticals and products
Total product revenue, net
Research, development and other
Total revenue, net
Cost of revenue:
Cost of products sold
Cost of research, development and other
Total cost of revenue
Gross profit
Operating expenses:
Selling and marketing
Research and development
General and administrative
(Gain) on sale of assets
Total operating expenses
Income from operations
Interest and other expense, net
Income before income taxes
Income tax expense (benefit):
Current
Net operating loss usage
Valuation allowance adjustment
Total income tax expense (benefit)
Net income
Basic net income per share
Diluted net income per share
Weighted average outstanding shares used to compute basic
net income per share
Weighted average outstanding shares used to compute diluted
net income per share
$
$
$
$
2005
Year Ended December 31,
2006
2007
$
54,716
12,833
67,549
1,888
69,437
42,515
1,095
43,610
$
59,936
11,879
71,815
3,245
75,060
43,000
1,414
44,414
65,910
14,897
80,807
1,528
82,335
48,874
274
49,148
25,827
30,646
33,187
14,020
3,749
7,187
—
24,956
871
774
97
—
—
(185 )
(185 )
282
0.01
0.01
$
$
$
14,356
3,483
9,887
(155 )
27,571
3,075
1,041
2,034
58
79
69
206
1,828
0.04
0.03
$
$
$
16,109
2,679
8,925
(47 )
27,666
5,521
588
4,933
108
17
(30,000 )
(29,875 )
34,808
0.68
0.63
49,650
50,438
50,347
51,097
52,932
55,509
See accompanying notes to consolidated financial statements.
48
HESKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
Common Stock
Additional
Deferred
Accumulated
Accumulated
Total
Balances, January 1, 2005
Issuance of common stock related to
Shares
49,339
Amount Capital
$
$ 212,533
49
Paid-in
Other
Comprehensive
Compensation Income (Loss)
170
(67 ) $
$
Stockholders’
Deficit
Equity
$ (210,106 ) $
2,579
options, ESPP and other
Repurchase of stock
Recognition of stock based
compensation
Comprehensive net income:
Net income
Minimum pension liability
adjustments
Unrealized gain on available for
sale investments
Foreign currency translation
adjustments
Comprehensive net income
Balances, December 31, 2005
Issuance of common stock related to
options, ESPP and other
Recognition of stock based
compensation
Comprehensive net income:
Net income
Minimum pension liability
adjustments
Unrealized (loss) on available for
sale investments
Foreign currency translation
adjustments
Comprehensive net income
Balances, December 31, 2006
Issuance of common stock related to
options, ESPP and other
Recognition of stock based
compensation
Comprehensive net income:
Net income
Minimum pension liability
adjustments
Unrealized gain on available for
sale investments
Foreign currency translation
adjustments
Comprehensive net income
Balances, December 31, 2007
769
(66 )
—
—
—
—
—
—
50,042
722
—
—
—
—
—
—
50,764
684
—
—
—
—
—
—
51,448
$
1
—
—
—
—
—
—
—
50
1
—
—
—
—
—
—
51
—
—
—
—
—
—
—
51
579
(58 )
—
—
—
—
—
—
213,054
765
782
—
—
—
—
—
214,601
851
233
—
—
—
—
—
$ 215,685
$
—
—
67
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
—
—
—
—
96
27
(340 )
—
(47 )
—
—
—
(89 )
(5 )
233
—
92
—
—
—
53
5
185
—
335
—
—
—
282
—
—
—
—
(209,824 )
—
—
580
(58 )
67
282
96
27
(340 )
65
3,233
766
782
1,828
1,828
—
—
—
—
(207,996 )
—
—
(89 )
(5 )
233
1,967
6,748
851
233
34,808
34,808
—
—
—
—
$ (173,188 ) $
53
5
185
35,051
42,883
See accompanying notes to consolidated financial statements.
49
HESKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to cash provided by (used in) operating activities:
Depreciation and amortization
Amortization of intangible assets
Deferred tax (benefit) expense
Stock based compensation
Loss (gain) on disposition of assets
Unrealized gain on foreign currency translation
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Other current assets
Other long-term assets
Accounts payable
2005
Year Ended December 31,
2006
2007
$
282
$
1,828
$
34,808
1,850
157
(185 )
90
17
(149 )
1,585
38
86
84
(1,494 )
1,671
334
148
782
(155 )
(161 )
(2,200 )
(1,419 )
84
—
(349 )
2,183
—
(29,983 )
233
(47 )
(19 )
308
(6,840 )
19
4
804
Accrued liabilities and other
Income taxes payable
Deferred revenue and other long-term liabilities
Net cash provided by (used in) operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets, net of related costs
Proceeds from repayment of loan
Purchases of property and equipment
Capitalized patent costs
Net cash provided by (used in) investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock
Repurchase of stock
Proceeds from (repayments of) line of credit borrowings, net
Proceeds from long-term debt
Repayments of debt and capital lease obligations
Net cash provided by (used in) financing activities
EFFECT OF EXCHANGE RATE CHANGES ON CASH
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
CASH AND CASH EQUIVALENTS, END OF YEAR
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest
Non-cash transfer of inventory to property and equipment
(1,265 )
—
(948 )
148
—
100
(1,376 )
(187 )
(1,463 )
557
(58 )
(922 )
2,500
(302 )
1,775
(211 )
249
4,982
5,231
1,004
34
$
$
$
2,421
58
(1,917 )
1,125
1,640
—
(1,189 )
(292 )
159
766
—
(1,431 )
—
(763 )
(1,428 )
188
44
5,231
5,275
1,178
15
$
$
$
(1,320 )
(58 )
(1,822 )
(1,730 )
47
—
(2,357 )
—
(2,310 )
851
—
4,591
—
(1,275 )
4,167
122
249
5,275
5,524
774
3,565
$
$
$
See accompanying notes to consolidated financial statements.
50
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Heska Corporation (“Heska” or the “Company”) develops, manufactures, markets, sells and supports veterinary products. Heska’s core focus is on
the canine and feline companion animal health markets.
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 of America 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. Significant estimates are required when establishing the allowance for doubtful accounts and the provision for excess/obsolete inventory, in
determining the period over which the Company’s obligations are fulfilled under agreements to license product rights and/or technology rights, evaluating
long-lived assets for impairment and in determining the need for, and the amount of, a valuation allowance on deferred tax assets.
Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount. The allowance for doubtful accounts is the Company’s best estimate of the amount
of probable credit losses in the Company’s existing accounts receivable. The Company determines the allowance based on historical write-off experience.
The Company reviews its allowance for doubtful accounts monthly. Past due balances over 90 days and over a specified amount are reviewed individually
for collectibility. Account balances are charged against the allowance after all means of collection have been exhausted and the potential for recovery is
considered remote. The Company does not have any off-balance-sheet credit exposure related to its customers.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents and accounts
receivable. The Company maintains the majority of its cash and cash equivalents 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 currency foreign hedging arrangements. Its accounts receivable
balances are due primarily from domestic veterinary clinics and individual veterinarians, and both domestic and international corporations.
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. The Company valued its European Euro and Japanese Yen cash accounts at the spot market foreign exchange rate as of each
balance
51
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
sheet date, with changes due to foreign exchange fluctuations recorded in current earnings. The Company held 1,607,633 and 415,931 Euros at December 31,
2006 and 2007, respectively. The Company held 50,954,278 and 57,730,441 Yen at December 31, 2006 and 2007, respectively. The Company held
1,347,692 and 667,506 Swiss Francs at December 31, 2006 and 2007, respectively. The Company held 1,202 and 1,348 British Pounds at December 31, 2006
and 2007, respectively.
Fair Value of Financial Instruments
The Company’s financial instruments consist of cash and cash equivalents, short-term trade receivables and payables and notes payable, including
the revolving line of credit. 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, 2006 and
2007, approximates the carrying value due primarily to the floating rate of interest on such debt instruments.
Inventories
Inventories are stated at the lower of cost or market using the first-in, first-out method. Inventory manufactured by the Company includes the cost of
material, labor and overhead. If the cost of inventories exceeds estimated fair value, provisions are made to reduce the carrying value to estimated fair value.
Inventories, net consist of the following (in thousands):
Raw materials
Work in process
Finished goods
Allowance for excess or obsolete inventory
Property and Equipment
December 31,
2006
2007
$
$
5,337
3,426
5,851
(1,524 )
13,090
$
$
4,865
3,138
8,969
(577 )
16,395
Property and equipment are recorded at cost and depreciated on a straight-line 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.
52
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Property and equipment consist of the following (in thousands):
Land
Building
Machinery and equipment
Leasehold and building improvements
Less accumulated depreciation and amortization
Estimated
Useful Life
N/A
10 to 20 years
3 to 15 years
7 to 15 years
December 31,
2006
2007
377
2,678
19,503
5,230
27,788
(20,840 )
6,948
$
$
377
2,678
24,918
5,282
33,255
(22,586 )
10,669
$
$
From time to time, the Company utilizes marketing programs whereby its instruments in inventory may be placed in a customer’s location on a rental
basis. The cost of these instruments is transferred to machinery and equipment and depreciated, typically over a four year period. During 2005, 2006 and
2007, total costs transferred from inventory were approximately $34 thousand, $15 thousand and $3.6 million, respectively.
Depreciation and amortization expense for property and equipment was $1.9 million, $1.7 million and $2.2 million for the years ended December 31,
2005, 2006 and 2007, respectively.
Realizability of Long-Lived Assets
The Company continually evaluates whether events and circumstances have occurred that indicate the remaining estimated useful life of long-lived
assets may warrant revision, or that the remaining balance of these assets may not be recoverable. When deemed necessary, the Company completes this
evaluation by comparing the carrying amount of the assets against the estimated undiscounted future cash flows associated with them. If such evaluations
indicate that the future undiscounted cash flows of amortizable long-lived assets are not sufficient to recover the carrying value of such assets, the assets are
adjusted to their estimated fair values.
Goodwill and Other Intangible Assets
Goodwill is subject to an annual assessment for impairment. Impairment is indicated when the carrying amount of the related reporting unit is
greater than its estimated fair value.
The Company’s recorded goodwill relates to the 1997 acquisition of Heska AG, the Company’s Swiss subsidiary. This goodwill is reviewed at least
annually for impairment. At December 31, 2006 and 2007, goodwill was approximately $771 thousand and $834 thousand, respectively, and is included in
the assets of the Core Companion Animal Health segment. The Company completed its annual analysis of the fair value of its goodwill at December 31,
2007 and determined there was no indicated impairment of its goodwill. The change in carrying value of the goodwill between years was solely due to
foreign currency rate changes. There can be no assurance that future goodwill impairments will not occur. There are no other intangible assets that are not
being amortized on a periodic basis.
53
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Revenue Recognition
The Company generates its revenues through sale of products and services, licensing of product and technology rights, and research and
development services. Revenue is accounted for in accordance with the guidelines provided by SEC Codification of Staff Accounting Bulletins, Topic 13:
Revenue Recognition. 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, if
required, with an appropriate provision for estimated returns and other 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. The Company maintains an allowance for sales returns based upon its
customer policies and historical experience. Shipping and handling costs charged to customers is included as revenue, and the related costs are recorded as a
component of cost of products sold.
In addition to its direct sales force, the Company utilizes independent 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.
Upfront payments received by the Company under arrangements for product, patent or technology rights in which the Company retains an interest in
the underlying product, patent or technology are initially deferred, and revenue is subsequently recognized over the estimated life of the agreement, product,
patent or technology. The Company received approximately $560 thousand, $395 thousand and $325 thousand of such payments in 2005, 2006 and 2007,
respectively. Revenue from royalties is recognized based upon historical experience or as the Company is informed of sales on which it is entitled to
royalties.
For multiple-element arrangements that are not subject to a higher level of authoritative literature, the Company follows the guidelines of the
Financial Accounting Standards Board’s (“FASB”) Emerging Issues Task Force (“EITF”) Issue No. 00-21, “Accounting for Revenue Arrangements with
Multiple Deliverables” (“EITF 00-21”), in determining the separate units of accounting. For those arrangements subject to the separation criteria of EITF 00-
21, the Company must determine whether the various elements meet the criteria to be accounted for as separate elements. If the elements cannot be
separated, revenue is recognized once revenue recognition criteria for the entire arrangement have been met or over the period that the Company’s obligations
to the customer are fulfilled, as appropriate. If the elements are determined to be separable, the revenue is allocated to the separate elements based on relative
fair value and recognized separately for each element when the applicable revenue recognition criteria have been met. In accounting for these multiple
element arrangements, the Company must make determinations about whether elements can be accounted for separately and make estimates regarding their
relative fair values.
Cost of Products Sold
Royalties payable in connection with certain licensing agreements (see Note 9) are reflected in cost of products sold as incurred.
54
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Stock-Based Compensation
During the year ended December 31, 2005, the Company accounted for its stock-based compensation plans using the intrinsic value method in
accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), and related interpretations, and
follows the disclosure provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”)
and Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure” (“SFAS No. 148”).
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004) “Share-Based Payment” (“SFAS
No. 123R”). Any accounting difference between SFAS No. 123R and SFAS No. 123, as historically applied by the Company, shall be defined as the “123R
Effect”. During the year ended December 31, 2006 and 2007, the 123R Effect reduced the Company’s income from continuing operations, income before
income taxes and net income by $782 thousand and $233 thousand, basic and diluted earnings per share by $0.02 and $0.01 per share for 2006 and $0.01 and
$0.00 per share for 2007, respectively, and did not have a material impact on cash flow from operations and cash flow from financing. At December 31,
2007, the Company had two stock-based compensation plans. See Note 7 for a description of these plans and additional disclosures regarding the plans. The
Company recorded compensation expense of $67 thousand for the year ended December 31, 2005 related to grants of restricted common stock. The
Company recognized $23 thousand of compensation expense related to the exercise of one option in 2005. For the years ended December 31, 2006 and 2007,
the Company recorded compensation expense of approximately $782 thousand and $233 thousand, respectively, related to its stock-based compensation
plans.
Had compensation expense for the Company’s stock-based compensation plans been based on the fair value at the grant dates for awards under those
plans, consistent with the methodology of SFAS No. 123, the Company’s net loss and net loss per share for the year ended December 31, 2005 would
approximate the pro forma amounts as follows (in thousands, except per share amounts):
Net income (loss) as reported
Stock-based employee compensation expense included in the determination of net loss, as reported
Stock-based employee compensation expense as if the fair value based method had been applied to all
awards
Net income (loss), pro forma
Net income (loss) per share:
Basic and diluted — as reported
Basic and diluted — pro forma
Year Ended
December 31,
2005
(in thousands
except per share data)
$
$
$
$
282
90
(3,175 )
(2,803 )
0.01
(0.06 )
As discussed in more detail in Note 7, in March 2005 the vesting of options to purchase approximately 750 thousand shares was accelerated. These
options were not “in-the-money” at the time of acceleration and, therefore, there was no compensation expense recorded in accordance with APB No. 25 as a
result of the modifications. However, for pro forma purposes in accordance with SFAS No. 123, the remaining unamortized compensation related to these
options, calculated under SFAS No. 123 of approximately $540 thousand was recorded in 2005 and included in the table above.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expenses were $353 thousand, $443 thousand and $654 thousand for the years
ended December 31, 2005, 2006 and 2007, respectively.
55
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Income Taxes
The Company records a current provision for income taxes based on estimated amounts payable or 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, in each tax jurisdiction, 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. Deferred
tax assets are reduced by a valuation allowance based on judgmental assessment of available evidence if the Company is unable to conclude that it is more
likely than not that some or all of the deferred tax assets will be realized.
Basic and Diluted Net Income Per Share
Basic net income per common share is computed using the weighted average number of common shares outstanding during the period. Diluted net
income 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. At December 31, 2005, 2006 and
2007, securities that have been excluded from diluted net income per share because they would be anti-dilutive are outstanding options to purchase 7,918,601,
3,721,800 and 1,616,886 shares, respectively, of the Company’s common stock. Securities included in the diluted net income per share calculation at
December 31, 2005, 2006 and 2007, using the treasury stock method, were outstanding options to purchase approximately 788 thousand, 2.6 million and 4.4
million shares of the Company’s common stock, respectively.
Comprehensive Income
Comprehensive income, as shown in the Consolidated Statement of Stockholders’ Equity, includes net income adjusted for the results of certain
stockholders’ equity changes. Such changes include foreign currency items and minimum pension liability adjustments. At December 31, 2007, Accumulated
Other Comprehensive Income consists of $344 thousand gain for cumulative translation adjustments, $36 thousand for unrealized pension liability and $27
thousand of unrealized gain on available for sale investments. At December 31, 2006, Accumulated Other Comprehensive Income consists of $159 thousand
gain for cumulative translation adjustments, $89 thousand for unrealized pension liability and $22 thousand of unrealized gain on available for sale
investments. At December 31, 2005, Accumulated Other Comprehensive Income consists of $74 thousand loss for cumulative translation loss adjustments
and $27 thousand of unrealized gain on available for sale securities.
Foreign Currency Translation
The functional currency of the Company’s Swiss subsidiary is the Swiss Franc. Assets and liabilities of the Company’s Swiss subsidiary are
translated using the exchange rate in effect at the balance sheet date. Revenue and expense accounts and cash flows are translated using an average of
exchange rates in effect during the period. Cumulative translation gains and losses 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 current operations, as are exchange gains and losses on intercompany transactions expected to be
settled in the near term.
56
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
New Accounting Pronouncements
As of January 1, 2007, we adopted FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes - an interpretation of
FASB Statement No. 109,” which establishes that the financial statement effects of a tax position taken or expected to be taken in a tax return are to be
recognized in the financial statements when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. The
adoption of FIN 48 had no material impact on our results of operations or our financial position for the year ended December 31, 2007.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. SFAS No. 157 is
effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The adoption of
SFAS No. 157 is not expected to have a material impact on our results of operations or our financial position.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Liabilities — including an amendment of FASB
Statement No. 115”. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. This statement
will be effective for us January 1, 2008. We have not yet determined the impact, if any, that adopting this standard may have on our financial statements.
In June 2007, the FASB issued EITF Issue No. 07-3, “Accounting for Nonrefundable Advance Payments for Goods or Services Received for Use in
Future Research and Development Activities,” which is effective for fiscal years beginning after December 15, 2007. The EITF concluded that
nonrefundable advance payments for goods and services that will be used or rendered for future research and development activities should be deferred and
capitalized. Such amounts should be recognized as an expense as the related goods are delivered or the services are performed, or when goods or services are
no longer expected to be provided. We are currently assessing the impact of implementing this standard but we do not expect it will have a material impact
on our results of operations or our financial position.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (SFAS 141R), which replaces SFAS No. 141
“Business Combinations”. Under the provisions of SFAS 141R, acquisition costs will generally be expensed as incurred; noncontrolling interests will be
valued at fair value at the acquisition date; in-process research and development will be recorded at fair value as an indefinite-lived intangible asset at the
acquisition date; restructuring costs associated with a business combination will generally be expensed subsequent to the acquisition date; and changes in
deferred tax asset valuation allowances and income tax uncertainties after the acquisition date generally will affect income tax expense. SFAS 141(R) will be
effective, on a prospective basis, for all business combinations for which the acquisition date is after the beginning of our fiscal year 2009, with the exception
of the accounting for valuation allowances on deferred taxes and acquired tax contingencies for which the adoption is retrospective. We are currently
evaluating the impact, if any, that SFAS 141R may have on our financial statements.
57
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company adopted SFAS No. 123R effective January 1, 2006 under the modified prospective method of adoption. This pronouncement requires
companies to measure the cost of employee services received in exchange for an award of equity instruments (including stock options) based on the grant-
date fair value of the award. The fair value is estimated using option pricing models where applicable. The resulting cost is recognized over the period
during which an employee is required to provide service in exchange for the award, usually the vesting period. This represents a change in accounting for the
Company’s stock option plans and employee stock purchase plan. Prior to the Company’s adoption of SFAS No. 123R on January 1, 2006, the Company
measured stock-based compensation under the intrinsic value based method of APB No. 25 with pro forma disclosures of net income or loss assuming the fair
value method of SFAS No. 123, which became effective in 1996, had been applied.
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. At December 31, 2006 and 2007, the Company had capitalized machinery and equipment under capital leases with a gross value of
approximately $38 thousand and $38 thousand, respectively, and net book value of approximately $17 thousand and $9 thousand, respectively. The
capitalized cost of the equipment under capital leases is included in the accompanying consolidated 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 2009, at interest
rates ranging from 11.0% to 14.0% 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, 2007 were as follows (in thousands):
Year Ending December 31,
2008
2009
Total future minimum lease payments
Less amount representing interest
Present value of future minimum lease payments
Less current portion
Total long-term capital lease obligations
58
$
$
10
2
12
1
11
9
2
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
4. LONG-TERM DEBT
Long-term debt consists of the following (dollars in thousands):
Real estate mortgage loan with a commercial bank, due in monthly installments, with the balance due of $163
thousand on June 30, 2009, with a stated interest rate of prime plus 2.5% at December 31, 2006 and prime at
December 31, 2007 (10.75% and 7.25%, respectively).
Term loan with a commercial bank, secured by machinery and equipment, due in monthly installments beginning
February 2006 with the balance due of $481 thousand on June 30, 2009, with a stated interest rate of prime plus
2.5% at December 31, 2006 and prime at December 31, 2007 (10.75% and 7.25%, respectively).
Term loan with a commercial bank, secured by machinery and equipment, due in monthly installments beginning
February 2006 with the balance due of $120 thousand on June 30, 2009, with a stated interest rate of prime plus
2.5% at December 31, 2006 and prime at December 31, 2007 (10.75% and 7.25%, respectively).
Subordinated promissory note, secured by the manufacturing facility in Des Moines, paid in full in May 2007.
Less installments due within one year
December 31,
2006
2007
$
693
$
481
1,592
1,148
398
500
3,183
(1,267 )
1,916
$
287
—
1,916
(767 )
1,149
$
The Company has a credit and security agreement with Wells Fargo Bank, National Association which expires June 30, 2009. The agreement
includes the real estate mortgage loan and term loans above, and a $15.0 million asset-based revolving line of credit with a stated interest rate at
December 31, 2007 of prime (7.25%). Amounts due under the credit facility are secured by a first security interest in essentially all of the Company’s assets.
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 monthly minimum liquidity. The amount available for borrowings
under the line of credit varies based upon available cash, eligible accounts receivable and eligible inventory. As of December 31, 2007, approximately $12.6
million was outstanding on the line of credit and there was $1.6 million available capacity for additional borrowings under the line of credit agreement.
Maturities of long-term debt as of December 31, 2007 were as follows (in thousands):
Year Ending December 31,
2008
2009
59
$767
1,149
$1,916
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
5. SUPPLEMENTAL DISCLOSURE OF INTEREST AND OTHER EXPENSE (INCOME) INFORMATION
Interest and other expense (income):
Interest income
Interest expense
2005
Year Ended December 31,
2006
(in thousands)
2007
$
(63 ) $
1,086
(69 ) $
1,244
(87 )
721
Other, net
6. INCOME TAXES
$
(249 )
774
$
(134 )
1,041
$
(46 )
588
As of December 31, 2007, the Company had a domestic net operating loss carryforward (“NOL”), of approximately $164.6 million, a domestic
alternative minimum tax credit of approximately $146 thousand and a domestic research and development tax credit carryforward of approximately $307
thousand. The Company’s domestic NOL is scheduled to expire in various years beginning in 2010 and ending in 2025, with the majority scheduled to expire
in 2018 or later. The NOL and tax credit carryforwards are subject to alternative minimum tax limitations and to examination by the tax authorities. In
addition, the Company had a “change of ownership” as defined under the provisions of Section 382 of the Internal Revenue Code of 1986, as amended (an
“Ownership Change”). The Company believes the latest Ownership Change occurred at the time of its initial public offering in July 1997. The Company
does not believe this Ownership Change will place a significant restriction on its ability to utilize its NOL in the future. The Company also had an NOL of
approximately $920 thousand in Switzerland at December 31, 2007 related to losses previously recorded by Heska AG, the Company’s subsidiary in
Switzerland, which is scheduled to expire at the end of 2008.
The Company reduces its deferred tax assets by an offsetting valuation allowance if, based on judgmental assessment of available evidence, the
Company is unable to conclude that it is more likely than not that some or all of the related deferred tax assets will be realized. The Company maintained a
full, offsetting valuation allowance for all deferred tax assets prior to 2005. The Company records a valuation allowance adjustment income tax benefit or
expense due to a change in circumstances that causes a change in judgment about the realizability of the related deferred tax asset in future years. Based on
the profitable operating performance of Heska AG, the Company’s evaluation determined that its NOL in Switzerland was realizable on a more-likely-than-
not basis and the related valuation allowance was released in the fourth quarter of 2005, resulting in an income tax benefit of approximately $185 thousand
and a corresponding net deferred tax asset of approximately $185 thousand on December 31, 2005. The Company subsequently obtained agreements from
the tax authorities in the canton of Fribourg (the “Tax Agreements”) regarding the Company’s determination of taxable income. The Company anticipated the
Tax Agreements would reduce the Company’s taxable income and therefore tax obligation in Switzerland in future years as compared to prior expectations.
In addition, the Tax Agreements reduced the Company’s taxable income in Switzerland in 2005 and 2006 from previous estimates for financial reporting
purposes. Accordingly, due to the Company’s lower income expectations in Switzerland related to the Tax Agreements, the Company no longer believed it
would be able to utilize all of its NOL in Switzerland before it fully expired and made an associated reduction in its net deferred tax asset in the fourth quarter
of 2006 via an increase of $69 thousand in the related valuation allowance along with a corresponding income tax expense journal entry. As a result of the
Tax Agreements, the Company had a smaller net deferred tax asset, lower foreign taxable income and greater domestic taxable income than the Company
estimated when it reported its results for the year ended December 31, 2005. Based on the Company’s profitable domestic operating performance, the
Company’s evaluation determined that a portion of its domestic deferred tax assets, which primarily consist of its domestic NOL, was realizable on a more-
likely-than-not basis and the related valuation allowance was released in the fourth quarter of 2007, resulting in an income tax benefit of $30 million and a
corresponding net deferred tax asset of $30 million on December 31, 2007.
We are subject to income taxes in the U.S. federal jurisdiction, and various foreign, state and local jurisdictions. Tax regulations within each
jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. In the United States, the tax
years 2004 — 2006 remain open to examination by the federal Internal Revenue Service and the tax years 2003 — 2006 remain open for various state taxing
authorities.
60
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The components of income (loss) before income taxes were as follows (in thousands):
Domestic
Foreign
2005
Year Ended December 31,
2006
2007
$
$
(1,080 ) $
1,177
97
$
1,976
58
2,034
$
$
4,802
131
4,933
Temporary differences that give rise to the components of deferred tax assets are as follows (in thousands):
Current deferred tax assets (liabilities):
Inventory
Accrued compensation
Net operating loss carryforwards — domestic
Net operating loss carryforwards — foreign
Other
Valuation allowance
Total current deferred tax assets (liabilities)
Noncurrent deferred tax assets (liabilities):
Research and development tax credit
Alternative minimum tax credit
Deferred revenue
Property and equipment
Net operating loss carryforwards — domestic
$
$
$
December 31,
2006
2007
$
$
$
555
52
—
17
347
971
(954 )
17
307
81
4,217
925
64,345
191
69
649
36
315
1,260
—
1,260
307
146
3,655
1,151
62,318
Net operating loss carryforwards — foreign
Valuation allowance
Total noncurrent deferred tax assets (liabilities)
32
69,907
(69,875 )
32
$
—
67,577
(38,801 )
28,776
$
61
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The components of the income tax expense (benefit) are as follows (in thousands):
Current income tax expense (benefit):
Federal
State
Foreign
Total current expense (benefit)
Deferred income tax expense (benefit):
Federal
State
Foreign
Total deferred benefit
Valuation allowance
Total income tax expense (benefit)
2005
Year Ended December 31,
2006
2007
$
$
—
—
—
—
—
—
(185 )
(185 )
—
(185 )
$
$
58
—
—
58
—
—
148
148
—
206
$
$
81
27
—
108
(26,667 )
(3,333 )
17
(29,983 )
—
(29,875 )
The Company’s income tax expense (benefit) relating to income (loss) for the periods presented differ from the amounts that would result from
applying the federal statutory rate to that income (loss) as follows:
Statutory federal tax rate
State income taxes, net of federal benefit
Other permanent differences
Domestic NOL utilization
Foreign NOL utilization
Foreign rate difference
Current year impact of foreign tax holiday
Loss of foreign NOL benefit under new tax rate agreement
Swiss NOL carryforward
Change in valuation allowance
Other
Effective income tax rate
7. CAPITAL STOCK
Stock Option Plans
2005
Year Ended December 31,
2006
2007
34 %
4 %
107 %
—
(95 )%
(199 )%
(166 )%
—
(190 )%
352 %
(38 )%
(191 )%
35 %
4 %
9 %
—
—
2 %
(1 )%
7 %
(1 )%
(50 )%
5 %
10 %
33 %
4 %
4 %
(38 )%
—
—
—
—
—
(608 )%
(1 )%
(606 )%
The Company has two stock option plans which authorize 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. In May 2003, the stockholders approved a new plan, the 2003 Stock Incentive Plan, which
allows for the granting of options for up to 2,390,500 shares of the Company’s common stock. The number of shares reserved for issuance under all plans as
of January 1, 2008 was 4,478,553.
The stock options granted by the board of directors may be either incentive stock options (“ISOs”) or non-qualified stock options (“NQs”). The
exercise price for options under all of the plans may be no less than
62
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
100% of the fair value of the underlying common stock for ISOs or 85% of fair 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.
There are four key inputs to the Black-Scholes model which the Company uses to estimate fair value for options which it issues: expected term,
expected volatility, risk-free interest rate and expected dividends, all of which require the Company to make estimates. The Company’s estimates for these
inputs may not be indicative of actual future performance and changes to any of these inputs can have a material impact on the resulting estimated fair value
calculated for the option. The Company’s expected term input was estimated based on the Company’s historical experience for time from option grant to
option exercise for all employees in 2007, 2006 and 2005; the Company treated all employees in one grouping in all three years. The Company’s expected
volatility input was estimated based on the Company’s historical stock price volatility in 2007, 2006 and 2005. The Company’s risk-free interest rate input
was determined based on the U.S. Treasury yield curve at the time of option issuance in 2007, 2006 and 2005. The Company’s expected dividends input was
zero in 2007, 2006 and 2005. Weighted average assumptions used in 2007, 2006 and 2005 for each of these four key inputs are listed in the following table.
Risk-free interest rate
Expected lives
Expected volatility
Expected dividend yield
A summary of the Company’s stock option plans is as follows:
2005
4.17%
2.8 years
86%
0%
2006
4.81%
2.8 years
65%
0%
2007
3.46%
3.0 years
60%
0%
Outstanding at beginning of period
Granted at Market
Granted above Market
Cancelled
Exercised
Outstanding at end of period
Exercisable at end of period
2005
Year Ended December 31,
2006
2007
Weighted
Average
Exercise
Price
1.4509
1.0130
—
1.6345
0.7222
1.3251
1.3373
Options
$
9,350,959
$
3,999,897
$
—
(821,161 ) $
(540,113 ) $
$
$
11,989,582
11,765,335
Weighted
Average
Exercise
Price
1.3251
1.5175
—
1.3042
1.0418
1.3575
1.3585
Options
$
11,989,582
$
1,078,891
—
$
(681,377 ) $
(568,273 ) $
$
$
11,818,823
11,792,445
Weighted
Average
Exercise
Price
1.3575
1.9305
—
2.9538
1.1348
1.3979
1.3675
Options
$
11,818,823
$
980,835
$
—
(122,746 ) $
(558,495 ) $
$
$
12,118,417
11,340,083
The total estimated fair value of stock options granted during the years ended December 31, 2007, 2006 and 2005 were computed to be
approximately $810 thousand, $718 thousand and $2.2 million, respectively. The amounts are amortized ratably over the vesting periods of the options. The
weighted average estimated fair value of options granted during the years ended December 31, 2007, 2006 and 2005 was computed to be approximately
$0.83, $0.68 and $0.56, respectively. The total intrinsic value of options exercised during the years ended December 31, 2007, 2006 and 2005 were $557
thousand, $251 thousand and $123 thousand, respectively. The cash proceeds from options exercised during the years ended December 31, 2007, 2006 and
2005 were $634 thousand, $592 thousand and $390 thousand. The Company does not consider the tax benefit realized as a result of the exercise of these
options to be material given the Company’s relatively large NOL in the United States.
63
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The following table summarizes information about stock options outstanding and exercisable at December 31, 2007.
Exercise Prices
$0.34 - $0.87
$0.88 - $1.06
$1.07 - $1.25
$1.27 - $1.82
$1.83 - $13.75
$0.34 - $13.75
Number of
Options
Outstanding
at
December 31,
2007
1,948,126
2,845,950
2,568,823
2,139,453
2,616,065
12,118,417
Options Outstanding
Options Exercisable
Weighted
Average
Remaining
Contractual
Life in Years
Weighted
Average
Exercise
Price
5.11
6.07
6.39
7.04
6.43
6.23
$
$
$
$
$
$
0.6426
0.9401
1.2134
1.5971
2.4768
1.3979
Number of
Options
Exercisable
at
December 31,
2007
1,948,126
2,845,950
2,564,656
2,139,453
1,841,898
11,340,083
$
$
$
$
$
$
Weighted
Average
Exercise
Price
0.6426
0.9401
1.2136
1.5971
2.7422
1.3675
As of December 31, 2007, there was $681 thousand of total unrecognized compensation expense related to outstanding stock options. That cost is
expected to be recognized over a weighted-average period of 2.1 years with all cost to be recognized by the end of December 2011, assuming all options vest
according to the vesting schedules in place at December 31, 2007. As of December 31, 2007, the aggregate intrinsic value of outstanding options was
approximately $6.9 million and the aggregate intrinsic value of exercisable options was approximately $6.9 million.
Modifications to and Vesting of Certain Stock Option Grants
On February 24, 2005, the Company’s Board of Directors (the “Board of Directors”) considered the significant impact that the use of fair values,
rather than intrinsic values, would have on the Company’s future results of operations, as well as factors including that the management team had requested
that their salaries be frozen for 2005, many non-management employees’ 2005 raises were to be below market levels, no management bonus payments were
made for 2004 and the 2005 management incentive plan called for a performance in excess of the Company’s internal budget before any bonus payments
were to be made, and authorized the Company’s Stock Option Committee (the “Stock Option Committee”), which consisted solely of the Company’s Chief
Executive Officer, to immediately vest all options granted from that date through June 30, 2005 and to accelerate the vesting of any outstanding but unvested
stock options with a strike price that is not “in-the-money” at its discretion (the aggregate authorization to the Stock Option Committee to be known as the
“Vesting Authorization”) through June 30, 2005; for similar reasons and understanding the SEC had issued a release amending the compliance date for SFAS
No. 123R, on May 9, 2005, the Board of Directors approved the extension of the Vesting Authorization to the Stock Option Committee from June 30, 2005 to
December 31, 2005. On March 30, 2005, the Stock Option Committee exercised its discretion and accelerated the vesting of outstanding but unvested stock
options with a strike price greater than or equal to $0.82. This action effected options to purchase approximately 750 thousand shares, approximately
55 thousand of which were shares underlying options held by the Company’s Directors and Executive Officers. All options granted in 2005 on or after
March 30, 2005, which totaled options to purchase approximately 3.9 million shares, were granted with immediate vesting.
Employee Stock Purchase Plan (the “ESPP”)
Under the 1997 Employee Stock Purchase Plan, the Company is authorized to issue up to 2,750,000 shares of common stock to its employees, of
which 2,322,443 had been issued as of December 31, 2007. 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. Each enrollment
64
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
period is one year, with six-month measurement periods ending June 30 and December 31. The purchase price of the stock for June 30 and December 31 was
85% of the end-of-measurement-period market price.
For the years ended December 31, 2005, 2006 and 2007, the weighted-average fair value of the purchase rights granted was $0.27, $0.36 and $0.50
per share, respectively. Pro forma stock-based compensation was approximately $65 thousand in 2005 for the ESPP. Beginning in 2006, stock-based
compensation was expensed.
Restricted Stock Exchange
On August 9, 2001, the Board of Directors approved a proposal to give Heska Corporation and Heska AG 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 value of the
restricted stock at the time of the exchange was $0.68 per share. The restricted stock vested over 48 months beginning November 1, 2001. This exchange
resulted in deferred compensation of approximately $710 thousand that was recognized over the vesting period of the restricted stock. The Company
recognized $67 thousand of non-cash compensation expense from this exchange in 2005. A total of approximately 728 thousand shares vested under the
exchange offer. The final vesting date was October 1, 2005 and employees may sell previously vested shares.
8. MAJOR CUSTOMERS
The Company had no customers in 2005, 2006 and 2007 to whom sales represented 10% or more of total revenue. No customer represented 10% or
more of total accounts receivable at December 31, 2007. At December 31, 2006, the Company had one customer, Schering-Plough Animal Health
Corporation (“SPAH”), who represented 13% of total accounts receivable.
9. COMMITMENTS AND CONTINGENCIES
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, 2005, 2006 and 2007, royalties of $895 thousand, $722 thousand and $559 thousand became payable under these agreements,
respectively.
The Company has a contract with one supplier for unconditional annual minimum inventory purchases totaling approximately $2.7 million in fiscal
2008.
The Company has entered into operating leases for its office and research facilities and certain equipment with future minimum payments as of
December 31, 2007 as follows (in thousands):
Year Ending December 31,
2008
2009
2010
2011
2012
Thereafter
$
$
1,824
1,706
1,671
1,709
1,750
20,358
29,018
65
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Company had rent expense of $1.4 million, $1.8 million and $1.9 million in 2005, 2006 and 2007, respectively.
From time to time, the Company may be involved in litigation relating to claims arising out of its operations. At December 31, 2007, the Company
had no material litigation pending.
The Company’s current terms and conditions of sale include a limited warranty that its products and services will conform to published
specifications at the time of shipment. The typical remedy for breach of warranty is to correct or replace any defective product, and if not possible or
practical, the Company will accept the return of the defective product and refund the amount paid. Historically, the Company has incurred minimal warranty
costs, and as a result, does not maintain a warranty reserve.
The Company’s licensing arrangements generally include a product indemnification provision that will indemnify and defend a licensee in actions
brought against the licensee that claim the Company’s patents infringe upon a copyright, trade secret or valid patent. Historically, the Company has not
incurred any significant costs related to product indemnification claims, and as a result, does not maintain a reserve for such exposure.
10. SEGMENT REPORTING
The Company is comprised of two reportable segments, Core Companion Animal Health (“CCA”) and Other Vaccines, Pharmaceuticals and
Products (“OVP”). The Core Companion Animal Health segment includes diagnostic instruments and supplies, as well as single use diagnostic and other
tests, pharmaceuticals and vaccines, primarily for canine and feline use. These products are sold directly by the Company as well as through independent
third-party distributors and through other distribution relationships. CCA segment products manufactured at the Des Moines, Iowa production facility
included in the OVP segment’s assets are transferred at cost and are not recorded as revenue for the OVP segment. The Other Vaccines, Pharmaceuticals and
Products segment includes private label vaccine and pharmaceutical production, primarily for cattle but, also for other animals including small mammals and
fish. All OVP products are sold by third parties under third party labels.
Additionally, the Company generates non-product revenue from research and development projects for third parties, licensing of technology and
royalties. The Company performs these research and development projects for both companion animal and livestock purposes.
Summarized financial information concerning the Company’s reportable segments is shown in the following table (in thousands).
2005:
Total revenue
Operating income (loss)
Interest expense
Total assets
Capital expenditures
Depreciation and amortization
Amortization of intangible assets
Core
Companion Animal
Health
Other Vaccines,
Pharmaceuticals
and Products
Total
$
56,604
(595 )
652
22,848
931
846
157
$
12,833
1,466
434
13,936
445
1,004
—
69,437
871
1,086
36,784
1,376
1,850
157
$
66
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2006:
Total revenue
Operating income
Interest expense
Total assets
Capital expenditures
Depreciation and amortization
Amortization of intangible assets
2007:
Total revenue
Operating income
Interest expense
Total assets
Capital expenditures
Depreciation and amortization
Amortization of intangible assets
Core
Companion Animal
Health
Other Vaccines,
Pharmaceuticals
and Products
Total
$
$
$
$
62,968
2,780
809
26,112
810
765
334
12,092
295
435
12,383
379
906
—
Core
Companion Animal
Health
Other Vaccines,
Pharmaceuticals
and Products
$
$
67,279
1,862
429
62,414
1,416
1,295
—
15,056
3,659
292
13,177
941
888
—
75,060
3,075
1,244
38,495
1,189
1,671
334
Total
82,335
5,521
721
75,591
2,357
2,183
—
Total revenue by principal geographic area was as follows (in thousands):
United States
$
60,849
$
63,828
$
69,389
For the Years Ended December 31,
2006
2005
2007
Europe
Other International
Total
Total assets by principal geographic areas were as follows (in thousands):
United States
Europe
Other International
Total
4,151
4,437
69,437
$
5,974
5,258
75,060
$
4,088
8,858
82,335
2005
December 31,
2006
2007
33,414
3,370
—
36,784
$
$
33,395
5,100
—
38,495
$
$
72,585
3,006
—
75,591
$
$
$
67
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
11. QUARTERLY FINANCIAL INFORMATION (unaudited)
The following summarizes selected quarterly financial information for each of the two years in the periods ended December 31, 2006 and 2007
(amounts in thousands, except per share data).
Q1
Q2
Q3
Q4
Total
2006:
Total revenue
Gross profit
Operating income
Net income (loss)
Net income (loss) per share — basic
Net income (loss) per share — diluted
2007:
Total revenue
Gross profit
Operating income
Net income
Net income per share — basic
Net income per share — diluted
$
$
$
$
17,500
6,853
42
(239 )
(0.00 )
(0.00 )
22,715
10,360
2,650
2,394
0.05
0.04
68
$
$
18,537
7,629
622
302
0.01
0.01
20,087
8,301
1,210
1,033
0.02
0.02
$
$
18,605
7,936
1,150
864
0.02
0.02
19,491
7,608
1,133
1,012
0.02
0.02
$
$
20,418
8,228
1,261
901
0.02
0.02
20,042
6,918
528
30,369
0.59
0.55
75,060
30,646
3,075
1,828
0.04
0.03
82,335
33,187
5,521
34,808
0.68
0.63
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures.
Our management, with the participation of our chief executive officer and our chief financial officer, evaluated the effectiveness of our disclosure
controls and procedures, as defined by Rule 13a-15 of the Exchange Act, as of the period covered by this Annual Report on Form 10-K. Based on this
evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures are adequate to provide
reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management,
including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding disclosure.
Management’s Report on Internal Control Over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act. Under the supervision and with the participation of our management, including our chief executive officer and chief
financial officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on criteria outlined in the
COSO Internal Control over Financial Reporting — Guidance for Smaller Public Companies, a supplemental implementation guide issued in 2007 which
modified criteria established in the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this evaluation, the Company’s management has concluded that the Company’s internal control over financial reporting
was effective as of December 31, 2007.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate. Accordingly, even an effective system of internal control will provide only reasonable
assurance that the objectives of the internal control system are met.
The effectiveness of our internal control over financial reporting as of December 31, 2007, has been audited by Ehrhardt Keefe Steiner & Hottman
PC, an independent registered public accounting firm, as stated in their report, which is included herein.
Changes in Internal Control over Financial Reporting.
There has been no change in our internal control over financial reporting during the fourth fiscal quarter covered by this Form 10-K that has
materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
69
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 2008 Annual Meeting of Stockholders.
Item 10. Directors and Executive Officers of the Registrant.
Executive Officers
The information required by this item with respect to executive officers is incorporated by reference to Item 1 of this report and can be found under
the caption “Executive Officers.”
Directors
The information required by this section with respect to our directors will be incorporated by reference to the information in the sections entitled
“Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy Statement.
Code of Ethics
Our Board of Directors has adopted a code of ethics for senior executive and financial officers (including our principal executive officer, principal
financial officer and principal accounting officer). The code of ethics is available on our website at www.heska.com. We intend to disclose any amendments
to or waivers from the code of ethics at that location.
Audit Committee
The information required by this section with respect to our Audit Committee will be incorporated by reference to the information in the section
entitled “Directors and Executive Officers” in the Proxy Statement.
Section 16(a) Beneficial Ownership Reporting Compliance
The information required by this item is incorporated by reference to the information in the section entitled “Section 16(a) Beneficial Ownership
Reporting Compliance” in the Proxy Statement.
Item 11. Executive Compensation.
The information required by this section will be incorporated by reference to the information in the sections entitled “Director Compensation” and
“Executive Compensation” in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this section will be incorporated by reference to the information in the section entitled “Common Stock Ownership of
Certain Beneficial Owners and Management” in the Proxy Statement.
70
Item 13. Certain Relationships and Related Transactions.
The information required by this section will be incorporated by reference to the information in the sections entitled “Executive Compensation—
Employment, Severance and Change of Control Agreements,” “Certain Transactions and Relationships” and “Directors and Executive Officers” in the Proxy
Statement.
Item 14. Principal Accountant Fees and Services.
The information required by this section will be incorporated by reference to the information in the section entitled “Auditor Fees and Services” in
the Proxy Statement.
The information required by Part III to the extent not set forth herein, will be incorporated herein by reference to our definitive Proxy Statement for
the 2008 Annual Meeting of Stockholders.
71
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(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
(amounts in thousands)
Allowance for doubtful accounts
Year ended:
December 31, 2005
December 31, 2006
December 31, 2007
(a) Write-offs of uncollectible accounts.
(3) Exhibits:
Balance at
Beginning of
Year
Additions
Charged to
Costs and
Expenses
Other
Additions
Deductions
Balance at
End of Year
$
$
$
95
88
98
$
$
$
43
46
26
—
—
—
$
$
$
(50 )(a) $
(36 )(a) $
(28 )(a) $
88
98
96
72
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
3(i)
3(ii)
10.1*
10.2*
10.3*
10.4*
10.5*
10.6*
10.7*
10.8*
10.9*
10.10*
10.11*
10.12*
10.13*
10.14*
10.15*
10.16*
10.17*
10.18*
10.19*
10.20*
10.21*
10.22*
10.23*
Notes
(2)
(3)
(12)
(12)
(12)
(9)
(12)
(12)
(11)
(13)
(10)
(6)
(8)
(6)
(12)
(12)
(12)
Description of Document
Restated Certificate of Incorporation of the Registrant.
Bylaws of the Registrant.
1997 Incentive Stock Plan of Registrant, as amended and restated.
1997 Incentive Stock Plan Employees and Consultants Option Agreement.
1997 Incentive Stock Plan Outside Directors Option Agreement.
1997 Employee Stock Purchase Plan of Registrant, as amended.
2003 Equity Incentive Plan.
2003 Equity Incentive Plan Option Agreement.
Management Incentive Plan Master Document.
2008 Management Incentive Plan.
Director Compensation Policy, effective January 1, 2007.
Form of Indemnification Agreement entered into between Registrant and its directors and certain officers.
Amended and Restated Employment Agreement with Robert B. Grieve, dated March 29, 2006.
Amendment to Employment Agreement between Registrant and Robert B. Grieve, dated effective as of January 1, 2008.
Employment Agreement between Registrant and Jason Napolitano, dated May 6, 2002.
Amendment to Employment Agreement between Registrant and Jason Napolitano, dated effective as of January 1, 2008.
Employment Agreement between Registrant and Joseph H. Ritter, dated May 1, 2004.
Amendment to Employment Agreement between Registrant and Joseph H. Ritter, dated effective as of January 1, 2008.
Employment Agreement between Registrant and Michael Bent, dated May 1, 2000.
Amendment to Employment Agreement between Registrant and Michael Bent, dated effective as of January 1, 2008.
Employment Agreement between Registrant and Michael McGinley, dated May 1, 2000.
Amendment to Employment Agreement between Registrant and Michael McGinley, dated effective as of January 1, 2008.
Employment Agreement between Registrant and Nancy Wisnewski, dated April 15, 2002.
Amendment to Employment Agreement between Registrant and Nancy Wisnewski, dated effective as of January 1, 2008.
Employment Agreement between Registrant and John R. Flanders, dated December 11, 2006.
10.24*
10.25
10.26
10.27
10.28+
10.29+
10.30+
10.31
10.32+
10.33+
10.34+
10.35+
10.36+
10.37+
10.38+
10.39+
10.40+
10.41+
10.42+
10.43+
21.1
23.1
24.1
31.1
31.2
32.1
Notes
*
+
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
(11)
(12)
(13)
(8)
(9)
(9)
(12)
(1)
(4)
(5)
(7)
(12)
(12)
(12)
(12)
(12)
(12)
Amendment to Employment Agreement between Registrant and John R. Flanders, dated effective as of January 1, 2008.
Net Lease Agreement between Registrant and CCMRED 40 LLC, dated May 24, 2004.
First Amendment to Net Lease Agreement and Development Agreement between Registrant and CCMRED 40, LLC, dated
February 11, 2005.
Second Amendment to Net Lease Agreement between Registrant and CCMRED 40 LLC, dated July 14, 2005.
73
Third Amended and Restated Credit and Security Agreement between Registrant, Diamond Animal Health, Inc. and Wells
Fargo Business Credit, Inc., dated December 30, 2005.
First Amendment to Third Amended and Restated Credit and Security Agreement between Registrant, Diamond Animal
Health, Inc. and Wells Fargo Bank, National Association, dated December 5, 2006.
Second Amendment to Third Amended and Restated Credit and Security Agreement between Registrant, Diamond Animal
Health, Inc. and Wells Fargo Bank, National Association, dated July 20, 2007.
Third Amendment to Third Amended and Restated Credit and Security Agreement between Registrant, Diamond Animal
Health, Inc. and Wells Fargo Bank, National Association, dated December 21, 2007.
Supply Agreement between Registrant and Quidel Corporation, dated July 3, 1997.
First Amendment to Product Supply Agreement between Registrant and Quidel Corporation, dated March 15, 1999.
Amended and Restated Bovine Vaccine Distribution Agreement between Diamond Animal Health, Inc. and Agri
Laboratories, Ltd., dated September 30, 2002.
First Amendment to Amended and Restated Bovine Vaccine Distribution Agreement between Diamond Animal Health, Inc.
and Agri Laboratories, Ltd., dated September 20, 2004.
Second Amendment to Amended and Restated Bovine Vaccine Distribution Agreement between Diamond Animal
Health, Inc. and Agri Laboratories, Ltd., dated December 10, 2004.
Third Amendment to Amended and Restated Bovine Vaccine Distribution Agreement between Diamond Animal
Health, Inc. and Agri Laboratories, Ltd., dated May 26, 2006.
Fourth Amendment to Amended and Restated Bovine Vaccine Distribution Agreement between Diamond Animal
Health, Inc. and Agri Laboratories, Ltd., dated as of November 16, 2007.
Supply and Distribution Agreement between Registrant and Boule Medical AB, dated June 17, 2003, Letter Amendment to
Supply and Distribution Agreement between Registrant and Boule Medical AB, dated June 1, 2004 and Letter Amendment
to Supply and Distribution Agreement between Registrant and Boule Medical AB, dated December 31, 2004.
Supply and License Agreement between Registrant and Schering-Plough Animal Health Corporation, dated August 1, 2003.
Distribution Agreement between Registrant and i-STAT Corporation, dated October 1, 2004.
Distribution Agreement between Registrant and Arkray Global Business, Inc. dated November 1, 2004.
Clinical Chemistry Analyzer Agreement between Registrant and FUJIFILM Corporation dated as of January 30, 2007.
Subsidiaries of the Company.
Consent of Ehrhardt Keefe Steiner & Hottman PC, Independent Registered Public Accounting Firm.
Power of Attorney (See page 76 of this Form 10-K).
Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as
amended.
Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as
amended.
74
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Indicates management contract or compensatory plan or arrangement.
Portions of the exhibit have been omitted pursuant to a request for confidential treatment.
Filed with the Registrant’s Form 10-Q for the quarter ended September 30, 1997.
Filed with the Registrant’s Form 10-Q for the quarter ended June 30, 2000.
Filed with the Registrant’s Form 10-Q for the quarter ended June 30, 2001.
Filed with the Registrant’s Form 10-K for the year ended December 31, 2001.
Filed with the Registrant’s Form 10-Q for the quarter ended September 30, 2002.
Filed with the Registrant’s Form 10-K for the year ended December 31, 2002.
Filed with the Registrant’s Form 10-Q for the quarter ended September 30, 2004.
Filed with the Registrant’s Form 10-K for the year ended December 31, 2004.
Filed with the Registrant’s Form 10-Q for the quarter ended June 30, 2005.
Filed with the Registrant’s Form 10-K for the year ended December 31, 2005.
Filed with the Registrant’s Form 10-Q for the quarter ended March 31, 2006.
Filed with the Registrant’s Form 10-K for the year ended December 31, 2006.
Filed with the Registrant’s Form 8-K dated March 5, 2007.
75
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 March 3, 2008.
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, Jason
A. Napolitano and Michael A. Bent, 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
/s/ ROBERT B. GRIEVE
Robert B. Grieve
/s/ JASON A. NAPOLITANO
Jason A. Napolitano
/s/ MICHAEL A. BENT
Michael A. Bent
/s/ WILLIAM A. AYLESWORTH
William A. Aylesworth
/s/ A. BARR DOLAN
A. Barr Dolan
/s/ PETER EIO
Peter Eio
/s/ G. IRWIN GORDON
G. Irwin Gordon
/s/ LOUISE L. McCORMICK
Louise L. McCormick
/s/ JOHN F. SASEN, SR.
John F. Sasen, Sr.
Title
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer) and Director
Executive Vice President and Chief Financial
Officer (Principal Financial Officer)
Vice President, Controller
(Principal Accounting Officer)
Director
Director
Director
Director
Director
Director
76
Date
March 3, 2008
March 3, 2008
March 3, 2008
March 3, 2008
March 3, 2008
March 3, 2008
March 3, 2008
March 3, 2008
March 3, 2008
Heska Corporation 2008 Management Incentive Plan
Exhibit 10.8
The following is intended to implement the Heska Corporation Management Incentive Plan Master Document for the year beginning on January 1, 2008 and
ending on December 31, 2008 (the “2008 MIP”). The Compensation Committee has agreed on the following for the 2008 MIP.
1) The Category Percentages for the 2008 MIP are as follows:
Chief Executive Officer
Chief Financial Officer
Vice Presidents
Directors
50.0% of base pay
35.0% of base pay
35.0% of base pay
25.0% of base pay
2) The Plan Allocation for the 2008 MIP is as follows:
75% on overall achievement of the company-wide financial objective and 25% on individual performance
3) The Key Parameters for the 2008 MIP is as follows:
Budgeted Pre-MIP Operating Income results in 100% payout.
4) The Payout Structure for the 2008 MIP is as follows:
Pre-MIP
Operating Income
<=5,862,139
6,220,577
6,579,015
6,937,453
7,295,891
7,654,329
8,012,767
8,371,205
8,729,643
9,088,081
9,446,519
9,804,957
10,163,395
10,521,833
10,880,271
11,238,709
11,238,709+
MIP Payout
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
110.0%
120.0%
130.0%
140.0%
150.0%
Capped
MIP Amount (A)
—
(115,489)
(230,978)
(346,467)
(461,956)
(577,445)
(692,933)
(808,422)
(923,911)
(1,039,400)
(1,154,889)
(1,270,378)
(1,385,867)
(1,501,356)
(1,616,845)
(1,732,333)
(1,732,333)
Post-MIP
Operating Income
<=5,862,139
6,105,088
6,348,037
6,590,986
6,833,935
7,076,885
7,319,834
7,562,783
7,805,732
8,048,681
8,291,630
8,534,579
8,777,528
9,020,477
9,263,426
9,506,376
9,506,376+
Notes:
(A) MIP payout equals 32.22% of incremental Operating Income above the baseline point of 2007, capped at a maximum of $1.732 million (which occurs at
pre-MIP Operating Income of $11,238,709).
Any MIP payment based on Pre-MIP Operating Income over $11,238,709 will be at the sole and absolute discretion of the Compensation Committee.
INDEMNIFICATION AGREEMENT
Exhibit 10.10
THIS INDEMNIFICATION AGREEMENT is effective as of [insert date] (“Agreement”), by and between Heska Corporation, a Delaware
corporation (the “Company”), and [insert name of person] (the “Indemnitee”), with reference to the following facts:
A. The Company desires the benefits of having Indemnitee serve as an officer and/or director secure in the knowledge that any expenses,
liability and/or losses incurred by him in his good faith service to the Company will be borne by the Company or its successors and assigns;
B. Indemnitee is willing to serve in his position with the Company only on the condition that he be indemnified for such expenses, liability
and/or losses;
C. The Company and Indemnitee recognize that obtaining liability insurance for directors, officers and agents of a corporation at reasonable
cost may at times be difficult;
D. The Company and Indemnitee recognize that there has been substantial litigation against corporate directors, officers and agents; and
E. The Company’s Restated Certificate of Incorporation allows the Company to indemnify its directors, officers and agents to the maximum
extent permitted under Delaware law.
NOW, THEREFORE, the parties hereby agree as follows:
1. Definitions. For purposes of this Agreement:
1.1 “Agent” shall mean any person who (a) is or was a director, officer, employee or agent of the Company or a subsidiary of
the Company whether serving in such capacity or as a director, officer, employee, agent, fiduciary or other official of another corporation,
joint venture, trust or other enterprise at the request of, for the convenience of, or to represent the interests of the Company or a subsidiary
of the Company or (b) was a director, officer, employee or agent of Heska Corporation, a California corporation and the predecessor by
merger to the Company (the “Predecessor Corporation”), whether serving in such capacity or as a director, officer, employee, agent,
fiduciary or other official of another corporation, joint venture, trust or other enterprise at the request of, for the convenience of, or to
represent the interests of such Predecessor Corporation.
1.2 “Change of Control” shall mean the occurrence of any of the following events after the date of this Agreement:
(a) A change in the composition of the board of directors of the Company (the “Board”), as a result of
which fewer than two-thirds of the incumbent directors are directors who either (a) had been directors of the Company
24 months prior to such change or (b) were elected, or nominated for election, to the Board with the affirmative votes of
at least a majority of the directors who had been directors of the Company 24 months prior to such change and who were
still in office at the time of the election or nomination; or
(b) Any “person” (as such term is used in sections 13(d) and 14(d) of the Securities Exchange Act of
1934 (the “Exchange Act”), as amended) through the acquisition or aggregation of securities is or becomes the beneficial
owner, directly or indirectly, of securities of the Company representing 20 percent or more of the combined voting power
of the Company’s then outstanding securities ordinarily (and apart from rights accruing under special circumstances)
having the right to vote at elections of directors (the “Capital Stock”); provided, however, that any change in ownership
of the Company’s securities by any person resulting solely from a reduction in the aggregate number of outstanding
shares of Capital Stock, and any decrease thereafter in such person’s ownership of securities, shall be disregarded until
such person increases in any manner, directly or indirectly, such person’s beneficial ownership of any securities of the
Company.
1.3 “Disinterested Director” shall mean a director of the Company who is not and was not a party to the Proceeding in respect
of which indemnification is being sought by Indemnitee.
1.4 “Expenses” shall be broadly construed and shall include, without limitation, (a) all direct and indirect costs incurred, paid
or accrued, (b) all attorneys’ fees, retainers, court costs, transcripts, fees of experts, witness fees, travel expenses, food and lodging expenses
while traveling, duplicating costs, printing and binding costs, telephone charges, postage, delivery service, freight or other transportation
fees and expenses, (c) all other disbursements and out-of-pocket expenses, (d) amounts paid in settlement, to the extent not prohibited by
Delaware Law, and (e) reasonable compensation for time spent by Indemnitee for which he is otherwise not compensated by the Company
or any third party, actually
2
and reasonably incurred in connection with or arising out of a Proceeding, including a Proceeding by Indemnitee to establish or enforce a
right to indemnification under this Agreement, applicable law or otherwise.
1.5 “Independent Counsel” shall mean a law firm or a member of a law firm that neither is presently nor in the past five years
has been retained to represent: (a) the Company, an affiliate of the Company or Indemnitee in any matter material to either party or (b) any
other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term “Independent
Counsel” shall not include any person who, under the applicable standards of professional conduct then prevailing would have a conflict of
interest in representing either the Company or Indemnitee in an action to determine Indemnitee’s right to indemnification under this
Agreement.
1.6 “Liabilities” shall mean liabilities of any type whatsoever, including, but not limited to, judgments or fines, ERISA or other
excise taxes and penalties, and amounts paid in settlement (including all interest, assessments or other charges paid or payable in connection
with any of the foregoing) actually and reasonably incurred by Indemnitee in connection with a Proceeding.
1.7 “Delaware Law” means the Delaware General Corporation Law, as amended and in effect from time to time or any
successor or other statutes of Delaware having similar import and effect.
1.8 “Proceeding” shall mean any pending, threatened or completed action, hearing, suit or any other proceeding, whether civil,
criminal, arbitrative, administrative, investigative or any alternative dispute resolution mechanism, including without limitation any such
Proceeding brought by or in the right of the Company.
2. Employment Rights and Duties. Subject to any other obligations imposed on either of the parties by contract or by law, and with the
understanding that this Agreement is not intended to confer employment rights on either party which they did not possess on the date of its execution,
Indemnitee agrees to serve as a director or officer so long as he is duly appointed or elected and qualified in accordance with the applicable provisions of the
Restated Certificate of Incorporation (the “Certificate”) and Bylaws (the “Bylaws”) of the Company or any subsidiary of the Company and until such time as
he resigns or fails to stand for election or until his employment terminates. Indemnitee may from time to time also perform other services at the request, or
for the convenience of, or otherwise benefiting the Company. Indemnitee may at any time and for any reason resign or be removed from such position
(subject to any other contractual obligation or other obligation imposed by operation of law), in which event the Company shall have no obligation under
this Agreement to continue Indemnitee in any such position.
3
2.1 Directors’ and Officers’ Insurance.
(a) The Company hereby covenants and agrees that, so long as Indemnitee shall continue to serve as a
director or officer of the Company and thereafter so long as Indemnitee shall be subject to any possible Proceeding, the
Company, subject to Section 2.1(c), shall maintain directors’ and officers’ insurance in full force and effect.
(b) In all policies of directors’ and officers’ insurance, Indemnitee shall be named as an insured in such a
manner as to provide Indemnitee the same rights and benefits, subject to the same limitations, as are accorded to the
Company’s directors or officers most favorably insured by such policy.
3. Indemnification. The Company shall indemnify Indemnitee to the fullest extent not prohibited by Delaware Law and the provisions of the
Certificate and Bylaws of the Company in effect on the date hereof, and as Delaware Law, the Certificate and Bylaws may from time to time be amended
(but, in the case of any such amendment, only to the extent such amendment permits the Company to provide broader indemnification rights than Delaware
Law, the Certificate and Bylaws permitted the Company to provide before such amendment). The right to indemnification conferred in the Certificate shall
be presumed to have been relied upon by Indemnitee in serving or continuing to serve the Company as a director or officer and shall be enforceable as a
contract right. Without in any way diminishing the scope of the indemnification provided by the Certificate and this Section 3, the Company will indemnify
Indemnitee if and whenever he is or was a witness, party or is threatened to be made a witness or a party to any Proceeding, by reason of the fact that he is or
was an Agent or by reason of anything done or not done, or alleged to have been done or not done, by him in such capacity, against all Expenses and
Liabilities actually and reasonably incurred by Indemnitee or on his behalf in connection with the investigation, defense, settlement or appeal of such
Proceeding. In addition to, and not as a limitation of, the foregoing, the rights of indemnification of Indemnitee provided under this Agreement shall include
those rights set forth in the remainder of this Agreement.
4. Payment of Expenses.
4.1 All Expenses incurred by or on behalf of Indemnitee shall be advanced by the Company to Indemnitee within 20 days after
the receipt by the Company of a written request for such advance which may be made from time to time, whether prior to or after final
disposition of a Proceeding (unless there has been a final determination by a court of competent jurisdiction that Indemnitee is not entitled
to be indemnified for such Expenses). Indemnitee’s entitlement to advancement of Expenses
4
shall include those incurred in connection with any Proceeding by Indemnitee seeking a determination, an adjudication or an award in
arbitration pursuant to this Agreement. The requests shall reasonably evidence the Expenses incurred by Indemnitee in connection
therewith. Indemnitee hereby undertakes to repay the amounts advanced if it shall ultimately be determined that Indemnitee is not entitled
to be indemnified pursuant to the terms of this Agreement.
4.2 Notwithstanding any other provision in this Agreement, to the extent that Indemnitee has been successful on the merits or
otherwise in defense of any Proceeding, Indemnitee shall be indemnified against all Expenses and Liabilities actually and reasonably
incurred by Indemnitee in connection therewith.
5. Procedure for Determination of Entitlement to Indemnification.
5.1 Whenever Indemnitee believes that he is entitled to indemnification pursuant to this Agreement, Indemnitee shall submit a
written request for indemnification (the “Indemnification Request”) to the Company to the attention of the Chief Executive Officer with a
copy to the Secretary. This request shall include documentation or information which is necessary for the determination of entitlement to
indemnification and which is reasonably available to Indemnitee. Determination of Indemnitee’s entitlement to indemnification shall be
made no later than 60 days after receipt of the Indemnification Request. The Chief Executive Officer or the Secretary shall, promptly upon
receipt of Indemnitee’s request for indemnification, advise the Board in writing that Indemnitee has made such request for indemnification.
5.2 The Indemnification Request shall set forth Indemnitee’s selection of which of the following forums shall determine
whether Indemnitee is entitled to indemnification:
(1) A majority vote of Directors who are not parties to the action with respect to which indemnification is
sought, even though less than a quorum.
(2) A written opinion of an Independent Counsel (provided there are no such Directors as set forth in
(1) above or if such Directors as set forth in (1) above so direct or there has been a Change of Control).
(3) A majority vote of the stockholders at a meeting at which a quorum is present, with the shares owned by
the person to be indemnified not being entitled to vote thereon.
5
(4) The court in which the Proceeding is or was pending upon application by Indemnitee.
The Company agrees to bear any and all costs and expenses incurred by Indemnitee or the Company in connection with the determination of
Indemnitee’s entitlement to indemnification by any of the above forums.
6. Presumptions and Effect of Certain Proceedings. No initial finding by the Board, its counsel, Independent Counsel, arbitrators or the
stockholders shall be effective to deprive Indemnitee of the protection of this indemnity, nor shall a court or other forum to which Indemnitee may apply for
enforcement of this indemnity give any weight to any such adverse finding in deciding any issue before it. Upon making a request for indemnification,
Indemnitee shall be presumed to be entitled to indemnification under this Agreement and the Company shall have the burden of proof to overcome that
presumption in reaching any contrary determination. The termination of any Proceeding by judgment, order, settlement, arbitration award or conviction, or
upon a plea of nolo contendere or its equivalent, shall not, of itself, (a) adversely affect the rights of Indemnitee to indemnification except as indemnification
may be expressly prohibited under this Agreement, (b) create a presumption that Indemnitee did not act in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the Company or (c) with respect to any criminal action or proceeding, create a presumption that
Indemnitee had reasonable cause to believe that his conduct was unlawful.
7. Remedies of Indemnitee in Cases of Determination not to Indemnify or to Advance Expenses.
7.1 In the event that (a) an initial determination is made that Indemnitee is not entitled to indemnification, (b) advances for
Expenses are not made when and as required by this Agreement, (c) payment has not been timely made following a determination of
entitlement to indemnification pursuant to this Agreement or (d) Indemnitee otherwise seeks enforcement of this Agreement, Indemnitee
shall be entitled to a final adjudication in an appropriate court of the State of Delaware of his entitlement to such indemnification or
advance. Alternatively, Indemnitee at his option may seek an award in arbitration. If the parties are unable to agree on an arbitrator, the
parties shall provide Judicial Arbitration & Mediation Services, Inc. (“JAMS”) with a statement of the nature of the dispute and the desired
qualifications of the arbitrator. JAMS will then provide a list of three available arbitrators. Each party may strike one of the names on the
list, and the remaining person will serve as the arbitrator. If both parties strike the same person, JAMS will select the arbitrator from the
other two names. The arbitration award shall be made within 90 days following the demand for arbitration. Except as set forth herein, the
provisions of Delaware law shall apply to any such arbitration. The Company shall not oppose Indemnitee’s right to seek any such
adjudication or arbitration award. In any such proceeding or arbitration
6
Indemnitee shall be presumed to be entitled to indemnification under this Agreement and the Company shall have the burden of proof to
overcome that presumption.
7.2 An initial determination, in whole or in part, that Indemnitee is not entitled to indemnification shall create no presumption
in any judicial proceeding or arbitration that Indemnitee has not met the applicable standard of conduct for, or is otherwise not entitled to,
indemnification.
7.3 If an initial determination is made or deemed to have been made pursuant to the terms of this Agreement that Indemnitee is
entitled to indemnification, the Company shall be bound by such determination in the absence of (a) a misrepresentation of a material fact
by Indemnitee in the request for indemnification or (b) a specific finding (which has become final) by a court of Competent jurisdiction that
all or any part of such indemnification is expressly prohibited by law.
7.4 The Company and Indemnitee agree herein that a monetary remedy for breach of this Agreement, at some later date, will be
inadequate, impracticable and difficult of proof, and further agree that such breach would cause Indemnitee irreparable harm. Accordingly,
the Company and Indemnitee agree that Indemnitee shall be entitled to temporary and permanent injunctive relief to enforce this Agreement
without the necessity of proving actual damages or irreparable harm. The Company and Indemnitee further agree that Indemnitee shall be
entitled to such injunctive relief, including temporary restraining orders, preliminary injunctions and permanent injunctions, without the
necessity of posting bond or other undertaking in connection therewith. Any such requirement of bond or undertaking is hereby waived by
the Company, and the Company acknowledges that in the absence of such a waiver, a bond or undertaking may be required by the court.
7.5 The Company shall be precluded from asserting that the procedures and presumptions of this Agreement are not valid,
binding and enforceable. The Company shall stipulate in any such court or before any such arbitrator that the Company is bound by all the
provisions of this Agreement and is precluded from making any assertion to the contrary.
7.6 Expenses incurred by Indemnitee in connection with his request for indemnification under, seeking enforcement of or to
recover damages for breach of this Agreement shall be borne and advanced by the Company.
8. Other Rights to Indemnification. Indemnitee’s rights of indemnification and advancement of expenses provided by this Agreement shall not
be deemed exclusive of any other rights to which Indemnitee may now or in the future be entitled under
7
applicable law, the Certificate, the Bylaws, an employment agreement, a vote of stockholders or Disinterested Directors, insurance or other financial
arrangements or otherwise.
9. Limitations on Indemnification. No indemnification pursuant to Section 3 shall be paid by the Company nor shall Expenses be advanced
pursuant to Section 3:
9.1 Insurance. To the extent that Indemnitee is reimbursed pursuant to such insurance as may exist for Indemnitee’s benefit.
Notwithstanding the availability of such insurance, Indemnitee also may claim indemnification from the Company pursuant to this
Agreement by assigning to the Company any claims under such insurance to the extent Indemnitee is paid by the Company. Indemnitee
shall reimburse the Company for any sums he receives as indemnification from other sources to the extent of any amount paid to him for
that purpose by the Company;
9.2 Section 16(b). On account and to the extent of any wholly or partially successful claim against Indemnitee for an
accounting of profits made from the purchase or sale by Indemnitee of securities of the Company pursuant to the provisions of
Section 16(b) or the Securities Exchange Act of 1934, as amended, and amendments thereto or similar provisions of any federal, state or
local statutory law.
9.3 Indemnitee’s Proceedings. Except as otherwise provided in this Agreement, in connection with all or any part of a
Proceeding which is initiated or maintained by or on behalf of Indemnitee, or any Proceeding by Indemnitee against the Company or its
directors, officers, employees or other agents, unless (a) such indemnification is expressly required to be made by Delaware Law, (b) the
Proceeding was authorized by a majority of the Disinterested Directors or (c) such indemnification is provided by the Company, in its sole
discretion, pursuant to the powers vested in the Company under Delaware Law.
10. Duration and Scope of Agreement; Binding Effect. This Agreement shall continue so long as Indemnitee shall be subject to any possible
Proceeding subject to indemnification by reason of the fact that he is or was an Agent and shall be applicable to Proceedings commenced or continued after
execution of this Agreement, whether arising from acts or omissions occurring before or after such execution. This Agreement shall be binding upon the
Company and its successors and assigns (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all
of the business or assets of the Company) and shall inure to the benefit of Indemnitee and his spouse, assigns, heirs, devisees, executors, administrators and
other legal representatives.
11. Notice by Indemnitee and Defense of Claims. Indemnitee agrees promptly to notify the Company in writing upon being served with any
summons, citation, subpoena, complaint, indictment, information or other document relating to any matter which may
8
be subject to indemnification hereunder, whether civil, criminal, arbitrative, administrative or investigative; but the omission so to notify the Company will
not relieve it from any liability which it may have to Indemnitee if such omission does not actually prejudice the Company’s rights and, if such omission
does prejudice the Company’s rights, it will relieve the Company from liability only to the extent of such prejudice; nor will such omission relieve the
Company from any liability which it may have to Indemnitee otherwise than under this Agreement. With respect to any Proceeding the Company will be
entitled to participate therein at its own expense;
12. Contribution. In order to provide for just and equitable contribution in circumstances in which the indemnification provided for in this
Agreement is held by a court of competent jurisdiction to be unavailable to Indemnitee in whole or part:
12.1 With respect to any Claim in which the Company is jointly liable with Indemnitee (or would be if joined in the Claim) shall
in the first instance pay the entirety of the amount of Expenses, judgments, fines, penalties and amounts paid in settlement and shall waive
any right of contribution from Indemnitee.
12.2 In the event that subparagraphs 12.1 of this paragraph is held unenforceable for any reason, the Company shall , after
taking into account, among other things, contributions by other directors and officers of the Company pursuant to indemnification
agreements or otherwise, and, in the absence of personal enrichment, acts of intentional fraud or dishonesty or criminal conduct on the part
of Indemnitee, contribute to the payment of Indemnitee’s losses to the extent that, after other contributions are taken into account, such
losses exceed: (i) in the case of a director of the Company or any of its subsidiaries who is not an officer of the Company or any of such
subsidiaries, the amount of fees paid to the director for serving as a director during the 12 months preceding the commencement of the
Proceeding; or (ii) in the case of a director of the Company or any of its subsidiaries who is also an officer of the Company or any of such
subsidiaries, the amount set forth in clause (i) plus 5% of the aggregate cash compensation paid to said director for service in such
office(s) during the 12 months preceding the commencement of the Proceeding; or (iii) in the case of an officer of the Corporation or any of
its subsidiaries, 5% of the aggregate cash compensation paid to such officer for service in such office(s) during the 12 months preceding the
commencement of such Proceeding.
12.3 In the event that subparagraphs 12.1 and 12.2 are held unenforceable for any reason, with respect to any Claim in which the
Company is jointly liable with Indemnitee (or would be if joined in the Claim), the Company shall contribute to the amount of Expenses,
judgments, fines, penalties and amounts paid in settlement as appropriate to reflect: (i) the relative benefits received by the Company, on the
one hand, and Indemnitee, on the other hand, from the transaction from which
9
the Claim arose, and (ii) the relative fault of the Company, on the one hand, and of Indemnitee, on the other, in connection with the events
which resulted in such Expenses, judgments, fines, penalties and amounts paid in settlement, as well as any other relevant equitable
considerations. The relative fault of the Company, on the one hand, and of Indemnitee, on the other, shall be determined by reference to,
among other things, the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent the circumstances
resulting in such Expenses and Liabilities.
13. Establishment of Trust. Upon a Change of Control of the Company, the Company or its successor or assign shall establish a Trust (the
“Trust”) for the benefit of the Indemnitee, the trustee (the “Trustee”) of which shall be chosen by the Company and which is reasonably acceptable to the
Indemnitee. Thereafter, from time to time, upon receipt of a written request from Indemnitee, the Company shall fund the Trust in amounts sufficient to
satisfy any and all Liabilities and Expenses reasonably anticipated at the time of such request for which the Company may indemnify Indemnitee hereunder.
The amount or amounts to be deposited in the Trust pursuant to the foregoing funding obligation shall be determined by mutual agreement of the Indemnitee
and the Company or, if the Company and the Indemnitee are unable to reach such an agreement, by Independent Counsel selected jointly by the Company
and the Indemnitee. The terms of the Trust shall provide that except upon the consent of the Indemnitee and the Company, (i) the Trust shall not be revoked
or the principal thereof invaded, without the written consent of the Indemnitee, (ii) the Trustee shall advance to the Indemnitee, within 20 days of a request
by the Indemnitee, any and all Expenses, the Indemnitee hereby agreeing to reimburse the Trustee of the Trust for all Expenses so advanced if a final
determination is made by a court in a final adjudication from which there is no further right of appeal that the Indemnitee is not entitled to be indemnified
under this Agreement, (iii) the Trust shall continue to be funded by the Company in accordance with the funding obligations set forth in this Section, (iv) the
Trustee shall promptly pay to the Indemnitee any amounts to which the Indemnitee shall be entitled pursuant to this Agreement, and (v) all unexpended
funds in the Trust shall revert to the Company upon a final determination by Independent Counsel selected by Indemnitee or a court of competent
jurisdiction that Indemnitee has been fully indemnified with respect to the Proceeding giving rise to the funding of the Trust under the terms of this
Agreement.
14. Miscellaneous Provisions.
14.1 Severability, Partial Indemnity. If any provision or provisions of this Agreement (or any portion thereof) shall be held by a
court of competent jurisdiction to be invalid, illegal or unenforceable for any reason whatever: (a) such provision shall be limited or
modified in its application to the minimum extent necessary to avoid the invalidity, illegality or unenforceability of such provision; (b) the
validity, legality and enforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby; and
(c) to the fullest extent
10
possible, the provisions of this Agreement shall be construed so as to give effect to the intent manifested by the provision (or portion
thereof) held invalid, illegal or unenforceable. If Indemnitee is entitled under any provision of this Agreement to indemnification by the
Company for some or a portion of any Expenses or Liabilities of any type whatsoever incurred by him in the investigation, defense,
settlement or appeal of a Proceeding but not entitled to all of the total amount thereof, the Company shall nevertheless indemnify
Indemnitee for such total amount except as to the portion thereof for which it has been determined pursuant to Section 5 hereof that
Indemnitee is not entitled.
14.2 Identical Counterparts. This Agreement may be executed in one or more counterparts, each of which shall for all purposes
be deemed to be an original but all of which together shall constitute one and the same Agreement. Only one such counterpart signed by the
party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement.
14.3 Interpretation of Agreement. It is understood that the parties hereto intend this Agreement to be interpreted and enforced so
as to provide indemnification to Indemnitee to the fullest extent not now or hereafter prohibited by law.
14.4 Headings. The headings of the Sections and paragraphs of this Agreement are inserted for convenience only and shall not
be deemed to constitute part of, this Agreement or to affect the construction thereof.
14.5 Pronouns. Use of the masculine pronoun shall be deemed to include use of the feminine pronoun where appropriate.
14.6 Modification and Waiver. No supplement, modification or amendment of this Agreement shall be binding unless executed
in writing by both of the parties to this Agreement. No waiver of any provision of this Agreement shall be deemed to constitute a waiver of
any of the provisions hereof (whether or not similar) nor shall such waiver constitute a continuing waiver. No waiver of any provision of
this Agreement shall be effective unless executed in writing.
14.7 Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to
have been duly given if (i) delivered by hand and receipted for by the party to whom said notice or other communication shall have been
directed or (ii) mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed:
(a)
If to Indemnitee, to:
[Insert name, address, and phone of
Indemnitee]
11
(b)
If to the Company to:
HESKA CORPORATION
3760 Rocky Mountain Avenue
Loveland, Colorado 80538
Attention: Chief Executive Officer
(970) 493-7272
Telephone:
(970) 619-3003
Telefax:
with a copy to:
HESKA CORPORATION
3760 Rocky Mountain Avenue
Loveland, Colorado 80538
Attention: Secretary
Telephone:
Telefax:
(970) 493-7272
(970) 619-3003
or to such other address as may have been furnished to Indemnitee by the Company or to the Company by Indemnitee, as the case may be.
14.8 Governing Law. The parties agree that this Agreement shall be governed by, and construed and enforced in accordance
with, the laws of the State of Delaware, as applied to contracts between Delaware residents entered into and to be performed entirely within
Delaware.
14.9 Consent to Jurisdiction. The Company and Indemnitee each hereby irrevocably consent to the jurisdiction of the courts of
the State of Delaware for all purposes in connection with any action or proceeding which arises out of or relates to this agreement and agree
that any action instituted under this agreement shall be brought only in the state courts of the State of Delaware.
14.10 Entire Agreement. This Agreement represents the entire agreement between the parties hereto, and there are no other
agreements, contracts or understanding between the parties hereto with respect to the subject matter of this Agreement, except as
specifically referred to herein or as provided in Sections 8 and 2 hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement to be effective on the day and year first above written.
12
HESKA CORPORATION
By:
Name:
Robert B. Grieve
Chairman of the Board and
Chief Executive Officer
Signature of [Indemnitee]
Title:
Date:
13
AMENDMENT TO
EMPLOYMENT AGREEMENT
BETWEEN
HESKA CORPORATION
AND
ROBERT B. GRIEVE
Exhibit 10.12
This Amendment to Employment Agreement is dated as of January 1, 2008 (this “Amendment”) and amends the Employment Agreement dated as
of March 29, 2006 (the “Employment Agreement”), between Heska Corporation, a Delaware corporation (“Heska”), and Robert B. Grieve, Ph.D.
(“Executive”). Unless otherwise defined in herein, all capitalized terms used herein shall have the meaning ascribed to them in the Employment Agreement.
RECITALS
Section 14 of the Employment Agreement permits the parties to modify the Employment Agreement in writing, and Executive and Heska have
agreed to amend the Employment Agreement as set forth in this Amendment.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing, and other good and valuable consideration, including Executive’s continued employment
with Heska, the receipt and sufficiency of which are hereby acknowledged, Executive and Heska hereby agree as follows:
1. Subsection 7(d) of the Employment Agreement is amended and restated in its entirety to read as set forth below:
(d) 409A Limitations. If Executive is a “specified employee” within the meaning of Section 1.409A-1(i) of the Treasury
regulations as of the date of termination, then payments to Executive hereunder shall not be made before the date that is six months
after the date of termination (or if earlier, the date of death of Executive); provided, however, that during such six-month period,
Heska shall make any and all payments contemplated hereunder to the extent such payments do not exceed two times the lesser of
(i) Executive’s annualized compensation, based upon the annual rate of compensation for the calendar year preceding the year in
which the date of termination occurs, or (ii) the maximum amount that may be taken into account under a qualified plan pursuant
to Section 401(a)(17) of the Code for the year in which the date of termination occurs; and provided further that any amounts
deferred hereunder shall be paid in a lump-sum amount at the expiration of such six-month period. It is the parties’ intent that no
payment made or to be made hereunder shall be subject to the provisions of Section 409A(a)(1)(B) of the Internal
Revenue Code. Accordingly, notwithstanding any payment date or schedule specified above, the parties agree to work
expeditiously to amend this Agreement to conform to their intent as set forth in this Section 7(d).
2. Subsection 9(f) of the Employment Agreement is amended and restated in its entirety to read as set forth below:
(f) Good Reason. For purposes of this Agreement, “Good Reason” means the occurrence of any of the following without
Executive’s express written consent:
(i) Executive’s authority with Heska is, or his duties or responsibilities as CEO are, materially diminished relative
to his authority, duties and responsibilities as in effect immediately prior to such change, other than the removal from the position
of Chairman if the Board decides to separate the roles of CEO and Chairman;
(ii) a material diminution in Executive’s Base Salary as in effect immediately prior to such diminution; provided,
that an across-the-board reduction in the base compensation and benefits of all other executive officers of Heska by the same
percentage amount (or under the same terms and conditions) as part of a general base compensation reduction and/or benefit
reduction shall not constitute such a qualifying material diminution;
(iii) a material change in the geographic location of Executive’s principal place of employment such that the new
location results in a commute for Executive that is both (A) longer than his commute prior to the relocation and (B) greater than
fifty (50) road miles each way from his home in the Severance, Colorado area;
(iv) any material breach by Heska of any provision of this Agreement; and
(v) any acquiring company fails to assume or be bound by the terms of this Agreement in Connection with a
Change of Control;
provided, however, that prior to any such event constituting Good Reason, Executive shall give Heska written notice of the existence of the
condition which Executive believes constitutes Good Reason (which notice must be given within ninety (90) days of the initial existence of
the condition) and such condition shall remain uncured for a period of thirty (30) days after the date of such notice. An event of Good
Reason shall occur automatically at the expiration of such 30-day period if the relevant condition remains uncured at such time.
2
3. All other terms and conditions of the Employment Agreement shall remain in full force and effect. This Amendment, together with the
Employment Agreement, contains all the terms and conditions agreed upon by the parties hereto regarding the subject matter hereof and thereof. All prior
agreements, promises, negotiations and representations, either oral or written, relating to the subject matter of this Amendment or the Employment
Agreement not expressly set forth in this Amendment or the Employment Agreement are of no force or effect.
4. Any waiver, alteration or modification of any of the terms of this Amendment or the Employment Agreement shall be valid only if made in
writing and signed by the parties hereto.
5. This Amendment may be executed in counterparts, each of which shall constitute an original but all of which together shall constitute one
and the same document. This Amendment to the extent signed and delivered by facsimile or other electronic means will be treated in all manner and respects
as an original agreement or instrument and will be considered to have the same binding legal effect as if it were the original signed version thereof delivered
in person.
[Signature Page(s) to Follow]
3
IN WITNESS WHEREOF, the parties hereto have executed this Amendment the day and year herein above written.
HESKA CORPORATION
/s/ Jason Napolitano
By:
Name: Jason Napolitano
Title: Chief Financial Officer
EXECUTIVE
/s/ Robert B. Grieve
Robert B. Grieve, Ph.D.
[Signature Page to Amendment to Employment Agreement]
AMENDMENT TO
EMPLOYMENT AGREEMENT
BETWEEN
HESKA CORPORATION
AND
JASON NAPOLITANO
Exhibit 10.14
This Amendment to Employment Agreement is dated effective as of January 1, 2008 (this “Amendment”) and amends the Employment Agreement
dated as of May 6, 2002 (the “Employment Agreement”), between Heska Corporation, a Delaware corporation (“Company”), and Jason Napolitano
(“Employee”). Unless otherwise defined in herein, all capitalized terms used herein shall have the meaning ascribed to them in the Employment Agreement.
RECITALS
Section 10 of the Employment Agreement permits the parties to modify the Employment Agreement in writing, and the Employee and Company
have agreed to modify the Employment Agreement to the extent set forth in this Amendment.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing, and other good and valuable consideration, including Employee’s continued employment
with Company, the receipt and sufficiency of which are hereby acknowledged, Employee and Company hereby agree as follows:
1. Subsection 6(c)(iii) of the Employment Agreement is amended and restated in its entirety to read as set forth below:
(iii) The parties agree that for the purposes of this Employment Agreement, an “involuntary termination” due to a “change of
control” will be deemed to have occurred when Employee is no longer employed by the Company’s successor following a “change
of control” because the Employee’s position is eliminated within nine (9) months of the “change of control” or when Employee’s
job authority, duties or responsibilities are materially diminished within nine (9) months of the “change of control” and Employee
elects to resign; provided, however, that prior to any such resignation, Employee shall give Company written notice of the
existence of the condition which Employee believes constitutes such material diminution (which notice must be given within
ninety (90) days of the initial existence of the condition) and such condition shall remain uncured for a period of thirty (30) days
after the date of such notice. For purposes of this subsection 6(c)(iii) and without in any manner limiting the circumstances that
may give rise to a material diminution, Employee’s job authority, duties or responsibilities shall be deemed to be materially
diminished if, but not limited to, the following: (1) Employee’s authority
with the Company or its successor is, or Employee’s duties or responsibilities are, materially diminished relative to Employee’s
authority, duties and responsibilities as in effect immediately prior to such change; (2) Employee suffers a material diminution in
base salary as in effect immediately prior to such diminution; (3) there is a material change in the geographic location of
Employee’s principal place of employment such that the new location results in a commute for Employee that is greater than fifty
(50) road miles longer than Employee’s commute prior to the relocation; (4) there occurs any material breach by the Company or
its successor of any provision of this Employment Agreement; or (5) any acquiring or successor company fails to assume or be
bound by the terms of this Employment Agreement in connection with a change of control.
2. Section 6(c) of the Employment Agreement is amended by inserting immediately after Subsection 6(c)(iv) of the Employment Agreement a
new Subsection 6(c)(v), which shall read in its entirety as set forth below:
(v) If Employee is a “specified employee” within the meaning of Section 1.409A-1(i) of the Treasury regulations as of the
date of termination, then payments to Employee hereunder shall not be made before the date that is six (6) months after the date of
termination (or if earlier, the date of death of Employee); provided, however, that during such six-month period, Company shall
make any and all payments contemplated hereunder to the extent such payments do not exceed two times the lesser of
(i) Employee’s annualized compensation, based upon the annual rate of compensation for the calendar year preceding the year in
which the date of termination occurs, or (ii) the maximum amount that may be taken into account under a qualified plan pursuant
to Section 401(a)(17) of the Internal Revenue Code of 1986, as amended, for the year in which the date of termination occurs; and
provided further that any amounts deferred hereunder shall be paid in a lump-sum amount at the expiration of such six-month
period. It is the parties’ intent that no payment made or to be made hereunder shall be subject to the provisions of Section 409A(a)
(1)(B) of the Internal Revenue Code of 1986, as amended. Accordingly, notwithstanding any payment date or schedule specified
above, the parties agree to work expeditiously to amend this Agreement to conform to their intent as set forth in this Section.
3. All other terms and conditions of the Employment Agreement shall remain in full force and effect. This Amendment, together with the
Employment Agreement, contains all the terms and conditions agreed upon by the parties hereto regarding the subject matter hereof and thereof. All prior
agreements, promises, negotiations and representations, either oral or written, relating to the subject matter of this Amendment or the Employment Agreement
not expressly set forth in this Amendment or the Employment Agreement are of no force or effect.
2
4. Any waiver, alteration or modification of any of the terms of this Amendment or the Employment Agreement shall be valid only if made in
writing and signed by the parties hereto.
5. This Amendment may be executed in counterparts, each of which shall constitute an original but all of which together shall constitute one
and the same document. This Amendment to the extent signed and delivered by facsimile or other electronic means will be treated in all manner and respects
as an original agreement or instrument and will be considered to have the same binding legal effect as if it were the original signed version thereof delivered
in person.
[Signature Page(s) to Follow]
3
IN WITNESS WHEREOF, the parties hereto have executed this Amendment effective as of the day and year first above written.
HESKA CORPORATION
/s/ John R. Flanders
By:
Name: John R. Flanders
Title: VP, General Counsel
EMPLOYEE
/s/ Jason Napolitano
Name: Jason Napolitano
Title: Executive Vice President and Chief Financial Officer
[Signature Page to Amendment to Employment Agreement]
AMENDMENT TO
EMPLOYMENT AGREEMENT
BETWEEN
HESKA CORPORATION
AND
JOSEPH H. RITTER
Exhibit 10.16
This Amendment to Employment Agreement is dated effective as of January 1, 2008 (this “Amendment”) and amends the Employment Agreement
dated as of May 1, 2004 (the “Employment Agreement”), between Heska Corporation, a Delaware corporation (“Company”), and Joseph H. Ritter
(“Employee”). Unless otherwise defined in herein, all capitalized terms used herein shall have the meaning ascribed to them in the Employment Agreement.
RECITALS
Section 10 of the Employment Agreement permits the parties to modify the Employment Agreement in writing, and the Employee and Company
have agreed to modify the Employment Agreement to the extent set forth in this Amendment.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing, and other good and valuable consideration, including Employee’s continued employment
with Company, the receipt and sufficiency of which are hereby acknowledged, Employee and Company hereby agree as follows:
1. Subsection 6(c)(iii) of the Employment Agreement is amended and restated in its entirety to read as set forth below:
(iii) The parties agree that for the purposes of this Employment Agreement, an “involuntary termination” due to a “change of
control” will be deemed to have occurred when Employee is no longer employed by the Company’s successor following a “change
of control” because the Employee’s position is eliminated within nine (9) months of the “change of control” or when Employee’s
job authority, duties or responsibilities are materially diminished within nine (9) months of the “change of control” and Employee
elects to resign; provided, however, that prior to any such resignation, Employee shall give Company written notice of the
existence of the condition which Employee believes constitutes such material diminution (which notice must be given within
ninety (90) days of the initial existence of the condition) and such condition shall remain uncured for a period of thirty (30) days
after the date of such notice. For purposes of this subsection 6(c)(iii) and without in any manner limiting the circumstances that
may give rise to a material diminution, Employee’s job authority, duties or responsibilities shall be deemed to be materially
diminished if, but not limited to, the following: (1) Employee’s authority
with the Company or its successor is, or Employee’s duties or responsibilities are, materially diminished relative to Employee’s
authority, duties and responsibilities as in effect immediately prior to such change; (2) Employee suffers a material diminution in
base salary as in effect immediately prior to such diminution; (3) there is a material change in the geographic location of
Employee’s principal place of employment such that the new location results in a commute for Employee that is greater than fifty
(50) road miles longer than Employee’s commute prior to the relocation; (4) there occurs any material breach by the Company or
its successor of any provision of this Employment Agreement; or (5) any acquiring or successor company fails to assume or be
bound by the terms of this Employment Agreement in connection with a change of control.
2. Section 6(c) of the Employment Agreement is amended by inserting immediately after Subsection 6(c)(iv) of the Employment Agreement a
new Subsection 6(c)(v), which shall read in its entirety as set forth below:
(v) If Employee is a “specified employee” within the meaning of Section 1.409A-1(i) of the Treasury regulations as of the
date of termination, then payments to Employee hereunder shall not be made before the date that is six (6) months after the date of
termination (or if earlier, the date of death of Employee); provided, however, that during such six-month period, Company shall
make any and all payments contemplated hereunder to the extent such payments do not exceed two times the lesser of
(i) Employee’s annualized compensation, based upon the annual rate of compensation for the calendar year preceding the year in
which the date of termination occurs, or (ii) the maximum amount that may be taken into account under a qualified plan pursuant
to Section 401(a)(17) of the Internal Revenue Code of 1986, as amended, for the year in which the date of termination occurs; and
provided further that any amounts deferred hereunder shall be paid in a lump-sum amount at the expiration of such six-month
period. It is the parties’ intent that no payment made or to be made hereunder shall be subject to the provisions of Section 409A(a)
(1)(B) of the Internal Revenue Code of 1986, as amended. Accordingly, notwithstanding any payment date or schedule specified
above, the parties agree to work expeditiously to amend this Agreement to conform to their intent as set forth in this Section.
3. All other terms and conditions of the Employment Agreement shall remain in full force and effect. This Amendment, together with the
Employment Agreement, contains all the terms and conditions agreed upon by the parties hereto regarding the subject matter hereof and thereof. All prior
agreements, promises, negotiations and representations, either oral or written, relating to the subject matter of this Amendment or the Employment Agreement
not expressly set forth in this Amendment or the Employment Agreement are of no force or effect.
2
4. Any waiver, alteration or modification of any of the terms of this Amendment or the Employment Agreement shall be valid only if made in
writing and signed by the parties hereto.
5. This Amendment may be executed in counterparts, each of which shall constitute an original but all of which together shall constitute one
and the same document. This Amendment to the extent signed and delivered by facsimile or other electronic means will be treated in all manner and respects
as an original agreement or instrument and will be considered to have the same binding legal effect as if it were the original signed version thereof delivered
in person.
[Signature Page(s) to Follow]
3
IN WITNESS WHEREOF, the parties hereto have executed this Amendment effective as of the day and year first above written.
HESKA CORPORATION
By: /s/ John R. Flanders
Name: John R. Flanders
Title: VP, General Counsel
EMPLOYEE
/s/ Joseph H. Ritter
Name: Joseph H. Ritter
Title: EVP, Global Business Operations
[Signature Page to Amendment to Employment Agreement]
AMENDMENT TO
EMPLOYMENT AGREEMENT
BETWEEN
HESKA CORPORATION
AND
MICHAEL BENT
Exhibit 10.18
This Amendment to Employment Agreement is dated effective as of January 1, 2008 (this “Amendment”) and amends the Employment Agreement
dated as of May 1, 2000 (the “Employment Agreement”), between Heska Corporation, a Delaware corporation (“Company”), and Michael Bent
(“Employee”). Unless otherwise defined in herein, all capitalized terms used herein shall have the meaning ascribed to them in the Employment Agreement.
RECITALS
Section 10 of the Employment Agreement permits the parties to modify the Employment Agreement in writing, and the Employee and Company
have agreed to modify the Employment Agreement to the extent set forth in this Amendment.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing, and other good and valuable consideration, including Employee’s continued employment
with Company, the receipt and sufficiency of which are hereby acknowledged, Employee and Company hereby agree as follows:
1. Subsection 6(c)(iii) of the Employment Agreement is amended and restated in its entirety to read as set forth below:
(iii) The parties agree that for the purposes of this Employment Agreement, an “involuntary termination” due to a “change of
control” will be deemed to have occurred when Employee is no longer employed by the Company’s successor following a “change
of control” because the Employee’s position is eliminated within nine (9) months of the “change of control” or when Employee’s
job authority, duties or responsibilities are materially diminished within nine (9) months of the “change of control” and Employee
elects to resign; provided, however, that prior to any such resignation, Employee shall give Company written notice of the
existence of the condition which Employee believes constitutes such material diminution (which notice must be given within
ninety (90) days of the initial existence of the condition) and such condition shall remain uncured for a period of thirty (30) days
after the date of such notice. For purposes of this subsection 6(c)(iii) and without in any manner limiting the circumstances that
may give rise to a material diminution, Employee’s job authority, duties or responsibilities shall be deemed to be materially
diminished if, but not limited to, the following: (1) Employee’s authority
with the Company or its successor is, or Employee’s duties or responsibilities are, materially diminished relative to Employee’s
authority, duties and responsibilities as in effect immediately prior to such change; (2) Employee suffers a material diminution in
base salary as in effect immediately prior to such diminution; (3) there is a material change in the geographic location of
Employee’s principal place of employment such that the new location results in a commute for Employee that is greater than fifty
(50) road miles longer than Employee’s commute prior to the relocation; (4) there occurs any material breach by the Company or
its successor of any provision of this Employment Agreement; or (5) any acquiring or successor company fails to assume or be
bound by the terms of this Employment Agreement in connection with a change of control.
2. Section 6(c) of the Employment Agreement is amended by inserting immediately after Subsection 6(c)(iv) of the Employment Agreement a
new Subsection 6(c)(v), which shall read in its entirety as set forth below:
(v) If Employee is a “specified employee” within the meaning of Section 1.409A-1(i) of the Treasury regulations as of the
date of termination, then payments to Employee hereunder shall not be made before the date that is six (6) months after the date of
termination (or if earlier, the date of death of Employee); provided, however, that during such six-month period, Company shall
make any and all payments contemplated hereunder to the extent such payments do not exceed two times the lesser of
(i) Employee’s annualized compensation, based upon the annual rate of compensation for the calendar year preceding the year in
which the date of termination occurs, or (ii) the maximum amount that may be taken into account under a qualified plan pursuant
to Section 401(a)(17) of the Internal Revenue Code of 1986, as amended, for the year in which the date of termination occurs; and
provided further that any amounts deferred hereunder shall be paid in a lump-sum amount at the expiration of such six-month
period. It is the parties’ intent that no payment made or to be made hereunder shall be subject to the provisions of Section 409A(a)
(1)(B) of the Internal Revenue Code of 1986, as amended. Accordingly, notwithstanding any payment date or schedule specified
above, the parties agree to work expeditiously to amend this Agreement to conform to their intent as set forth in this Section.
3. All other terms and conditions of the Employment Agreement shall remain in full force and effect. This Amendment, together with the
Employment Agreement, contains all the terms and conditions agreed upon by the parties hereto regarding the subject matter hereof and thereof. All prior
agreements, promises, negotiations and representations, either oral or written, relating to the subject matter of this Amendment or the Employment Agreement
not expressly set forth in this Amendment or the Employment Agreement are of no force or effect.
2
4. Any waiver, alteration or modification of any of the terms of this Amendment or the Employment Agreement shall be valid only if made in
writing and signed by the parties hereto.
5. This Amendment may be executed in counterparts, each of which shall constitute an original but all of which together shall constitute one
and the same document. This Amendment to the extent signed and delivered by facsimile or other electronic means will be treated in all manner and respects
as an original agreement or instrument and will be considered to have the same binding legal effect as if it were the original signed version thereof delivered
in person.
[Signature Page(s) to Follow]
3
IN WITNESS WHEREOF, the parties hereto have executed this Amendment effective as of the day and year first above written.
HESKA CORPORATION
/s/ John R. Flanders
By:
Name: John R. Flanders
Title: VP, General Counsel
EMPLOYEE
/s/ Michael Bent
Name: Michael Bent
Title: Vice President, Controller and
Principal Accounting Officer
[Signature Page to Amendment to Employment Agreement]
AMENDMENT TO
EMPLOYMENT AGREEMENT
BETWEEN
DIAMOND ANIMAL HEALTH, INC.
AND
MICHAEL MCGINLEY
Exhibit 10.20
This Amendment to Employment Agreement is dated effective as of January 1, 2008 (this “Amendment”) and amends the Employment Agreement
dated as of May 1, 2000 (the “Employment Agreement”), between Diamond Animal Health, Inc., an Iowa corporation (“Company”), and Michael McGinley
(“Employee”). Unless otherwise defined in herein, all capitalized terms used herein shall have the meaning ascribed to them in the Employment Agreement.
RECITALS
Section 10 of the Employment Agreement permits the parties to modify the Employment Agreement in writing, and the Employee and Company
have agreed to modify the Employment Agreement to the extent set forth in this Amendment.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing, and other good and valuable consideration, including Employee’s continued employment
with Company, the receipt and sufficiency of which are hereby acknowledged, Employee and Company hereby agree as follows:
1. Subsection 6(c)(iii) of the Employment Agreement is amended and restated in its entirety to read as set forth below:
(iii) The parties agree that for the purposes of this Employment Agreement, an “involuntary termination” due to a “change of
control” will be deemed to have occurred when Employee is no longer employed by the Company’s successor following a
“change of control” because the Employee’s position is eliminated within nine (9) months of the “change of control” or when
Employee’s job authority, duties or responsibilities are materially diminished within nine (9) months of the “change of control”
and Employee elects to resign; provided, however, that prior to any such resignation, Employee shall give Company written notice
of the existence of the condition which Employee believes constitutes such material diminution (which notice must be given
within ninety (90) days of the initial existence of the condition) and such condition shall remain uncured for a period of thirty (30)
days after the date of such notice. For purposes of this subsection 6(c)(iii) and without in any manner limiting the circumstances
that may give rise to a material diminution, Employee’s job authority, duties or responsibilities shall be deemed to be materially
diminished if, but not limited to, the following: (1) Employee’s authority with the Company or its successor is, or Employee’s
duties or responsibilities are, materially diminished relative to Employee’s authority, duties and responsibilities as in effect
immediately prior to such change; (2) Employee suffers a material diminution in base salary as in effect immediately prior to such
diminution; (3) there is a material change in the geographic location of Employee’s principal place of employment such that the
new location results in a commute for Employee that is greater than fifty (50) road miles longer than Employee’s commute prior to
the relocation; (4) there occurs any material breach by the Company or its successor of any provision of this Employment
Agreement; or (5) any acquiring or successor company fails to assume or be bound by the terms of this Employment Agreement in
connection with a change of control.
2. Section 6(c) of the Employment Agreement is amended by inserting immediately after Subsection 6(c)(iv) of the Employment Agreement
a new Subsection 6(c)(v), which shall read in its entirety as set forth below:
(v) If Employee is a “specified employee” within the meaning of Section 1.409A-1(i) of the Treasury regulations as of the
date of termination, then payments to Employee hereunder shall not be made before the date that is six (6) months after the date of
termination (or if earlier, the date of death of Employee); provided, however, that during such six-month period, Company shall
make any and all payments contemplated hereunder to the extent such payments do not exceed two times the lesser of
(i) Employee’s annualized compensation, based upon the annual rate of compensation for the calendar year preceding the year in
which the date of termination occurs, or (ii) the maximum amount that may be taken into account under a qualified plan pursuant
to Section 401(a)(17) of the Internal Revenue Code of 1986, as amended, for the year in which the date of termination occurs; and
provided further that any amounts deferred hereunder shall be paid in a lump-sum amount at the expiration of such six-month
period. It is the parties’ intent that no payment made or to be made hereunder shall be subject to the provisions of
Section 409A(a)(1)(B) of the Internal Revenue Code of 1986, as amended. Accordingly, notwithstanding any payment date or
schedule specified above, the parties agree to work expeditiously to amend this Agreement to conform to their intent as set forth in
this Section.
3. All other terms and conditions of the Employment Agreement shall remain in full force and effect. This Amendment, together with the
Employment Agreement, contains all the terms and conditions agreed upon by the parties hereto regarding the subject matter hereof and thereof. All prior
agreements, promises, negotiations and representations, either oral or written, relating to the subject matter of this Amendment or the Employment Agreement
not expressly set forth in this Amendment or the Employment Agreement are of no force or effect.
2
4. Any waiver, alteration or modification of any of the terms of this Amendment or the Employment Agreement shall be valid only if made in
writing and signed by the parties hereto.
5. This Amendment may be executed in counterparts, each of which shall constitute an original but all of which together shall constitute one
and the same document. This Amendment to the extent signed and delivered by facsimile or other electronic means will be treated in all manner and respects
as an original agreement or instrument and will be considered to have the same binding legal effect as if it were the original signed version thereof delivered
in person.
[Signature Page(s) to Follow]
3
IN WITNESS WHEREOF, the parties hereto have executed this Amendment effective as of the day and year first above written.
DIAMOND ANIMAL HEALTH, INC.
EMPLOYEE
/s/ Jason Napolitano
By:
Name: Jason Napolitano
Title: Chief Financial Officer
/s/ Michael McGinley
Name: Michael McGinley
Title: Vice President Operations &
Technical Affairs and General
Manager
AMENDMENT TO
EMPLOYMENT AGREEMENT
BETWEEN
HESKA CORPORATION
AND
NANCY WISNEWSKI
Exhibit 10.22
This Amendment to Employment Agreement is dated effective as of January 1, 2008 (this “Amendment”) and amends the Employment Agreement
dated as of April 15, 2002 (the “Employment Agreement”), between Heska Corporation, a Delaware corporation (“Company”), and Nancy Wisnewski
(“Employee”). Unless otherwise defined in herein, all capitalized terms used herein shall have the meaning ascribed to them in the Employment Agreement.
RECITALS
Section 10 of the Employment Agreement permits the parties to modify the Employment Agreement in writing, and the Employee and Company
have agreed to modify the Employment Agreement to the extent set forth in this Amendment.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing, and other good and valuable consideration, including Employee’s continued employment
with Company, the receipt and sufficiency of which are hereby acknowledged, Employee and Company hereby agree as follows:
1. Subsection 6(c)(iii) of the Employment Agreement is amended and restated in its entirety to read as set forth below:
(iii) The parties agree that for the purposes of this Employment Agreement, an “involuntary termination” due to a “change of
control” will be deemed to have occurred when Employee is no longer employed by the Company’s successor following a “change
of control” because the Employee’s position is eliminated within nine (9) months of the “change of control” or when Employee’s
job authority, duties or responsibilities are materially diminished within nine (9) months of the “change of control” and Employee
elects to resign; provided, however, that prior to any such resignation, Employee shall give Company written notice of the
existence of the condition which Employee believes constitutes such material diminution (which notice must be given within
ninety (90) days of the initial existence of the condition) and such condition shall remain uncured for a period of thirty (30) days
after the date of such notice. For purposes of this subsection 6(c)(iii) and without in any manner limiting the circumstances that
may give rise to a material diminution, Employee’s job authority, duties or responsibilities shall be deemed to be materially
diminished if, but not limited to, the following: (1) Employee’s authority
with the Company or its successor is, or Employee’s duties or responsibilities are, materially diminished relative to Employee’s
authority, duties and responsibilities as in effect immediately prior to such change; (2) Employee suffers a material diminution in
base salary as in effect immediately prior to such diminution; (3) there is a material change in the geographic location of
Employee’s principal place of employment such that the new location results in a commute for Employee that is greater than fifty
(50) road miles longer than Employee’s commute prior to the relocation; (4) there occurs any material breach by the Company or
its successor of any provision of this Employment Agreement; or (5) any acquiring or successor company fails to assume or be
bound by the terms of this Employment Agreement in connection with a change of control.
2. Section 6(c) of the Employment Agreement is amended by inserting immediately after Subsection 6(c)(iv) of the Employment Agreement a
new Subsection 6(c)(v), which shall read in its entirety as set forth below:
(v) If Employee is a “specified employee” within the meaning of Section 1.409A-1(i) of the Treasury regulations as of the
date of termination, then payments to Employee hereunder shall not be made before the date that is six (6) months after the date of
termination (or if earlier, the date of death of Employee); provided, however, that during such six-month period, Company shall
make any and all payments contemplated hereunder to the extent such payments do not exceed two times the lesser of
(i) Employee’s annualized compensation, based upon the annual rate of compensation for the calendar year preceding the year in
which the date of termination occurs, or (ii) the maximum amount that may be taken into account under a qualified plan pursuant
to Section 401(a)(17) of the Internal Revenue Code of 1986, as amended, for the year in which the date of termination occurs; and
provided further that any amounts deferred hereunder shall be paid in a lump-sum amount at the expiration of such six-month
period. It is the parties’ intent that no payment made or to be made hereunder shall be subject to the provisions of Section 409A(a)
(1)(B) of the Internal Revenue Code of 1986, as amended. Accordingly, notwithstanding any payment date or schedule specified
above, the parties agree to work expeditiously to amend this Agreement to conform to their intent as set forth in this Section.
3. All other terms and conditions of the Employment Agreement shall remain in full force and effect. This Amendment, together with the
Employment Agreement, contains all the terms and conditions agreed upon by the parties hereto regarding the subject matter hereof and thereof. All prior
agreements, promises, negotiations and representations, either oral or written, relating to the subject matter of this Amendment or the Employment Agreement
not expressly set forth in this Amendment or the Employment Agreement are of no force or effect.
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4. Any waiver, alteration or modification of any of the terms of this Amendment or the Employment Agreement shall be valid only if made in
writing and signed by the parties hereto.
5. This Amendment may be executed in counterparts, each of which shall constitute an original but all of which together shall constitute one
and the same document. This Amendment to the extent signed and delivered by facsimile or other electronic means will be treated in all manner and respects
as an original agreement or instrument and will be considered to have the same binding legal effect as if it were the original signed version thereof delivered
in person.
[Signature Page(s) to Follow]
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IN WITNESS WHEREOF, the parties hereto have executed this Amendment effective as of the day and year first above written.
HESKA CORPORATION
/s/ John R. Flanders
By:
Name: John R. Flanders
Title: VP, General Counsel
EMPLOYEE
/s/ Nancy Wisnewski
Name: Nancy Wisnewski
Title: VP, Product Development and
Technical Customer Service
[Signature Page to Amendment to Employment Agreement]
AMENDMENT TO
EMPLOYMENT AGREEMENT
BETWEEN
HESKA CORPORATION
AND
JOHN R. FLANDERS
Exhibit 10.24
This Amendment to Employment Agreement is dated effective as of January 1, 2008 (this “Amendment”) and amends the Employment Agreement
dated as of December 11, 2006 (the “Employment Agreement”), between Heska Corporation, a Delaware corporation (“Company”), and John R. Flanders
(“Employee”). Unless otherwise defined in herein, all capitalized terms used herein shall have the meaning ascribed to them in the Employment Agreement.
RECITALS
Section 10 of the Employment Agreement permits the parties to modify the Employment Agreement in writing, and the Employee and Company
have agreed to modify the Employment Agreement to the extent set forth in this Amendment.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing, and other good and valuable consideration, including Employee’s continued employment
with Company, the receipt and sufficiency of which are hereby acknowledged, Employee and Company hereby agree as follows:
1. Subsection 6(c)(iii) of the Employment Agreement is amended and restated in its entirety to read as set forth below:
(iii) The parties agree that for the purposes of this Employment Agreement, an “involuntary termination” due to a “change of
control” will be deemed to have occurred when Employee is no longer employed by the Company’s successor following a “change
of control” because the Employee’s position is eliminated within nine (9) months of the “change of control” or when Employee’s
job authority, duties or responsibilities are materially diminished within nine (9) months of the “change of control” and Employee
elects to resign; provided, however, that prior to any such resignation, Employee shall give Company written notice of the
existence of the condition which Employee believes constitutes such material diminution (which notice must be given within
ninety (90) days of the initial existence of the condition) and such condition shall remain uncured for a period of thirty (30) days
after the date of such notice. For purposes of this subsection 6(c)(iii) and without in any manner limiting the circumstances that
may give rise to a material diminution, Employee’s job authority, duties or responsibilities shall be deemed to be materially
diminished if, but not limited to, the following: (1) Employee’s authority
with the Company or its successor is, or Employee’s duties or responsibilities are, materially diminished relative to Employee’s
authority, duties and responsibilities as in effect immediately prior to such change; (2) Employee suffers a material diminution in
base salary as in effect immediately prior to such diminution; (3) there is a material change in the geographic location of
Employee’s principal place of employment such that the new location results in a commute for Employee that is greater than fifty
(50) road miles longer than Employee’s commute prior to the relocation; (4) there occurs any material breach by the Company or
its successor of any provision of this Employment Agreement; or (5) any acquiring or successor company fails to assume or be
bound by the terms of this Employment Agreement in connection with a change of control.
2. Section 6(c) of the Employment Agreement is amended by inserting immediately after Subsection 6(c)(iv) of the Employment Agreement a
new Subsection 6(c)(v), which shall read in its entirety as set forth below:
(v) If Employee is a “specified employee” within the meaning of Section 1.409A-1(i) of the Treasury regulations as of the
date of termination, then payments to Employee hereunder shall not be made before the date that is six (6) months after the date of
termination (or if earlier, the date of death of Employee); provided, however, that during such six-month period, Company shall
make any and all payments contemplated hereunder to the extent such payments do not exceed two times the lesser of
(i) Employee’s annualized compensation, based upon the annual rate of compensation for the calendar year preceding the year in
which the date of termination occurs, or (ii) the maximum amount that may be taken into account under a qualified plan pursuant
to Section 401(a)(17) of the Internal Revenue Code of 1986, as amended, for the year in which the date of termination occurs; and
provided further that any amounts deferred hereunder shall be paid in a lump-sum amount at the expiration of such six-month
period. It is the parties’ intent that no payment made or to be made hereunder shall be subject to the provisions of Section 409A(a)
(1)(B) of the Internal Revenue Code of 1986, as amended. Accordingly, notwithstanding any payment date or schedule specified
above, the parties agree to work expeditiously to amend this Agreement to conform to their intent as set forth in this Section.
3. All other terms and conditions of the Employment Agreement shall remain in full force and effect. This Amendment, together with the
Employment Agreement, contains all the terms and conditions agreed upon by the parties hereto regarding the subject matter hereof and thereof. All prior
agreements, promises, negotiations and representations, either oral or written, relating to the subject matter of this Amendment or the Employment Agreement
not expressly set forth in this Amendment or the Employment Agreement are of no force or effect.
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4. Any waiver, alteration or modification of any of the terms of this Amendment or the Employment Agreement shall be valid only if made in
writing and signed by the parties hereto.
5. This Amendment may be executed in counterparts, each of which shall constitute an original but all of which together shall constitute one
and the same document. This Amendment to the extent signed and delivered by facsimile or other electronic means will be treated in all manner and respects
as an original agreement or instrument and will be considered to have the same binding legal effect as if it were the original signed version thereof delivered
in person.
[Signature Page(s) to Follow]
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IN WITNESS WHEREOF, the parties hereto have executed this Amendment effective as of the day and year first above written.
HESKA CORPORATION
EMPLOYEE
/s/ Mark D. Cicotello
By:
Name Mark D. Cicotello
Title: VP of Human Resources
/s/ John R. Flanders
Name: John R. Flanders
Title: VP, General Counsel
[Signature Page to Amendment to Employment Agreement]
[***] — Certain information in this exhibit have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has
been requested with respect to the omitted portions.
Exhibit 10.29
FIRST AMENDMENT TO THIRD AMENDED AND RESTATED
CREDIT AND SECURITY AGREEMENT
This Amendment, dated as of December 5, 2006, is made by and between Heska Corporation, a Delaware corporation (“Heska”), Diamond
Animal Health, Inc., an Iowa corporation (“Diamond”) (each of Heska and Diamond may be referred to herein individually as a “Borrower” and collectively
as the “Borrowers”), and Wells Fargo Bank, National Association, operating through its Wells Fargo Business Credit operating division (the “Lender”).
Recitals
The Borrowers and the Lender are parties to a Third Amended and Restated Credit and Security Agreement dated as of December 30, 2005
(as the same may be hereafter amended from time to time, the “Credit Agreement”). Capitalized terms used in these recitals have the meanings given to them
in the Credit Agreement unless otherwise specified.
The Borrowers have requested that certain amendments be made to the Credit Agreement, which the Lender is willing to make pursuant to
the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained, it is agreed as
follows:
1. Defined Terms. Capitalized terms used in this Amendment which are defined in the Credit Agreement shall have the same meanings as
defined therein, unless otherwise defined herein. In addition, Section 1.1 of the Credit Agreement is amended by adding or amending, as the case may be, the
following definitions:
“Additional Capital Increase” shall have the meaning set forth in Section 2.22.
“Available Additional Capital” means [***] of the amount, if any, by which Additional Capital exceeds [***].
“Capital Expenditures” for any Borrower for a period means the sum of (a) any expenditure of money for the purchase or
construction of assets, or for improvements or additions thereto during such period, which are capitalized on such Borrower’s balance sheet,
whether financed or unfinanced, but excluding expenditures to purchase Rental Inventory, plus (b) all expenditures of money to purchase
Rental Inventory in excess of the Rental Inventory Cap during the fiscal year in which such period occurs.
[***] — Certain information on this page have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has
been requested with respect to the omitted portions.
“Investment Cap” means [***], unless said amount is increased pursuant to Section 2.22, in which event it means the amount to
which said amount is increased.
“Rental Inventory Cap” means $1,500,000, unless said amount is increased pursuant to Section 2.22, in which event it means the
amount to which said amount is increased.
2. Inventory Cap. The figure “$4,500,000” in clause (iii) of the definition of “Borrowing Base” is replaced by the figure “$4,750,000.”
3. Use of Available Additional Capital. Article 2 of the Credit Agreement is hereby amended by inserting therein a new Section 2.22 to
read in its entirety as follows:
“Section 2.22 Use of Available Additional Capital. Pursuant to the procedure set forth in this Section 2.22 and so long as no
Default Period then exists, the Borrowers from time to time may increase one or more of the Investment Cap, the Rental Inventory Cap and
the Capital Expenditures amounts set forth in Section 7.10 in an aggregate amount equal to Available Additional Capital (the “Additional
Capital Increase”). Before making an Additional Capital Increase:
(a) the Borrowers shall send to the Lender a written request containing a statement by a responsible officer of
the Borrowers setting forth in sufficient detail the amount of Additional Capital raised as of that time and the amounts of
Available Additional Capital which the Borrowers requests approval for to allocate to each of the Investment Cap, the
Rental Inventory Cap and the Capital Expenditures amounts set forth in Section 7.10; and
(b) the Lender shall send a written acknowledgement to the Borrowers agreeing to the amount of Available
Additional Capital.”
4. Projections. Sub-section (f) of Section 6.1 of the Credit Agreement is hereby amended to read in its entirety as follows:
“(f) on or before April 30 of each year, the projected balance sheets and income statements for each of the subsequent twelve
months, each in reasonable detail, representing each Borrower’s good faith projections and certified by such Borrower’s chief financial
officer as being the most accurate projections available and identical to the projections used by such Borrower for internal planning
purposes, together with such supporting schedules and information as the Lender may in its discretion require;”
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5. Financial Covenants. Sections 6.12, 6.13 and 6.16 of the Credit Agreement are hereby amended to read in their entireties as follows:
“Section 6.12 Minimum Capital. Heska will maintain, on a consolidated basis, as of each date listed below, its Capital at an amount not less
than the amount set forth opposite such date (amounts in parentheses denote negative numbers):
Date
November 30, 2006
December 31, 2006
January 31, 2007
February 28, 2007
March 31, 2007
April 30, 2007
May 31, 2007
June 30, 2007
July 31, 2007 and the last day of each month thereafter
Minimum Capital
3,800,000
4,900,000
3,750,000
3,500,000
4,400,000
4,300,000
4,200,000
4,850,000
4,900,000
$
$
$
$
$
$
$
$
$
In addition to the foregoing, if Heska makes a purchase of intellectual property rights by June 30, 2007, as contemplated by Section 7.4(a)
(ix), to the extent the purchase is expensed in accordance with GAAP, the Minimum Capital amounts listed above occurring after the date of
such purchase shall be adjusted downward on a dollar-for-dollar basis by the amount of such expense, not to exceed the Investment Cap.”
“Section 6.13 Minimum Net Income. Heska will achieve, on a consolidated basis, during each period described below, Net
Income in an amount not less than the amount set forth opposite such period (amounts in parentheses denote negative numbers):
Period
Twelve months ending December 31, 2006
Three months ending March 31, 2007
Six months ending June 30, 2007
Minimum Net
Income
750,000
(1,500,000 )
(600,000 )
$
$
$
In addition to the foregoing, if Heska makes a purchase of intellectual property rights by June 30, 2007, as contemplated by Section 7.4(a)
(ix), to the extent the purchase is expensed in accordance with GAAP, the Minimum Net Income amounts listed above occurring after the
date of such purchase shall be adjusted downward on a dollar-for-dollar basis by the amount of such expense, not to exceed the Investment
Cap.”
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“Section 6.16 New Covenants. Annually, on or before May 31, the Borrowers and the Lender shall agree on new covenant levels
for Sections 6.12, 6.13, 6.14, 7.4(a)(v) and 7.10 for periods after such date. The new covenant levels will be based on (i) the Borrowers’
projections for such periods and (ii) the year to date financial results of Heska, on a consolidated basis, and such new covenant levels shall
be no less stringent than the present levels. An Event of Default shall occur if the new covenants are not agreed to by the above date.”
6. Investments. Clause (ix) of Section 7.4(a) of the Credit Agreement is hereby amended to read in its entirety as follows:
“(ix) unless a Default Period exists or would exist immediately after or as a result of any such purchase or investment, a purchase
of intellectual property rights concerning immunodiagnostic technology or an investment in an equity position in a company in the
immunodiagnostic industry, not to exceed the Investment Cap, which purchase or investment shall occur on or before June 30, 2007.”
7. Capital Expenditures. Section 7.10 of the Credit Agreement is hereby amended to read in its entirety as follows:
“Section 7.10 Capital Expenditures. The Borrowers, together with any Affiliates, will not incur or contract to incur, in the
aggregate, Capital Expenditures in the aggregate during the fiscal year-to-date period ending on any date described below in excess of the
amount set forth opposite such period:
Period
November 30, 2006
December 31, 2006
January 31, 2007
February 28, 2007
March 31, 2007
April 30, 2007
May 31, 2007
June 30, 2007
Maximum Capital
Expenditures
2,500,000
2,500,000
750,000
750,000
750,000
1,500,000
1,500,000
1,500,000
$
$
$
$
$
$
$
$
In addition to the foregoing, the amounts set forth above shall be adjusted upward on a dollar-for-dollar basis by the amount allocated for
such purpose in accordance with Section 2.22.”
8. Compliance Certificate. Exhibit B to the Credit Agreement is replaced in its entirety by Exhibit A to this Amendment.
9. No Other Changes. Except as explicitly amended by this Amendment, all of the terms and conditions of the Credit Agreement shall
remain in full force and effect and shall apply to any advance or letter of credit thereunder.
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10. Consent to Merger. The Lender hereby consents to the merger of Heska Holdings AG into Heska AG.
11. Conditions Precedent. This Amendment, including the consent set forth in paragraph 10, shall be effective when the Lender shall have
received an executed original hereof, together with the following, each in form and substance acceptable to the Lender in its sole discretion:
(a) A Certificate of Authority of the Borrowers certifying as to the resolutions of the boards of directors of the Borrowers approving the
execution and delivery of this Amendment.
(b) Such other matters as the Lender may require.
12. Representations and Warranties. The Borrowers hereby represent and warrant to the Lender as follows:
(a) The Borrowers have all requisite power and authority to execute this Amendment and to perform all of its obligations hereunder, and
this Amendment has been duly executed and delivered by the Borrowers and constitute the legal, valid and binding obligation of the Borrowers,
enforceable in accordance with their terms.
(b) The execution, delivery and performance by the Borrowers of this Amendment have been duly authorized by all necessary corporate
action and do not (i) require any authorization, consent or approval by any governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, (ii) violate any provision of any law, rule or regulation or of any order, writ, injunction or decree presently in
effect, having applicability to the Borrowers, or the articles of incorporation or by-laws of the Borrowers, or (iii) result in a breach of or constitute a
default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which any Borrower is a party or by which it
or its properties may be bound or affected.
(c) All of the representations and warranties contained in Article V of the Credit Agreement are correct on and as of the date hereof as
though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date.
13. No Waiver. The execution of this Amendment and acceptance of any documents related hereto shall not be deemed to be a waiver of
any Default or Event of Default under the Credit Agreement or breach, default or event of default under any Security Document or other document held by
the Lender, whether or not known to the Lender and whether or not existing on the date of this Amendment.
14. Release. The Borrowers hereby absolutely and unconditionally release and forever discharge the Lender, and any and all participants,
parent corporations, subsidiary corporations, affiliated corporations, insurers, indemnitors, successors and assigns thereof, together with all of the present and
former directors, officers, agents and employees of any of the foregoing, from any and all claims, demands or causes of action of any kind, nature or
description, whether arising in law or equity or upon contract or tort or under any state or federal
5
law or otherwise, which any Borrower has had, now has or has made claim to have against any such person for or by reason of any act, omission, matter,
cause or thing whatsoever arising from the beginning of time to and including the date of this Amendment, whether such claims, demands and causes of
action are matured or unmatured or known or unknown.
15. Costs and Expenses. The Borrowers hereby reaffirm their agreement under the Credit Agreement to pay or reimburse the Lender on
demand for all costs and expenses incurred by the Lender in connection with the Loan Documents, including without limitation all reasonable fees and
disbursements of legal counsel. Without limiting the generality of the foregoing, the Borrowers specifically agree to pay all fees and disbursements of counsel
to the Lender for the services performed by such counsel in connection with the preparation of this Amendment and the documents and instruments incidental
hereto. The Borrowers hereby agree that the Lender may, at any time or from time to time in its sole discretion and without further authorization by the
Borrowers, make a loan to the Borrowers under the Credit Agreement, or apply the proceeds of any loan, for the purpose of paying any such fees,
disbursements, costs and expenses.
16. Miscellaneous. This Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall
be deemed an original and all of which counterparts, taken together, shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first written above.
HESKA CORPORATION
By
/s/ Jason Napolitano
Its Chief Financial Officer
WELLS FARGO BANK, NATIONAL ASSOCIATION
By
/s/ Tim Ulrich
Tim Ulrich, Vice President
DIAMOND ANIMAL HEALTH, INC.
By
/s/ Jason Napolitano
Its Chief Financial Officer
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Compliance Certificate
Exhibit A to First Amendment
To:
Date:
Subject:
Wells Fargo Business Credit
, 200
Heska Corporation
Financial Statements
In accordance with our Third Amended and Restated Credit and Security Agreement dated as of December 30, 2005 (the “Credit Agreement”), attached are
the financial statements of Heska Corporation (“Heska”) as of and for , 20 (the “Reporting Date”) and the year-to-date period then
ended (the “Current Financials”). All terms used in this certificate have the meanings given in the Credit Agreement.
I certify that, to the best of my knowledge, the Current Financials have been prepared in accordance with GAAP, subject to year-end audit adjustments, and
fairly present the Borrowers’ financial condition and the results of its operations as of the date thereof.
Events of Default. (Check one):
o
o
o
o
The undersigned does not have knowledge of the occurrence of a Default or Event of Default under the Credit Agreement.
The undersigned has knowledge of the occurrence of a Default or Event of Default under the Credit Agreement and attached hereto
is a statement of the facts with respect to thereto.
I hereby certify to the Lender as follows:
The Reporting Date does not mark the end of one of the Borrowers’ fiscal quarters, hence I am completing all paragraphs below
except paragraph 4.
The Reporting Date marks the end of one of the Borrowers’ fiscal quarters, hence I am completing all paragraphs below .
Financial Covenants. I further hereby certify as follows:
1. Accounts Payable. Pursuant to Section 6.5 of the Credit Agreement, as of the Reporting Date, Past Due Payables on a
consolidated basis was $ , which o satisfies o does not satisfy the requirement that the Borrowers have no Past Due Payables.
2. Spread. Pursuant to Section 2.7 of the Credit Agreement, as of the Reporting Date, Heska’s prior-fiscal-year Net Income was, on
a consolidated basis, $ , which determines a base Spread of % pursuant to the table below. Heska o has o has not raised
at least $1,500,000 in Additional Capital as of the Reporting Date, leading to an o increase o decrease from the base Spread of %, so that the
applicable Spread is equal to %.
Prior Fiscal Year Net Income
Less than $0
Greater than or equal to $0 but less than $2,500,000
Greater than or equal to $2,500,000
Spread
2.75 %
1.75 %
0.75 %
3. Minimum Capital. Pursuant to Section 6.12 of the Credit Agreement, as of the Reporting Date, Heska’s Capital was, on a
consolidated basis, $ , which o satisfies o does not satisfy the requirement that such amount be not less than $ on
the Reporting Date, as set forth in the table below and adjusted, if applicable, in accordance with Section 6.12:
Date
November 30, 2006
December 31, 2006
January 1, 2007
February 28, 2007
March 31, 2007
April 30, 2007
May 31, 2007
June 30, 2007
July 31, 2007 and the last day of each month thereafter
2
Minimum Capital
3,800,000
4,900,000
3,750,000
3,500,000
4,400,000
4,300,000
4,200,000
4,850,000
4,900,000
$
$
$
$
$
$
$
$
$
4. Minimum Net Income. Pursuant to Section 6.13 of the Credit Agreement, as of the Reporting Date, Heska’s Net Income was, on
a consolidated basis, $ , which o satisfies o does not satisfy the requirement that such amount be no less than $
on the Reporting Date, as set forth in the table below and adjusted, if applicable, in accordance with Section 6.13:
Period
Twelve months ending December 31, 2006
Three months ending March 31, 2007
Six months ending June 30, 2007
Minimum Net Income
$
$
$
750,000
(1,500,000 )
(600,000 )
5. Minimum Liquidity. Pursuant to Section 6.14 of the Credit Agreement, as of the Reporting Date, Heska’s Liquidity was, on a
consolidated basis, $ , which o satisfies o does not satisfy the requirement that such amount be no less than $1,500,000 on the
Reporting Date.
6. Minimum Individual Book Net Worth. Pursuant to Section 6.15 of the Credit Agreement, as of the Reporting Date, Heska’s
Book Net Worth was $ and Diamond’s Book Net Worth was $ , which o satisfies o does not satisfy the
requirement that such amounts be no less than zero on the Reporting Date.
7. Maximum Contributions. Pursuant to Section 7.4(a)(v) of the Credit Agreement, as of the Reporting Date, Heska’s fiscal year-
to-date aggregate contributions to non-Borrower Subsidiaries was $ , which o satisfies o does not satisfy the requirement that
such amounts be no more than $700,000 during any fiscal year.
8. Capital Expenditures. Pursuant to Section 7.10 of the Credit Agreement, for the fiscal year-to-date period ending on the
Reporting Date, Heska’s Capital Expenditures were, in the aggregate and on a consolidated basis, $ which o satisfies o does not
satisfy the requirement that such amount be not more than $ during the period ending on the Reporting Date, as set forth in the
table below and adjusted, if applicable, in accordance with Section 7.10:
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Date
November 30, 2006
December 31, 2006
January 1, 2007
February 28, 2007
March 31, 2007
April 30, 2007
May 31, 2007
June 30, 2007
Maximum Capital
Expenditures
2,500,000
2,500,000
750,000
750,000
750,000
1,500,000
1,500,000
1,500,000
$
$
$
$
$
$
$
$
Attached hereto are all relevant facts in reasonable detail to evidence the computations of the financial covenants referred to above. These computations were
made in accordance with GAAP.
HESKA CORPORATION
By
Its
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[***] — Certain information in this exhibit have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has
been requested with respect to the omitted portions.
Exhibit 10.30
SECOND AMENDMENT TO THIRD AMENDED AND RESTATED
CREDIT AND SECURITY AGREEMENT
This Amendment, dated as of July 20, 2007, is made by and between Heska Corporation, a Delaware corporation (“Heska”), Diamond
Animal Health, Inc., an Iowa corporation (“Diamond”) (each of Heska and Diamond may be referred to herein individually as a “Borrower” and collectively
as the “Borrowers”), and Wells Fargo Bank, National Association, operating through its Wells Fargo Business Credit operating division (the “Lender”).
Recitals
The Borrowers and the Lender are parties to a Third Amended and Restated Credit and Security Agreement dated as of December 30, 2005
as amended by the terms of that certain First Amendment to Third Amended and Restated Credit and Security Agreement dated as of December 5, 2006
(collectively, and as amended from time to time in the future, the “Credit Agreement”). Capitalized terms used in these recitals have the meanings given to
them in the Credit Agreement unless otherwise specified.
The Borrowers have requested that certain amendments be made to the Credit Agreement, which the Lender is willing to make pursuant to
the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained, it is agreed as
follows:
1. Spread. Section 2.7 of the Credit Agreement is hereby amended to read it its entirety as follows:
“Section 2.7 Spread. The spread (the “Spread”) means the percentage set forth in the table below opposite the applicable prior-
fiscal-year Net Income of the Borrowers, which percentage shall change annually effective as of the first day of the month following the month in
which the Borrowers delivers to the Lender their audited financial statements for the prior fiscal year; provided, however, that in no case shall any
decrease in the Spread occur during a Default Period:
Prior Fiscal Year Net Income
Less than $0
Greater than or equal to $0 but less than $2,500,000
Greater than or equal to $2,500,000
Spread
2.00 %
1.00 %
0.00 %”
2. Audit Fees. Section 2.9(b) of the Credit Agreement is hereby amended to read it its entirety as follows:
“(b) Audit Fees. The Borrower shall pay the Lender fees in connection with any collateral exams, audits or inspections
conducted by or on behalf of the Lender of any Collateral or the Borrower’s operations or business at the rates established from time to time
by the Lender as its collateral exam fees (which fees are currently $100 per hour per collateral examiner), together with all actual out-of-
pocket costs and expenses incurred in conducting any such collateral examination or inspection; provided, however, that so long as no
Default Period exists and average Availability (computed on a 90-day rolling average basis, as reasonably determined by the Lender)
exceeds $1,500,000 the Lender will not conduct more than three such collateral exams in any calendar year.”
3. Projections. Sub-section (f) of Section 6.1 of the Credit Agreement is hereby amended to read in its entirety as follows:
“(f) on or before May 31 of each year, the projected balance sheets and income statements for each of the subsequent twelve
months, each in reasonable detail, representing each Borrower’s good faith projections and certified by such Borrower’s chief financial
officer as being the most accurate projections available and identical to the projections used by such Borrower for internal planning
purposes, together with such supporting schedules and information as the Lender may in its discretion require;”
4. Financial Covenants. Sections 6.12, 6.13 and 6.16 of the Credit Agreement are hereby amended to read in their entireties as follows:
“Section 6.12 Minimum Capital. Heska will maintain, on a consolidated basis, as of each date listed below, its Capital at an
amount not less than the amount set forth opposite such date (amounts in parentheses denote negative numbers):
2
[***] — Certain information on this page have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has
been requested with respect to the omitted portions.
Date
July 31, 2007
August 31, 2007
September 30, 2007
Minimum Capital
[***]
[***]
[***]
October 31, 2007
November 30, 2007
December 31, 2007
January 31, 2008
February 29, 2008
March 31, 2008
April 30, 2008
May 31, 2008
June 30, 2008 and the last day of each month thereafter
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
In addition to the foregoing, if Heska makes a purchase of intellectual property rights by June 30, 2008, as contemplated by Section 7.4(a)
(ix), to the extent the purchase is expensed in accordance with GAAP, the Minimum Capital amounts listed above occurring after the date of
such purchase shall be adjusted downward on a dollar-for-dollar basis by the amount of such expense, not to exceed the Investment Cap.”
“Section 6.13 Minimum Net Income. Heska will achieve, on a consolidated basis, during each period described below, Net
Income in an amount not less than the amount set forth opposite such period (amounts in parentheses denote negative numbers):
Period
Nine months ending September 30, 2007
Twelve months ending December 31, 2007
Three months ending March 31, 2008
Six months ending June 30, 2008
Minimum Net Income
[***]
[***]
[***]
[***]
In addition to the foregoing, if Heska makes a purchase of intellectual property rights by June 30, 2008, as contemplated by Section 7.4(a)
(ix), to the extent the purchase is expensed in accordance with GAAP, the Minimum Net Income amounts listed above occurring after the
date of such purchase shall be adjusted downward on a dollar-for-dollar basis by the amount of such expense, not to exceed the Investment
Cap.”
3
“Section 6.16 New Covenants. Annually, on or before June 30, the Borrowers and the Lender shall agree on new covenant levels
for Sections 6.12, 6.13, 6.14, 7.4(a)(v) and 7.10 for periods after such date. The new covenant levels will be based on (i) the Borrowers’
projections for such periods and (ii) the year to date financial results of Heska, on a consolidated basis, and such new covenant levels shall
be no less stringent than the present levels. An Event of Default shall occur if the new covenants are not agreed to by the above date.”
5. Investments. Clause (v) of Section 7.4(a) of the Credit Agreement is hereby amended to read in its entirety as follows:
“(v) unless a Default Period exists or would exist immediately after or as a result of any such advance or contribution,
advances or contributions during the fiscal year ending December 31, 2007, and the six month period ending June 30, 2008, by Heska to
any Subsidiary that is not a Borrower; provided, however, that (A) both before and after such advance or contribution Heska’s Tangible Net
Worth must equal or exceed $100,000 and (B) all contributions and advances made in reliance on this subsection (v) shall not exceed
$700,000 in the aggregate during the twelve month period beginning July 1, 2007 and ending June 30, 2008;”
6. Capital Expenditures. Section 7.10 of the Credit Agreement is hereby amended to read in its entirety as follows:
“Section 7.10 Capital Expenditures. The Borrowers, together with any Affiliates, will not incur or contract to incur, in the
aggregate, Capital Expenditures in the aggregate during the fiscal year-to-date period ending on any date described below in excess of the
amount set forth opposite such period:
4
[***] — Certain information on this page have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has
been requested with respect to the omitted portions.
Period
July 31, 2007
August 31, 2007
September 30, 2007
October 31, 2007
November 30, 2007
December 31, 2007
January 31, 2008
February 29, 2008
March 31, 2008
April 30, 2008
May 31, 2008
June 30, 2008
Maximum Capital
Expenditures
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
In addition to the foregoing, the amounts set forth above shall be adjusted upward on a dollar-for-dollar basis by the amount allocated for
such purpose in accordance with Section 2.22.”
7. Compliance Certificate. Exhibit B to the Credit Agreement is replaced in its entirety by Exhibit A to this Amendment.
8. No Other Changes. Except as explicitly amended by this Amendment, all of the terms and conditions of the Credit Agreement shall
remain in full force and effect and shall apply to any advance or letter of credit thereunder.
9. Conditions Precedent. This Amendment shall be effective when the Lender shall have received an executed original hereof, together
with the following, each in form and substance acceptable to the Lender in its sole discretion:
(a) A Certificate of Authority of the Borrowers certifying as to the resolutions of the boards of directors of the Borrowers approving the
execution and delivery of this Amendment.
(b) Such other matters as the Lender may require.
10. Representations and Warranties. The Borrowers hereby represent and warrant to the Lender as follows:
(a) The Borrowers have all requisite power and authority to execute this Amendment and to perform all of its obligations hereunder, and
this Amendment has
5
been duly executed and delivered by the Borrowers and constitute the legal, valid and binding obligation of the Borrowers, enforceable in
accordance with their terms.
(b) The execution, delivery and performance by the Borrowers of this Amendment have been duly authorized by all necessary corporate
action and do not (i) require any authorization, consent or approval by any governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, (ii) violate any provision of any law, rule or regulation or of any order, writ, injunction or decree presently in
effect, having applicability to the Borrowers, or the articles of incorporation or by-laws of the Borrowers, or (iii) result in a breach of or constitute a
default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which any Borrower is a party or by which it
or its properties may be bound or affected.
(c) All of the representations and warranties contained in Article V of the Credit Agreement are correct on and as of the date hereof as
though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date.
11. No Waiver. The execution of this Amendment and acceptance of any documents related hereto shall not be deemed to be a waiver of
any Default or Event of Default under the Credit Agreement or breach, default or event of default under any Security Document or other document held by
the Lender, whether or not known to the Lender and whether or not existing on the date of this Amendment.
12. Release. The Borrowers hereby absolutely and unconditionally release and forever discharge the Lender, and any and all participants,
parent corporations, subsidiary corporations, affiliated corporations, insurers, indemnitors, successors and assigns thereof, together with all of the present and
former directors, officers, agents and employees of any of the foregoing, from any and all claims, demands or causes of action of any kind, nature or
description, whether arising in law or equity or upon contract or tort or under any state or federal law or otherwise, which any Borrower has had, now has or
has made claim to have against any such person for or by reason of any act, omission, matter, cause or thing whatsoever arising from the beginning of time to
and including the date of this Amendment, whether such claims, demands and causes of action are matured or unmatured or known or unknown.
13. Costs and Expenses. The Borrowers hereby reaffirm their agreement under the Credit Agreement to pay or reimburse the Lender on
demand for all costs and expenses incurred by the Lender in connection with the Loan Documents, including without limitation all reasonable fees and
disbursements of legal counsel. Without limiting the generality of the foregoing, the Borrowers specifically agree to pay all fees and disbursements of counsel
to the Lender for the services performed by such counsel in connection with the preparation of this Amendment and the documents and instruments incidental
hereto. The Borrowers hereby agree that the Lender may, at any time or from time to time in its sole discretion and without further authorization by the
Borrowers, make a loan to the Borrowers under the Credit Agreement, or apply the proceeds of any loan, for the purpose of paying any such fees,
disbursements, costs and expenses.
6
14. Miscellaneous. This Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall
be deemed an original and all of which counterparts, taken together, shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first written above.
HESKA CORPORATION
DIAMOND ANIMAL HEALTH, INC.
By
/s/ Jason Napolitano
Its Chief Financial Officer
By /s/ Jason Napolitano
Its Chief Financial Officer
WELLS FARGO BANK, NATIONAL ASSOCIATION
By
/s/ Tim Ulrich
Tim Ulrich, Vice President
7
Compliance Certificate
Exhibit A to Second Amendment
To:
Date:
Subject:
Wells Fargo Business Credit
, 200
Heska Corporation
Financial Statements
In accordance with our Third Amended and Restated Credit and Security Agreement dated as of December 30, 2005 (the “Credit Agreement”), attached are
the financial statements of Heska Corporation (“Heska”) as of and for , 20 (the “Reporting Date”) and the year-to-date period then
ended (the “Current Financials”). All terms used in this certificate have the meanings given in the Credit Agreement.
I certify that, to the best of my knowledge, the Current Financials have been prepared in accordance with GAAP, subject to year-end audit adjustments, and
fairly present the Borrowers’ financial condition and the results of its operations as of the date thereof.
Events of Default. (Check one):
o The undersigned does not have knowledge of the occurrence of a Default or Event of Default under the Credit Agreement.
o The undersigned has knowledge of the occurrence of a Default or Event of Default under the Credit Agreement and attached hereto is a
statement of the facts with respect to thereto.
I hereby certify to the Lender as follows:
o The Reporting Date does not mark the end of one of the Borrowers’ fiscal quarters, hence I am completing all paragraphs below except
paragraph 4.
o The Reporting Date marks the end of one of the Borrowers’ fiscal quarters, hence I am completing all paragraphs below .
Financial Covenants. I further hereby certify as follows:
1. Accounts Payable. Pursuant to Section 6.5 of the Credit Agreement, as of the Reporting Date, Past Due Payables on a
consolidated basis was $ , which o satisfies o does not satisfy the requirement that the Borrowers have no Past Due Payables.
2. Spread. Pursuant to Section 2.7 of the Credit Agreement, as of the Reporting Date, Heska’s prior-fiscal-year Net Income was, on
a consolidated basis, $ , which determines a base Spread of % pursuant to the table below. Heska o has o has not raised
at least $1,500,000 in Additional Capital as of the Reporting Date, leading to an o increase o decrease from the base Spread of %, so that the
applicable Spread is equal to %.
Prior Fiscal Year Net Income
Less than $0
Greater than or equal to $0 but less than $2,500,000
Greater than or equal to $2,500,000
Spread
2.00 %
1.00 %
0.00 %
3. Minimum Capital. Pursuant to Section 6.12 of the Credit Agreement, as of the Reporting Date, Heska’s Capital was, on a
consolidated basis, $ , which o satisfies o does not satisfy the requirement that such amount be not less than $ on
the Reporting Date, as set forth in the table below and adjusted, if applicable, in accordance with Section 6.12:
2
[***] — Certain information on this page have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has
been requested with respect to the omitted portions.
Date
July 31, 2007
August 31, 2007
September 30, 2007
October 31, 2007
November 30, 2007
Minimum Capital
[***]
[***]
[***]
[***]
[***]
December 31, 2007
January 31, 2008
February 29, 2008
March 31, 2008
April 30, 2008
May 31, 2008
June 30, 2008 and the last day of each month thereafter
[***]
[***]
[***]
[***]
[***]
[***]
[***]
4. Minimum Net Income. Pursuant to Section 6.13 of the Credit Agreement, as of the Reporting Date, Heska’s Net Income was, on
a consolidated basis, $ , which o satisfies o does not satisfy the requirement that such amount be no less than $
on the Reporting Date, as set forth in the table below and adjusted, if applicable, in accordance with Section 6.13:
Period
Nine months ending September 30, 2007
Twelve months ending December 31, 2007
Three months ending March 31, 2008
Six months ending June 30, 2008
Minimum Net
Income
[***]
[***]
[***]
[***]
5. Minimum Liquidity. Pursuant to Section 6.14 of the Credit Agreement, as of the Reporting Date, Heska’s Liquidity was, on a
consolidated basis, $ , which o satisfies o does not satisfy the requirement that such amount be no less than $1,500,000 on the
Reporting Date.
3
6. Minimum Individual Book Net Worth. Pursuant to Section 6.15 of the Credit Agreement, as of the Reporting Date, Heska’s
Book Net Worth was $ and Diamond’s Book Net Worth was $ , which o satisfies o does not satisfy the
requirement that such amounts be no less than zero on the Reporting Date.
7. Maximum Contributions. Pursuant to Section 7.4(a)(v) of the Credit Agreement, as of the Reporting Date, Heska’s fiscal year-
to-date aggregate contributions to non-Borrower Subsidiaries was $ , which o satisfies o does not satisfy the requirement that
such amounts be no more than $700,000 during any fiscal year.
8. Capital Expenditures. Pursuant to Section 7.10 of the Credit Agreement, for the fiscal year-to-date period ending on the
Reporting Date, Heska’s Capital Expenditures were, in the aggregate and on a consolidated basis, $ which o satisfies o does not
satisfy the requirement that such amount be not more than $ during the period ending on the Reporting Date, as set forth in the
table below and adjusted, if applicable, in accordance with Section 7.10:
4
[***] — Certain information on this page have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has
been requested with respect to the omitted portions.
Date
July 31, 2007
August 31, 2007
September 30, 2007
October 31, 2007
November 30, 2007
December 31, 2007
January 31, 2008
February 29, 2008
March 31, 2008
April 30, 2008
May 31, 2008
June 30, 2008
Maximum Capital
Expenditures
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
Attached hereto are all relevant facts in reasonable detail to evidence the computations of the financial covenants referred to above. These computations were
made in accordance with GAAP.
HESKA CORPORATION
By
Its
5
THIRD AMENDMENT TO THIRD AMENDED AND RESTATED
CREDIT AND SECURITY AGREEMENT
Exhibit 10.31
This Amendment, dated as of December 21, 2007, is made by and between Heska Corporation, a Delaware corporation (“Heska”),
Diamond Animal Health, Inc., an Iowa corporation (“Diamond”) (each of Heska and Diamond may be referred to herein individually as a “Borrower” and
collectively as the “Borrowers”), and Wells Fargo Bank, National Association, operating through its Wells Fargo Business Credit operating division (the
“Lender”).
Recitals
The Borrowers and the Lender are parties to a Third Amended and Restated Credit and Security Agreement dated as of December 30, 2005,
(as amended to date and as the same may be hereafter amended from time to time, the “Credit Agreement”).
The Borrowers have requested that certain amendments be made to the Credit Agreement, which the Lender is willing to make pursuant to
the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements herein contained, it is agreed as
follows:
1. Defined Terms. Capitalized terms used in this Amendment which are defined in the Credit Agreement shall have the same meanings as
defined therein, unless otherwise defined herein. In addition, Section 1.1 of the Credit Agreement is amended by adding or amending, as the case may be, the
following definitions:
“Diamond Revolving Note” means the Third Amended and Restated Revolving Note of Diamond and Heska in the form attached as
Exhibit B to the Third Amendment to this Agreement.
“Heska Revolving Note” means the Third Amended and Restated Revolving Note of Heska in the form attached as Exhibit A to the Third
Amendment to this Agreement.
“Maximum Line” means $15,000,000, unless said amount is reduced pursuant to Section 2.12, in which event it means the amount to which
said amount is reduced.
2. Inventory Cap. The figure “$4,750,000” in clause (iii) of the definition of “Borrowing Base” is replaced by the figure “$7,500,000”.
3. Schedules. Schedule 5.4 and Schedule 5.6 to the Credit Agreement are replaced by Schedule 5.4 and Schedule 5.6 to this Amendment.
4. No Other Changes. Except as explicitly amended by this Amendment, all of the terms and conditions of the Credit Agreement shall
remain in full force and effect and shall apply to any advance or letter of credit thereunder.
5. Origination Fee. The Borrowers shall pay the Lender as of the date hereof a fully earned, non-refundable fee in the amount of $15,000
in consideration of the Lender’s execution and delivery of this Amendment.
6. Conditions Precedent. This Amendment shall be effective when the Lender shall have received an executed original hereof, together
with the following, each in form and substance acceptable to the Lender in its sole discretion:
(a) The replacement Revolving Notes (the “Replacement Notes”) in the form set forth in Exhibits A and B to this Amendment.
(b) Payment of the fee described in paragraph 5.
(c) A Certificate of Authority of the Borrowers certifying as to the resolutions of the boards of directors of the Borrowers approving the
execution and delivery of this Amendment.
(d) Such other matters as the Lender may require.
7. Representations and Warranties. The Borrowers hereby represent and warrant to the Lender as follows:
(a) The Borrowers have all requisite power and authority to execute this Amendment and the Replacement Notes and to perform all
of its obligations hereunder, and this Amendment and the Replacement Notes have been duly executed and delivered by the Borrowers and constitute
the legal, valid and binding obligation of the Borrowers, enforceable in accordance with their terms.
(b) The execution, delivery and performance by the Borrowers of this Amendment and the Replacement Notes have been duly
authorized by all necessary corporate action and do not (i) require any authorization, consent or approval by any governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign, (ii) violate any provision of any law, rule or regulation or of any order,
writ, injunction or decree presently in effect, having applicability to the Borrowers, or the articles of incorporation or by-laws of the Borrowers, or
(iii) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which
any Borrower is a party or by which it or its properties may be bound or affected.
(c) All of the representations and warranties contained in Article V of the Credit Agreement are correct on and as of the date hereof as
though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date.
2
8. No Waiver. The execution of this Amendment and acceptance of the Replacement Notes and any documents related hereto shall not be
deemed to be a waiver of any Default or Event of Default under the Credit Agreement or breach, default or event of default under any Security Document or
other document held by the Lender, whether or not known to the Lender and whether or not existing on the date of this Amendment.
9. Release. The Borrowers hereby absolutely and unconditionally release and forever discharge the Lender, and any and all participants,
parent corporations, subsidiary corporations, affiliated corporations, insurers, indemnitors, successors and assigns thereof, together with all of the present and
former directors, officers, agents and employees of any of the foregoing, from any and all claims, demands or causes of action of any kind, nature or
description, whether arising in law or equity or upon contract or tort or under any state or federal law or otherwise, which any Borrower has had, now has or
has made claim to have against any such person for or by reason of any act, omission, matter, cause or thing whatsoever arising from the beginning of time to
and including the date of this Amendment, whether such claims, demands and causes of action are matured or unmatured or known or unknown.
10. Costs and Expenses. The Borrowers hereby reaffirm their agreement under the Credit Agreement to pay or reimburse the Lender on
demand for all costs and expenses incurred by the Lender in connection with the Loan Documents, including without limitation all reasonable fees and
disbursements of legal counsel. Without limiting the generality of the foregoing, the Borrowers specifically agree to pay all fees and disbursements of counsel
to the Lender for the services performed by such counsel in connection with the preparation of this Amendment and the documents and instruments incidental
hereto. The Borrowers hereby agree that the Lender may, at any time or from time to time in its sole discretion and without further authorization by the
Borrowers, make a loan to the Borrowers under the Credit Agreement, or apply the proceeds of any loan, for the purpose of paying any such fees,
disbursements, costs and expenses.
11. Miscellaneous. This Amendment may be executed in any number of counterparts, each of which when so executed and delivered shall
be deemed an original and all of which counterparts, taken together, shall constitute one and the same instrument.
3
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of the date first written above.
HESKA CORPORATION
DIAMOND ANIMAL HEALTH, INC.
By /s/ Jason Napolitano
Its Chief Financial Officer
WELLS FARGO BANK, NATIONAL
ASSOCIATION
By /s/ Tim Ulrich
Tim Ulrich, Vice President
By /s/ Jason Napolitano
Its Chief Financial Officer
4
$15,000,000
THIRD AMENDED AND RESTATED REVOLVING NOTE
(Heska)
Exhibit A to Third Amendment
Denver, Colorado
December , 2007
For value received, the undersigned, HESKA CORPORATION, a Delaware corporation (the “Borrower”), hereby promises to pay on the
Termination Date under the Credit Agreement (defined below), to the order of WELLS FARGO BUSINESS CREDIT, INC., a Minnesota corporation (the
“Lender”), at its main office in Denver, Colorado, or at any other place designated at any time by the holder hereof, in lawful money of the United States of
America and in immediately available funds, the principal sum of Fifteen Million Dollars ($15,000,000) or, if less, the aggregate unpaid principal amount of
all Revolving Advances made by the Lender to the Borrower under the Credit Agreement (defined below) together with interest on the principal amount
hereunder remaining unpaid from time to time, computed on the basis of the actual number of days elapsed and a 360-day year, from the date hereof until this
Note is fully paid at the rate from time to time in effect under the Third Amended and Restated Credit and Security Agreement dated as of December 30, 2005
(as the same may hereafter be amended, supplemented or restated from time to time, the “Credit Agreement”) by and among the Lender, the Borrower and
Diamond Animal Health, Inc. The principal hereof and interest accruing thereon shall be due and payable as provided in the Credit Agreement. This Note
may be prepaid only in accordance with the Credit Agreement.
This Note is issued pursuant, and is subject, to the Credit Agreement, which provides, among other things, for acceleration hereof. This Note is
issued in substitution for and replacement of, but not in repayment of, the Borrower’s Second Amended and Restated Revolving Note dated as of March 26,
2004, in the original principal amount of $12,000,000. This Note is the Heska Revolving Note referred to in the Credit Agreement. This Note is secured,
among other things, pursuant to the Credit Agreement and the Security Documents as therein defined, and may now or hereafter be secured by one or more
other security agreements, mortgages, deeds of trust, assignments or other instruments or agreements.
The Borrower hereby agrees to pay all costs of collection, including attorneys’ fees and legal expenses in the event this Note is not paid when due,
whether or not legal proceedings are commenced.
Presentment or other demand for payment, notice of dishonor and protest are expressly waived.
HESKA CORPORATION
By
Its
$15,000,000
THIRD AMENDED AND RESTATED REVOLVING NOTE
(Diamond Animal Health)
Exhibit B to Third Amendment
Denver, Colorado
December , 2007
For value received, the undersigned, DIAMOND ANIMAL HEALTH, INC., an Iowa corporation (“Diamond”), and HESKA CORPORATION, a
Delaware corporation (collectively, the “Borrowers”), hereby promise to pay on the Termination Date under the Credit Agreement (defined below), to the
order of WELLS FARGO BUSINESS CREDIT, INC., a Minnesota corporation (the “Lender”), at its main office in Denver, Colorado, or at any other place
designated at any time by the holder hereof, in lawful money of the United States of America and in immediately available funds, the principal sum of Fifteen
Million Dollars ($15,000,000) or, if less, the aggregate unpaid principal amount of all Revolving Advances made by the Lender to Diamond under the Credit
Agreement (defined below) together with interest on the principal amount hereunder remaining unpaid from time to time, computed on the basis of the actual
number of days elapsed and a 360-day year, from the date hereof until this Note is fully paid at the rate from time to time in effect under the Third Amended
and Restated Credit and Security Agreement dated as of December 30, 2005 (as the same may hereafter be amended, supplemented or restated from time to
time, the “Credit Agreement”) by and among the Lender and the Borrowers. The principal hereof and interest accruing thereon shall be due and payable as
provided in the Credit Agreement. This Note may be prepaid only in accordance with the Credit Agreement.
This Note is issued pursuant, and is subject, to the Credit Agreement, which provides, among other things, for acceleration hereof. This Note is
issued in substitution for and replacement of, but not in repayment of, the Borrowers’ Second Amended and Restated Revolving Note dated as of March 26,
2004, in the original principal amount of $12,000,000. This Note is the Diamond Revolving Note referred to in the Credit Agreement. This Note is secured,
among other things, pursuant to the Credit Agreement and the Security Documents as therein defined, and may now or hereafter be secured by one or more
other security agreements, mortgages, deeds of trust, assignments or other instruments or agreements.
The Borrower hereby agrees to pay all costs of collection, including attorneys’ fees and legal expenses in the event this Note is not paid when due,
whether or not legal proceedings are commenced.
Presentment or other demand for payment, notice of dishonor and protest are expressly waived.
DIAMOND ANIMAL HEALTH, INC.
HESKA CORPORATION
By
Its
Heska Corporation Subsidiaries:
Diamond Animal Health, Inc. (Iowa)
Heska AG (Switzerland)
Sensor Devices, Inc. (Wisconsin; - inactive)
Diamond Animal Health, Inc. Subsidiaries:
None
By
Its
2
Schedule 5.4
Subsidiaries
Heska AG Subsidiaries:
None
None
3
Schedule 5.6
Litigation Matters
4
[***] — Certain information in this document have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment
has been requested with respect to the omitted portions.
Exhibit 10.38
FOURTH AMENDMENT
TO
AMENDED AND RESTATED
BOVINE VACCINE DISTRIBUTION AGREEMENT
This Fourth Amendment (the “Fourth Amendment”) is entered into as of the 16th day of November, 2007 (“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
LABORATORIES, LTD., a Delaware corporation, with offices at 20927 State Route K, St. Joseph, Missouri 64505 (“Distributor”) as an amendment to that
certain Amended and Restated Bovine Vaccine Distribution Agreement dated as of September 30, 2002 between Diamond and Distributor (the “Original
Agreement”), as amended by that certain First Amendment dated as of September 20, 2004 (the “First Amendment”), that certain Second Amendment dated
as of December 10, 2004 (the “Second Amendment”) and that certain Third Amendment dated as of May 26, 2006 (the “Third Amendment”) (collectively,
the “Agreement”).
WHEREAS, Diamond and Distributor are parties to the Agreement providing for the distribution of certain bovine antigens; and
WHEREAS, Diamond and Distributor desire to amend the Agreement on the terms and conditions of this Fourth Amendment.
NOW, THEREFORE, the parties agree as follows:
1. Definitions. Capitalized terms used herein shall have the meaning ascribed to them in the Agreement, unless otherwise defined herein.
2. Exclusivity. Section 1.02 of the Agreement is hereby deleted in its entirety and replaced with the following paragraphs:
Distributor’s distribution rights under the Agreement shall be exclusive in the United States, Africa and Mexico for all products identified
on Exhibit A attached to the Agreement and Additional Products added pursuant to Section 2 through Contract Year 2009, except as set
forth in this paragraph, and unless terminated earlier in accordance with the provisions of the Agreement. Distributor’s distribution rights
under the Agreement shall be non-exclusive during the remaining term of the Agreement following Contract Year 2009. In addition,
Distributor’s rights under this Agreement shall be non-exclusive in Canada for all Products through Contract Year 2008 and Distributor
shall have no distribution rights in Canada after Contract Year 2008. Notwithstanding the foregoing, (i) Distributor shall have no
distribution rights for any Products
[***] — Certain information on this page have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has
been requested with respect to the omitted portions.
containing [***] antigens listed on Exhibit C without the prior written consent and agreement of [***]; (ii) Distributor acknowledges that
[***] has exclusive rights to distribute in Canada the product combinations (and lesser fallout products containing [***] antigens)
described in Exhibit C; (iii) Diamond and its Affiliates may sell, have sold and otherwise distribute to [***] without restriction the
individual [***] antigens listed in Exhibit C; (iv) 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 in Exhibit B; and
(v) 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.
It is further recognized by the parties hereto that the 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 in
territories in which Distributor has exclusivity, then Diamond shall be prohibited from making any Bulk Sales, except as set forth in
Section 1.02.
3. Appendices. Exhibit A, AA, B, C and D of the Agreement are hereby deleted each in its entirety and replaced with Exhibit A, AA, B, C
and D of this Fourth Amendment, respectively.
4. Territory. Section 1.03 of the Agreement is hereby deleted in its entirety and replaced with the following paragraph:
Subject to the terms and conditions of this Agreement, 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”)) in the United States, Africa, Mexico
and Canada, limited only as provided in Section 1.02; provided, that notwithstanding any provision of this Agreement to the contrary,
Distributor shall have no distribution rights in Canada after Contract Year 2008.
5. Remaining R&D Agreement. On September 20, 2004, Distributor and Diamond entered into a research, development and licensing
agreement (the “Remaining R&D Agreement”). The parties agree that the remaining activities required to be performed by Diamond under the current
Research and Development Program of the Remaining R&D Agreement are attached hereto as point 3 in Exhibit E and shall be performed subject to the
terms and conditions of the Remaining R&D Agreement. The parties agree, furthermore, that upon
[***] — Certain information on this page have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has
been requested with respect to the omitted portions.
completion of each activity in Exhibit E, all payments due Diamond from Distributor corresponding to such activity will be paid. In addition the parties agree
that at a logically reasonable time with respect to [***], Diamond shall use its reasonable best efforts to perform [***] solely at Diamond’s cost. The parties
agree that Diamond will pursue [***] for [***] regardless of the regulatory issues with [***]. For the purposes of this Amendment, “[***]” means [***].
6. Confidentiality of Agreement. Notwithstanding any provision of the Agreement to the contrary, this Fourth Amendment shall be publicly
available information for SEC filing, press release and other discussion purposes; provided, the parties shall agree to a draft of this Fourth Amendment (the
“Redacted Version”) including highlighted items which shall be redacted from any initial SEC filings and shall be deemed Confidential Information under
Section 13.05 of the Agreement. The parties also agree to a press release to announce this Fourth Amendment, attached hereto in Exhibit F, which shall be
issued after the parties have agreed on the Redacted Version. If the parties do not mutually agree on the Redacted Version and issue the press release in
Exhibit F prior to December 31, 2007, this Fourth Amendment shall be null and void.
7. Captions. The captions set forth in this Fourth Amendment are for convenience only and shall not be used in any way to construe or
interpret this Fourth Amendment, the Agreement, or the Remaining R&D Agreement.
8. Effect of Amendment. This Fourth Amendment is hereby incorporated by reference into the Agreement as if fully set forth therein, the
Agreement as amended by this Fourth Amendment shall continue in full force and effect following execution and delivery hereof, and references to the term
“Agreement” shall include this Fourth Amendment. In the event of any conflict between the terms and conditions of the Original Agreement, First
Amendment, Second Amendment, Third Amendment and this Fourth Amendment, the terms and conditions of this Fourth Amendment shall control.
IN WITNESS WHEREOF, the parties have caused this Fourth Amendment be executed by their duly authorized representatives as of the date first
written above.
DIAMOND ANIMAL HEALTH, INC.
By:
/s/ Jason Napolitano
Its: Chief Financial Officer
AGRI LABORATORIES, LTD.
By: Steve Schram
Its: CEO/President
[***] — Certain information on this page have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has
been requested with respect to the omitted portions.
EXHIBIT A
Initial Products
I. Modified Live Products:
Tradename
Antigens
Titanium BRSV
Titanium BRSV Vac3
Titanium 5
Titanium 5 L5
[***]
Titanium 3+ BRSV LP*
Titanium 3+ LP*
Titanium IBR
Titanium IBR LP*
Titanium 3
Titanium 4
Titanium 4 L5
BRSV
BRSV, PI3, IBR
BRSV, PI3, IBR, BVD1, BVD2
BRSV, PI3, IBR, BVD1, BVD2, Lepto 5
[***]
BRSV, PI3, IBR, BVD1, BVD2, L. pomona
IBR, BVD1, BVD2, PI3, L.pomona
IBR
IBR, L. pomona
IBR, BVD1, BVD2
IBR, PI3, BVD1, BVD2
IBR, PI3, BVD1, BVD2, Lepto 5
[***]
[***]
[***]
Pricing (USD)
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
Above Pricing based on Standard Batch Sizes:
[***]dose Large Freeze Dryer- [***] units / [***] doses Small Freeze Dryer- [***] units / [***] doses
[***] dose Large Freeze Dryer- [***]units / [***] doses Small Freeze Dryer- [***] units / [***] doses
* = Titanium + LP combinations have [***] unit Standard Batch size irrespective of presentation (Dose volume)
Any product or combination not listed above that is desired by Distributor may be added to this Exhibit pursuant to Section 2 of Agreement and new pricing
will be established; provided, that such additional Products shall qualify as “Initial Products” only if they meet the definition of “Initial Products” set forth in
Section 13.08 of the Agreement.
II. Killed Products:
Tradename
MasterGuard Preg.5
MasterGuard 10
Antigens
KIBR, KBVD1, KBVD2, MLV BRSV, PI3
KIBR, KBVD1, KBVD2, MLV BRSV, PI3, L5
Above Pricing based on Standard Batch Sizes
[***] dose
[***] dose
[***] units / [***] doses
[***] units / [***] doses
Tradename
[***]
[***]
Antigens
[***]
[***]
Above Pricing based on Standard Batch Sizes
[***] dose
[***] dose
[***] units / [***] doses or [***] units / [***] doses
[***] units / [***] doses or [***] units / [***] doses
Pricing (USD)
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***] — Certain information on this page have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has
been requested with respect to the omitted portions.
EXHIBIT AA
Potential Additional Antigens that qualify to be
Classified as “Initial Products” per Section 13.08
[***]
· [***]
· [***]
· [***]
· [***]
· [***]
· [***]
· [***]
[***] — Certain information on this page have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has
been requested with respect to the omitted portions.
EXHIBIT B
[***]
[***] Antigens or [***] Vaccine
Infectious Bovine [***]
Bovine [***]
> [***]
> [***]
Bovine [***]
[***]
[***]
(Master Cell Stock)
[***] — Certain information on this page have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has
been requested with respect to the omitted portions.
[***]
EXHIBIT C
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
1.
2.
3.
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***]
[***] — Certain information on this page have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has
been requested with respect to the omitted portions.
Diamond antigens to be incorporated into the [***] or Solid Dose Technologies:
EXHIBIT D
[***]
[***]
[***]
[***]
[***]
[***]
Note: [***] Component contains both Type I and Type II
[***] — Certain information on this page have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has
been requested with respect to the omitted portions.
1. [***]
2. [***]
3. [***]
· [***]
· [***]
· [***]
· [***]
· [***]
· [***]
Note: All activities subject to current [***] regulations and guidance.
Press Release Logo of Heska Corporation
FOR IMMEDIATE RELEASE
EXHIBIT E
EXHIBIT F
Press Release
At Heska Corporation:
Jason Napolitano, Executive Vice President & CFO
(970) 493-7272, Ext. 4105
Heska Announces Amended Agreement with AgriLabs
LOVELAND, CO, November 30, 2007 — Heska Corporation (NASDAQ: HSKA) today announced its Des Moines-based subsidiary (“Heska Des Moines”)
has amended its bovine vaccine distribution agreement with Agri Laboratories, Ltd. (“AgriLabs”). Heska Corporation (“Heska” or the “Company”) reports
revenue generated under this agreement in Heska’s Other Vaccines, Pharmaceuticals and Products segment. Under the terms of the amended agreement, Heska
Des Moines agreed to fund a portion of development spending under the remaining research and development agreement with AgriLabs in return for certain
distribution rights.
Under the amendment, AgriLabs will continue to market the underlying bovine vaccines in the United States, Africa and Mexico through December 15, 2013.
Subject to minimum purchase requirements, AgriLabs’ rights in these regions will be exclusive through December 15, 2009. Heska Des Moines is free to sell
these bovine vaccines to any party of its choosing in other regions of the world. AgriLabs will also maintain non-exclusive rights to these bovine vaccines in
Canada through December 15, 2008.
“The vaccines underlying this agreement are well known in the United States and Africa cattle markets where they are sold under AgriLabs’ label and tradenames
Titanium® and MasterGuard®. We were pleased when AgriLabs began to sell these vaccines in new markets, first in Africa and most recently in Mexico,”
said Robert Grieve, Heska’s Chairman and CEO. “We are pleased to continue our positive working relationship with AgriLabs and continue to benefit from their
livestock market expertise.”
“We are proud of the leadership position we have established for these vaccines. Our research and development agreement with Heska Des Moines is the
cornerstone of our commitment to maintain the preeminence of these vaccines in the marketplace,” commented Steve Schram, AgriLabs’ President and CEO.
“We are pleased Heska Des Moines has agreed to fund a portion of this effort. We view this as another installment in a long history of mutually beneficial
agreements between our companies.”
About Heska
Heska Corporation (NASDAQ: HSKA) sells advanced veterinary diagnostic and other specialty veterinary products. Heska’s state-of-the-art offerings to its
customers include diagnostic instruments and supplies as well as single use, point-of-care tests, vaccines and pharmaceuticals. The company’s core focus is
on the canine and feline markets where it strives to provide high value products and unparalleled customer support to veterinarians. For further information
on Heska and its products, visit the company’s website at www.heska.com.
About AgriLabs
AgriLabs is the largest private label marketer of veterinary vaccines and pharmaceuticals in the United States. AgriLabs is proficient in sales, marketing and
technology transfer of current and future compounds or antigens for both food and companion animal markets. The AgriLabs distribution network of
distribution owners is the largest in the United States and has the ability to efficiently reach the livestock and consumer marketplace through various
veterinary, direct and retail channels. For additional information on AgriLabs and its products or distributors, visit the company website at www.agrilabs.com
Forward-Looking Statements
This announcement contains forward-looking statements regarding Heska’s future financial and operating results. These statements are based on current
expectations and are subject to a number of risks and uncertainties. In addition, factors that could affect the business and financial results of Heska generally
include the following: risks regarding the commercialization and market acceptance of products the Company may introduce in the future; risks relating to
the size and stability of markets for the Company’s products, such as foreign markets for cattle vaccines which are generally smaller than the corresponding
domestic market and may be subject to greater volatility; uncertainties regarding the outcome of research and development efforts, which may not yield
marketable products or any products at all; uncertainties regarding reliance on third parties to whom substantial marketing rights to existing products have
been granted, such as reliance on an exclusive distribution agreement with AgriLabs and the affiliated risks of relying on perceptions of AgriLabs’ brand and
trademarks in the marketplace; competition; and the risks set forth in Heska’s filings and future filings with the Securities and Exchange Commission,
including those set forth in Heska’s Annual Report on Form 10-K for the year ended December 31, 2006 and Quarterly Report on Form 10-Q for the quarter
ended September 30, 2007.
###
Exhibit 10.43
[***] — Certain information in this exhibit have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has
been requested with respect to the omitted portions.
CLINICAL CHEMISTRY ANALYZER AGREEMENT
THIS CLINICAL CHEMISTRY ANALYZER AGREEMENT (this “Agreement”) is entered into as of January 30, 2007 (the “Effective Date”) by
and between FUJIFILM Corporation., a Japanese corporation having its principal place of business at 26-30, Nishiazabu 2-chome, Minato-ku, Tokyo 106-
8620 Japan (“Fuji”) and Heska Corporation, a Delaware corporation, having its principal place of business at 3760 Rocky Mountain Avenue, Loveland, CO
80538, USA (“Heska”).
W I T N E S S E T H:
WHEREAS, Fuji is a manufacturer of diagnostic health care equipment and desires to obtain a distributor of Products (as hereinafter defined) in
the veterinary market (the “Field” as hereinafter defined) in the Territory (as hereinafter defined);
WHEREAS, Heska is a distributor of various products in the Field in the Territory;
WHEREAS, in accordance with the terms and conditions hereof, Fuji is willing to appoint Heska as its exclusive distributor of Products in the
Territory, and Heska is willing to accept such appointment.
NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, and upon the terms and subject to the conditions
set forth below, Heska and Fuji hereby agree as follows:
ARTICLE 1 — DEFINITIONS
The following words and phrases, when used herein with initial capital letters, shall have the meanings set forth or referenced below:
1.1 “Affiliate” shall mean, with respect to each Party (as hereinafter defined), any legal entity that is, directly or indirectly, controlling, controlled by or
under common control with such Party. For purposes of this definition, a Party shall be deemed to control another entity if it owns or controls,
directly or indirectly, more than fifty percent (50%) of the voting equity of the other entity, or directly or indirectly possesses the power to direct, or
cause the direction of, the management and policies of such other entity by any means whatsoever.
1.2 “Analyzer” shall mean a non-handheld device, capable of performing chemical and electrolyte analyses of biological fluids, as described in
Exhibit 1.13 and having the Specifications set forth in Exhibit 4.1.
1.3 “Calendar Quarter” shall mean a period of three (3) consecutive calendar months commencing on January 1, April 1, July 1 or October 1 during the
Term.
1.4 “Calendar Year” shall mean each consecutive twelve (12) month period prior to the termination of this Agreement, commencing on January 1 and
ending on December 31 of each such Calendar Year.
1.5 “Competing Product” shall mean a non-handheld device, capable of performing chemical and electrolyte analyses of biological fluids.
1.6 “Confidential Information” shall mean this Agreement and any and all technical data, information, materials and other know-how, including trade
secrets, presently owned by or developed by, on behalf of, either Party and/or its Affiliates during the Term (as hereinafter defined) which relates to a
Product, its development, manufacture, promotion, marketing, distribution, sale or use and any and all financial data and information relating to the
business of either of the Parties and/or of their Affiliates, which a Party and/or its Affiliates discloses to the other Party and/or its Affiliates in writing
and identifies as being confidential, or if disclosed orally, visually or through some other media, is identified as confidential at the time of disclosure
and is summarized in writing within thirty (30) days of such disclosure and identified as confidential, except any portion thereof which:
(a) is known to the receiving Party and/or its Affiliates at the time of the disclosure, as evidenced by its written records;
(b) is disclosed to the receiving Party and/or its Affiliates by a Third Party having a right to make such disclosure;
(c) becomes patented, published or otherwise part of the public domain through no fault of the receiving Party and/or its Affiliates; or
(d) is independently developed by or for the receiving Party and/or its Affiliates without use of Confidential Information disclosed hereunder,
as evidenced by its written records.
1.7 “End User” shall mean a natural person, corporation, partnership, trust, joint venture, government authority or other legal entity or organization in
the Territory, other than Heska or Fuji and/or their respective Affiliates, that purchases Products under this Agreement for use or consumption in the
Field by itself or its Affiliates.
1.8 “Extension Term” shall mean each additional renewal of the term of this Agreement, if any, following the Initial Term or another Extension Term, as
set forth in Section 9.1.
1.9 “Field” shall mean the veterinary market.
1.10 “Initial Term” shall mean the time beginning on the Effective Date and ending on December 31st of the Calendar Year in which the fifth (5th) annual
anniversary of the Launch Date occurs, as set forth in Section 9.1.
1.11 “Launch Date” shall mean the date on which Heska begins Sale of Products.
1.12 “Party” shall mean Fuji or Heska and “Parties” shall mean Fuji and Heska.
1.13 “Products” shall mean the Analyzers developed under Section 2.1 hereunder, consumables (e.g., slides), spare parts and associated products
manufactured by or for Fuji, including those listed on Exhibit 1.13 subject to amendment pursuant to Section 2.4.
1.14 “Purchase Price” shall mean the price, less any discounts, for Products purchased by Heska and its Affiliates from Fuji and its Affiliates hereunder,
as set forth on Exhibit 1.13.
1.15 “Sale”, “Sell” or “Sold” shall mean to sell, hire, let, rent, lease, license or otherwise dispose of Product, either directly or indirectly through
Subdistributors, to a Third Party or Affiliate, provided such Affiliate is an end user of Products for commercial purposes for monetary or other
valuable consideration. “Sale”, “Sell” or “Sold” shall not include a transaction where samples of Product are supplied without charge in connection
with clinical or other experimental trials.
1.16 “Specifications” shall mean the features, functionality and characteristics of the Products, as set forth in Section 4.1.
1.17 “SpotChem Products” shall mean SPOTCHEM™ EZ Dry Chemistry analyzers and related products, including but not limited to consumables and
spare parts.
1.18 “Subdistributor” shall mean a natural person, corporation, partnership, trust, joint venture, government authority or other legal entity or organization
in the Territory, other than Heska or Fuji and/or their respective Affiliates, which purchases Products from Heska for the purpose of resale to End
Users for use in the Field.
1.19 “Technical Documentation” shall mean all documents prepared by Fuji in the ordinary course of business that describe the Products in terms of their
intended use and Product claims. Such documents may take the form of user instructions, system manuals, product updates or technical bulletins,
but are not limited to such forms.
1.20 “Term” shall have the meaning set forth in Section 9.1.
1.21 “Territory” shall mean United States of America and Canada.
1.22 “Third Party” shall mean a natural person, corporation, partnership, trust, joint venture, governmental authority or other legal entity or organization
other than the Parties and/or their Affiliates.
ARTICLE 2 — DEVELOPMENT
2.1 Development Plan. Fuji and Heska agree to work together to develop the Analyzer and its consumables that meet the Specifications. The
development of such Analyzer and consumables will be conducted in accordance with an agreed-upon development plan (the “Development Plan”).
Each Party will contribute the resources, such as technical information and personnel and expense, as outlined in the Development Plan.
2.2 Intellectual Property Rights. All rights and title to inventions and/or discoveries, patentable or otherwise, developed under this Agreement
(“Inventions”) solely by Fuji shall belong to Fuji. All rights and title to Inventions developed solely by Heska shall belong to Heska. All rights and
title to Inventions developed jointly by Fuji and Heska shall belong jointly to Fuji and Heska. The patent laws of the United States relating to
inventorship shall determine ownership rights with respect to patentable inventions. Each Party shall notify the other Party promptly in writing of
each Invention.
2.3 Right of First Negotiation with respect to Inventions. Within thirty (30) days after written notice of an Invention pursuant to Section 2.2:
(a) Fuji shall give Heska a written notice offering to enter into negotiations to license, on an exclusive basis, Fuji’s rights to Heska with respect to
any patent rights,technology, manufacturing, distribution or other rights in and to such Invention in the Field and in the Territory (the
“Veterinary Rights”). If, within thirty (30) days of receipt of such notice, Heska notifies Fuji that it is interested in licensing the Veterinary
Rights, Heska and Fuji shall enter into good faith negotiations with respect thereto and Fuji will not enter into any agreement or arrangement
with any Third Party with respect to the Veterinary Rights unless Heska and Fuji fail to execute a letter of intent or binding agreement within
ninety (90) days after Fuji’s receipt of Heska’s notice of interest. If the Parties do not execute a letter of intent or agreement within such ninety
(90) day period, Fuji shall be free to offer the Veterinary Rights to Third Parties; provided however, that until twelve (12) months after the
ninety-day period has expired without the letter of intent being executed with Heska, Fuji shall not offer or enter into any agreement or other
arrangement with respect to the Veterinary Rights with a Third Party on terms more favorable to such Third Party than those offered in writing
to Heska by Fuji; and
(b) Heska shall give Fuji a written notice offering to enter into negotiations to license, on an exclusive basis, Heska’s rights to Fuji with respect to
any patent rights,technology, manufacturing, distribution or other rights in and to such Invention outside the Field (the “Non-Veterinary
Rights”). If, within thirty (30) days of receipt of such notice, Fuji notifies Heska that it is interested in licensing the Non-Veterinary Rights, Fuji
[***] — Certain information on this page have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has
been requested with respect to the omitted portions.
and Heska shall enter into good faith negotiations with respect thereto and Heska will not enter into any agreement or arrangement with any
Third Party with respect to the Non-Veterinary Rights unless Fuji and Heska fail to execute a letter of intent or binding agreement within ninety
(90) days after Heska’s receipt of Fuji’s notice of interest. If the Parties do not execute a letter of intent or agreement within such ninety (90)
day period, Heska shall be free to offer the Non-Veterinary Rights to Third Parties; provided however, that until twelve (12) months after the
ninety-day period has expired without the letter of intent being executed with Fuji, Heska shall not offer or enter into any agreement or other
arrangement with respect to the Non-Veterinary Rights with a Third Party on terms more favorable to such Third Party than those offered in
writing to Fuji by Heska.
2.4 Improved Products. Any and all improvements in and to the Products shall, automatically upon their commercial availability, become Products
under this Agreement.
ARTICLE 3 — APPOINTMENT TO MARKET AND DISTRIBUTE; REQUIREMENTS
3.1 Exclusive Appointment; Requirements. As of the Effective Date, Fuji hereby appoints Heska and its Affiliates for the Term as Fuji’s exclusive
distributor of Products in the Field in the Territory, and Heska accepts such appointment; provided, however, if Heska fails to purchase at least [***] per
Calendar Year in any calendar Year during the Term of this Agreement (unless Heska’s failure to purchase such Analyzers is the result of Fuji’s failure to
delivery Product by the delivery date set forth in the applicable Purchase Order), the exclusive distributorship granted in this Section 3.1 shall change to a
non-exclusive distributorship upon written notice to Heska within thirty (30) days after expiration of such Calendar Year. Subject to Section 4.6, Fuji shall
manufacture and sell to Heska, and, subject to Section 3.2, Heska shall purchase from Fuji, all of Heska’s and its Affiliates’ requirements for marketing,
promoting, Selling and distributing Products in the Territory for use in the Field. Except as set fort in Section 3.2, the exclusive distributorship granted in this
Section 3.1 is on the condition that Heska or its Affiliates does not purchase from any third Party any Competing Product for marketing, promoting, Selling
and distributing for use in the field in the territory, as long as Fuji or its Affiliates is capable of supplying the Products to Heska. As exclusive distributor in
the Field in the Territory, Heska shall have the sole and exclusive right to market, promote, Sell and distribute Products in the Territory for use in the Field,
which right shall operate to exclude all others, including Fuji, its Affiliates and all Third Parties. In furtherance of this exclusive grant to Heska and its
Affiliates, Fuji hereby agrees to use its commercially reasonable efforts to ensure that any Products Sold outside the Field are not directly Sold by Fuji or
indirectly Sold by Fuji’s distributors or customers to End Users in the Territory, to the extent permitted under applicable competition laws.
3.2 Exception to Requirements Obligations. Notwithstanding Heska’s and its Affiliates’ obligations not to purchase Competing Products from any
Third Party pursuant to Section 3.1, Heska is specifically permitted to continue to purchase SpotChem Products and to Sell and distribute SpotChem Products
(i) to Affiliates and Third Parties prior to the Launch Date, and (ii) to Heska’s and Affiliates’ customer base in existence as of the Launch Date; provided that
Heska shall not purchase any new SPOTCHEM™ EZ Dry Chemistry analyzers at any time following the Launch Date.
3.3 Right of First Refusal. With the exceptions of the countries specifically set forth on Exhibit 3.3, in the event that Fuji desires to appoint a
distributor of the Products in the Field in any country or region outside the Territory, Fuji shall first offer in writing to Heska the opportunity to accept such
appointment, subject to the terms and conditions of this Agreement. Heska shall have thirty (30) days to accept or reject such offer in writing in its sole
discretion. In the event of acceptance by Heska, Fuji and Heska shall amend this Agreement to modify the Territory to include such country or region.
3.4 Selling Price. Heska, in its sole discretion, shall determine the final sales price of Products Sold by Heska to Affiliates and Third Parties in the
Field in the Territory, and no other term or provision in this Agreement shall be interpreted or deemed to provide Fuji with any right to determine the final
sales price of Products Sold by Heska hereunder.
3.5 Appointment of Subdistributors. Heska shall have the right to appoint Subdistributors for the Sale of the Products in the Field in the Territory.
Heska agrees that, if it enters into an agreement or arrangement with any Subdistributor to allow such Subdistributor to offer for Sale, Sell, have Sold, use,
have used, market, have marketed, distribute, have distributed, import and have imported Products in the Field in any country or region of the Territory,
Heska shall contractually restrict such Subdistributor’s activities to sales of Products in the Field for use in the Field by contractually restricting the
Subdistributor from reselling Products to Third Parties outside the Field outside the Territory to the extent permitted under applicable competition laws.
3.6 Right of First Negotiation with respect to New Products. Within thirty (30) days after written notice of any new product of Fuji capable of
performing chemical and/or electrolyte analyses of biological fluids (a “New Product”), Fuji shall give Heska a written notice offering to enter into
negotiations to purchase Heska’s and its Affiliates’ requirements for marketing, promoting, Selling and distributing such New Product in the Territory for use
in the Field (the “New Product Right”). If, within thirty (30) days of receipt of such notice, Heska notifies Fuji that it is interested in exercising such New
Product Right, Heska and Fuji shall enter into good faith negotiations with respect thereto and Fuji will not enter into any agreement or arrangement with any
Third Party with respect to the New Product Right for use in the Field in the Territory unless Heska and Fuji fail to execute a letter of intent or binding
agreement within ninety (90) days after Fuji’s receipt of Heska’s notice of interest. If the Parties do not execute a letter of intent or agreement within such
ninety (90) day period, Fuji shall be free to offer the New Product Right to Third Parties for use in the Field in the Territory.
[***] — Certain information on this page have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has
been requested with respect to the omitted portions.
ARTICLE 4 — SPECIFICATIONS, MANUFACTURE, SUPPLY AND DELIVERY OF PRODUCTS
4.1 Specifications. Fuji and Heska shall finalize and mutually agree upon the Specifications for the Products in writing no later than June 30, 2007. In
the event that either party proposes to modify the Specifications of any Products to be supplied to Heska, both parties agree to review and discuss such
proposals in good faith; provided, however, any change to the Specifications will only be made upon the prior written consent of both Heska and Fuji.
Except with Heska’s prior written consent, all consumable Product that have an expiration date shall have dating of not less than (i) [***] from the date of
manufacture by Fuji and (ii) [***] from the date of receipt by Heska.
4.2 Packaging and Labeling. Fuji shall supply all packaging and labeling required for Products. All Product packaging and labeling shall be as set
forth in the Specifications. All labeling and packaging shall designate Fuji as the “manufacturer” and Heska as the “distributor” of the Products and shall
include both Parties’ logos and additional branding of both Parties as shall be set forth in the Specifications. Heska shall reimburse Fuji for any additional
costs incurred in manufacturing Products as a result of changes to packaging and/or labeling requested by Heska in writing after the Launch Date. To the
extent any of the packaging and/or labeling to be used as contemplated hereby includes any Heska trademarks and/or artwork, Fuji shall not acquire any right
or interest therein except for the purpose of manufacturing and packaging Products for Heska pursuant hereto. Fuji shall be responsible for assuring that all
Product packaging materials and labels comply with applicable laws.
4.3 Manufacture, Sale and Purchase of Products. During the Term, Fuji shall manufacture or have manufactured, release, sell and deliver to Heska
those units of Products as are ordered by Heska and accepted by Fuji hereunder and in accordance with the Specifications for each of the Products. Each party
shall comply with all applicable rules and regulations applicable to the manufacture or sale of the Products in the Territory in the Field, including as
applicable, those rules and regulations of the FDA, and in accordance with all other applicable laws and regulations of countries in which Heska sells
Products.
4.4 Rolling Forecasts. Prior to the end of each Calendar Quarter, beginning at the end of the first Calendar Quarter in 2007, Heska shall provide Fuji
with a non-binding forecast of its requirements of the Products for the following four (4) Calendar Quarters.
4.5 Product Orders. Heska shall order Products on purchase orders which shall specify the quantities of each Product ordered, delivery dates, the
identity of Products ordered, Product price, and delivery and shipping instructions including carrier selected. All purchase orders shall provide Fuji with no
less than [***] notice to the specified delivery date after Fuji’s receipt of the purchase order. All orders will be governed by the terms of this Agreement. To
the extent that any purchase order, confirmation of acceptance or other document contains terms in conflict
with, or in addition to, the terms of this Agreement, such conflicting or additional terms shall not be binding on the Parties unless agreed upon in advance in
writing by the Parties.
4.6 Acceptance of Purchase Orders. Purchase orders in compliance with the requirements of this Agreement shall be deemed accepted upon receipt by
Fuji and shall be acknowledged as such by Fuji within five (5) days of receipt; provided, however, that if Heska’s purchase order of a Calendar Quarter
exceeds one-hundred and ten percent (110%) of the forecasts provided by Heska to Fuji pursuant to Section 4.4, Fuji shall only make commercially
reasonable efforts to accept and deliver the exceeding portion of the purchase order, but having no obligations to do so.
4.7 Purchase Prices. Purchase Prices for the Products are listed on Exhibit 1.13. The Purchase Price set forth in Exhibit 1.13 shall be fixed for the
Term.
4.8 Taxes. The Purchase Prices do not include insurance, freight, customs, duties, taxes, any foreign, federal, state or local taxes that may be applicable
to Products including, without limitation, sales, excise, value-added, withholding, and other taxes other than taxes based upon Fuji’s net income and other
similar charges. When Fuji has the legal obligation to collect such taxes, the appropriate amount shall be added to Heska’s invoice and paid by Heska unless
Heska provides Fuji with a valid tax exemption certificate authorized by the appropriate taxing authority.
4.9 Delivery of Product; Determination of Method of Transportation. Products shall be delivered FCA (Incoterms 2000) Fuji’s warehouse at
Yokohama, Japan. The method of transportation of the Products, shipping destination and the carrier selected shall be as specified by Heska in its purchase
orders. Notwithstanding the foregoing, regarding the consumable Products, Heska agrees and acknowledges that Fuji has an allowance of +5% of the quantity
of delivered Products than ordered quantity in the firm purchase order. In addition to the requirements set forth in Section 4.1, all consumable Products
which has the term of validity (i.e., expiration date) shall be delivered by Fuji within four (4) months from the date of manufacturing such consumable
Products.
4.10 Payments Due. All payments due and payable hereunder shall be made by check or wire transfer within sixty (60) days from Heska’s receipt of the
Products. The invoiced amount shall be paid by Heska to Fuji by: (a) wire transfer to the bank listed on Exhibit 4.10 or otherwise specified by Fuji, or
(b) certified bankers check.
4.11 Currency Basis. All prices including Product Prices for Products and payments therefor shall be in U.S. dollars (“US$”).
4.12 Acceptance of Product. Heska shall not be obligated to accept any Product that does not conform to the Specifications. Heska shall inspect all
Products upon delivery in a commercially reasonable manner. Failure by Heska to give notice of defective or damaged Product within the time periods
specified in Section 4.13 shall be deemed a waiver of Fuji’s obligations with respect to repair, replacement or refund as set forth below.
4.13 Defective and Improper Delivery; Product Returns. If Heska or a Subdistributor or End User claims that: (a) any Product is defective; (b) incorrect
Product was shipped; or (c) there was a shortage in the shipment, and notice in writing of such defective Product, incorrect shipment or shortage is provided
to Fuji within thirty (30) days of receipt of the shipment, then, upon receipt of such notice, Fuji shall either replace any defective or incorrectly shipped
Product, make up any shortfall or refund any Purchase Price paid by Heska, at Heska’s option. If any Product is claimed by Heska, a Subdistributor or End
User to be defective and Fuji is notified in writing of such defect in writing within fifteen (15) days of discovery of such defect, then Fuji shall either repair,
replace or provide a refund for any such defective Product at Heska’s discretion. Upon request by Fuji, Heska shall deliver to Fuji, at Fuji’s cost, any returned
Product with regard to which the credit is claimed. In addition, Fuji shall reimburse Heska for reasonable freight expenses directly related to delivering said
Product to Fuji.
ARTICLE 5. MARKETING OF PRODUCTS
5.1 Marketing. Heska shall, at its own expense, use commercially reasonable efforts to market and promote the Products in the Territory.
5.2 Catalogs, Bulletins. At Heska’s written request, Fuji shall provide Heska with reasonable quantities or electronic files of brochures, instructional
material, advertising literature and other relevant Technical Documentation regarding the Products, at no charge to Heska. Such documents shall be in the
English language, and may be in other languages to the extent already available. Heska, at its own cost, may provide a translation of the documents into the
local language.
5.3 Training. Fuji shall provide the training to Heska as set forth in Exhibit 5.3.
5.4 Technical Support. Heska agrees to be responsible as the first point of contact for technical support with the End User. The term “Technical
Support” shall mean, without limitation, problem resolution, explanation of functionality and collection of incident reports. Fuji will provide technical
service support to Heska, its Subdistributors and End Users as requested by Heska.
5.5 Warranty Services. Heska shall provide a technical liaison and assistance to End Users for warranty service of the Products. In addition, upon
mutual written agreement of Heska and Fuji, Heska shall perform certain warranty repairs during the term of the warranty, which shall be billed to and paid
by Fuji at mutually agreed upon labor rates. In order to provide such warranty repairs, Fuji shall provide appropriate service manuals, updated service
bulletins and parts in advance and in an adequate amount to effect such repairs.
6.1 Use of Trademarks and Tradenames. Heska shall not use the trademark “Fuji” and any other trademarks, service marks or tradenames used by Fuji
to identify the Products (the
ARTICLE 6. INTELLECTUAL PROPERTY RIGHTS
“Marks”) regarding selling, distributing, marketing or promoting the Products, without Fuji’s prior written consent, such consent not be unreasonably
withheld or delayed. Upon Fuji’s prior written consent with respect to each new substantive configuration of the marks that Heska proposes to use, Heska
may use the Marks solely for the purpose of identifying Fuji as the manufacturer of the products, Heska’s distribution of Products, and related performance
under this Agreement. For the avoidance of doubt, once Fuji approves a particular use of the Marks, Heska shall be permitted to continue to use such
configuration of the Marks without the need to obtain additional consent from Fuji; provided that each further use is similar to the prior approved use. Any
substantive changes to the configuration, however, will require Fuji’s further prior written consent. Further, Fuji agrees to approve or reject any proposed new
configuration of the Marks within ten (10) business days. The Marks and the goodwill associated therewith are and shall remain the exclusive property of
Fuji. Heska shall not: (a) use the Marks as part of any composite mark including any elements not approved in advance in writing by Fuji; (b) challenge the
validity or enforceability of the Marks (unless such restriction is illegal); (c) acquire any proprietary rights in the Marks by reason of any activities under this
Agreement or otherwise; or (d) use any Marks or Fuji’s corporate name or trade name as a part of its corporate name or trade name, nor shall it make any
representations or use any names which may or are likely to cause the public to mistake or confuse Heska for or with Fuji. All uses of the marks by Heska
and any additional goodwill created thereby shall inure to the exclusive benefit of Fuji. Fuji, at all times during the Term on reasonable notice, shall have the
right to inspect the materials and services on or in connection with which the Marks are use in order to assure Fuji that its quality standards relating to the
products and Heska’s servicing and other Mark-pertinent provisions of this Agreement are being observed. If at any time Fuji shall reasonably object to any
use to which the Marks are put, heska shall promptly cease any such use.
ARTICLE 7. REPRESENTATIONS AND WARRANTIES; RECALLS
7.1 Product Warranty to End Users. Heska shall pass through to End Users Fuji’s standard written limited warranty for all Products as set forth in
Section 7.2. Heska shall not alter or expand such warranty; provided, however, that nothing in this Agreement limits Heska’s ability to provide its own
warranty on any of the Products to its End Users (an “Extended Warranty”) so long as Heska is responsible for satisfying any obligations under such
Extended Warranty that exceed Fuji’s written limited warranty.
7.2 Warranty. Fuji shall extend to Heska and to Heska’s Subdistributors or End Users standard product warranties, as set forth in Exhibit 7.2; provided,
however, that any modification to any such Product warranties shall require the prior written consent of Heska. Further, Fuji warrants to Heska that at the
time of delivery by Fuji, all Products sold hereunder: (i) shall have been produced in accordance with the Specifications; (ii) shall be free from any defect in
materials or workmanship; (iii) shall have been manufactured in accordance with any applicable Current Good Manufacturing Practices and applicable laws
and regulations; (iv) shall be free from any security interests or other lien or encumbrance; (v) shall have a shelf life consistent with the requirements of this
Agreement and the dating set forth thereon, if any; and (vi) do not infringe any copyright, patent, trade secret, trademark, or other proprietary right of any
Third Party in the Territory.
7.3 Disclaimer of Warranties. EXCEPT FOR THE LIMITED WARRANTIES PROVIDED IN SECTIONS 7.1 AND 7.2, FUJI MAKES NO OTHER
REPRESENTATIONS OR WARRANTIES OF ANY KIND, AND THE WARRANTIES OF FUJI ARE IN LIEU OF ALL OTHER WARRANTIES,
INCLUDING BUT NOT LIMITED TO ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
EXCEPT FOR THE WARRANTY PROVIDED FOR IN SECTIONS 7.1 AND 7.2, FUJI MAKES NO WARRANTY OF ANY KIND TO END USERS OF
HESKA HEREUNDER.
7.4 Recall or Advisory Actions. If either Party proposes to recall a Product or issue an advisory letter regarding reliability of or defects in a Product,
then such Party shall first notify the other in writing in a timely manner prior to making such recall or issuing such advisory letter. Each Party shall endeavor
to reach an agreement with the other regarding the manner, text and timing of any publicity to be given such matters in time to comply with any applicable
regulatory requirements, but such Agreement shall not be a precondition to any action that a Party deems necessary to protect users of a Product or to comply
with any applicable governmental orders. In the event Fuji should request Heska to recall a Product, Heska shall take all appropriate actions to recall such
Product. Fuji shall bear the expenses of any recall requested by it or resulting from defective manufacture or packaging by Fuji. Heska shall bear the
expenses of any recall resulting from improper storage, handling or delivery by Heska. In cases where the recall is unrelated to any fault of either Party, the
expense of the recall shall be borne by the Parties equally.
ARTICLE 8. INDEMNIFICATION; LIMITATION OF LIABILTY; CONFIDENTIALITY
8.1 Indemnification by Fuji. Fuji shall indemnify, defend and hold Heska harmless against all claims, losses, damages, liabilities and expenses,
including reasonable attorney’s fees and disbursements, incurred by Heska arising with respect to, out of or in connection with any claim that (i) the Products
infringe any copyright, patent, trade secret, trademark, or other proprietary right of any Third Party or (ii) the Products cause bodily injury (including death),
or physical damage to tangible property; provided that Fuji is notified promptly in writing of the claim by Heska promptly after Heska’s notice thereof and
Heska provides reasonable assistance in the settlement or defense of such claim, at Fuji’s expense; provided, that Product is not altered by Heska except as
specifically directed by Fuji. If a Product is held to constitute an infringement and its use as contemplated by this Agreement is enjoined or threatened to be
enjoined, Fuji shall at its option and expense: (a) procure for Heska the right to continue to Sell and distribute the Products; or (b) replace or modify the
Products with a version that is non-infringing. The provision of Section 8.1 above shall not apply to the extent that the infringement or damage exists as a
result of: (i) any combination of the product with other product(s), (ii) any use of the Product other than its normal or intended use, (iii) any modification of
the Products made by a party other than Fuji, (iv) any design or specification of the product requested by Heska, or (v) Heska’s breach of this Agreement, or
any negligent act or omission of Heska, its employees, agents, distributors or dealers.
8.2 Limitation of Liability. EXCEPT FOR CLAIMS MADE PURSUANT TO SECTION 8.1, 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. THIS
SECTION DOES NOT LIMIT FUJI’S LIABILITY FOR BODILY INJURY (INCLUDING DEATH), OR PHYSICAL DAMAGE TO TANGIBLE
PROPERTY CAUSED BY FUJI OR THE PRODUCTS.
8.3 Confidentiality. Neither Party shall use for any purpose, other than as contemplated by this Agreement, or divulge to any Third Party, any
Confidential Information provided to such Party by the other Party, except as may be required by law or judicial order.
8.4 Public Announcements. Neither Party shall make any public announcement concerning this Agreement, nor make any public statement which
includes the name of the other Party or any of its Affiliates, or otherwise use the name of the other Party or any of its Affiliates in any public statement or
document, except as may be required by law, including the requirements of the SEC, or judicial order, without the written consent of the other Party, which
written consent shall not be withheld unreasonably; provided, that the party required by law to disclose shall use reasonable efforts to provide the other party
notice in writing of any proposed disclosure under this Section and an opportunity to object to the disclosure or seek confidential treatment thereof.
ARTICLE 9. TERM AND TERMINATION
9.1 Effective Date and Term. On the condition that Fuji’s Third Party patent searches have been completed as satisfactorily to Fuji by May 31, 2007,
this Agreement shall commence as of the Effective Date and expire on December 31st of the Calendar Year in which the fifth (5th) annual anniversary of the
Launch Date occurs (the “Initial Term”), unless sooner terminated as expressly provided in this Article 9. Following the Initial Term, this Agreement will
renew automatically for additional one (1) year terms (each, an “Extension Term”), unless (i) either Party provides not less than ninety (90) days written
notice to the other Party prior to the commencement of any Extension Term, of its intention not to renew; provided, however, if Heska has maintained
exclusivity during then current Calendar Year by meeting the minimum commitments set forth in Section 3.1, the Fuji shall not have the right to elect to not
renew this Agreement for the following Calendar Year or (ii) this Agreement is sooner terminated as expressly provided in this Article 9 or (iii) Heska fails to
meet the minimum commitments set forth in Section 3.1 and Fuji elects not to renew this Agreement pursuant to Section 9.1(i). The Initial Term and all
Extension Terms are referred to herein as the “Term.”
9.2 Termination For Cause By Either Party. In addition to the rights of the Parties to terminate this Agreement as provided hereinabove, either Party
may terminate this Agreement for cause upon written notice to the other Party in the event the other Party: (a) appoints a receiver, executes an assignment for
the benefit of creditors or files or otherwise becomes subject to bankruptcy or insolvency proceedings; or (b) materially breaches this Agreement and fails to
cure such breach within thirty (30) days after receipt of written notice of breach from the non-breaching Party, as such cure period may be extended for such
additional period as the non-breaching Party reasonably determines that the breaching Party is diligently pursuing a cure of
such breach, such additional period not to exceed ninety (90) days, or (c) either Party fails to comply with all applicable rules and regulations applicable to the
manufacture or sale of Products in the Territory in the Field.
9.3 By Heska. Heska may terminate this Agreement upon ten (10) days written notice to Fuji in the event that (i) the Launch Date fails to occur on or
before January 1, 2008 due to Fuji’s inability or unwillingness to supply the Product, unless Heska and Fuji mutually agree in writing to delay the Launch
Date due to development delays or other reasons within thirty (30) days after the Launch Date, or (ii) Fuji is unable to supply the Product to meet Heska’s
requirements (including delivery date) in three (3) separate purchase orders issued pursuant to Section 3.5 during any Calendar Year on or after the Launch
Date.
9.4 By Fuji. Fuji may terminate this Agreement upon ten (10) days written notice to Heska in the event that the Launch Date fails to occur on or before
January 1, 2008 due to Heska’s failure to order Product made available by Fuji, unless Heska and Fuji mutually agree in writing to delay the Launch Date due
to development delays or other reasons after thirty (30) days from the Launch Date.
9.5 Effect of Expiration or Termination. Upon expiration or termination of this Agreement:
(a) The Parties shall immediately cease the use of any Confidential Information of the other Party, except as permitted in this Section 9.5.
(b) Unless this Agreement is terminated by Fuji for Heska’s breach or bankruptcy, (i) Fuji shall honor all purchase orders accepted prior to the
date of expiration or termination, and (ii) Heska may continue to purchase from Fuji and Fuji will continue to manufacture and sell to
Heska, at Heska’s request, Heska’s requirements for consumable Products, spare parts and associated products (“Post-Termination Supply”)
on a nonexclusive basis but otherwise on the terms set forth in this Agreement for a period of up to five (5) years following the date of
expiration or termination; provided, however, that if Fuji decides to terminate manufacturing and supplying of devices capable of
performing chemical and electrolyte analyses of biological fluids for the use in the Territory at any time during the five year period, Fuji
may terminate the Post-Termination Supply by notifying to Heska in writing twelve (12) months prior to a scheduled date of termination
and Fuji shall discuss in good faith with Heska to agree upon the terms and conditions of Heska’s last purchases (e.g. volume, delivery
schedule); and further provided that the corresponding purchase price for Post-Termination Supply shall be reasonable, and if there is any
other distributor appointed in the Field and the Territory, the prices to Heska shall not be higher than those charged to such distributor.
Notwithstanding anything in this Article 9 to the contrary, in the event that Fuji continues to manufacture and supply devices capable of
performing chemical and electrolyte analyses of biological fluids in the Territory, whether inside or outside of the Field, then Fuji may not
elect to earlier terminate the manufacture of Products pursuant to this Section 9.5(b). Such consumable
Products, spare parts and associated products be no higher than Fuji charges any other customer in the Field and the Territory.
(c) Heska shall return to Fuji all promotional and sales training materials provided to Heska by Fuji under this Agreement except as required to
perform the activities set forth in Section 9.5(b).
(d) Each Party shall return the other Party’s Confidential Information, except (i) as may be required for each Party to exercise any post-
termination rights hereunder and (ii) for one (1) copy that may be retained in such Party’s confidential legal files.
9.6 Termination of Manufacturing. If Fuji decides to terminate manufacturing and supplying of devices capable of performing chemical and electrolyte
analyses of biological fluids for the use in the Territory, Fuji may terminate this Agreement by notifying to Heska in writing twelve (12) months prior to a
schedule date of termination; provided, however, Fuji shall not terminate manufacturing of Products during the Initial Term provided in Section 9.1; and
further provided that Fuji and Heska shall discuss in good faith to agree upon the terms and conditions of Heska’s last purchases (e.g. volume, delivery
schedule) and Post-Termination Supply. Notwithstanding anything in this Article 9 to the contrary, in the event that Fuji continues to manufacture and supply
devices capable of performing chemical and electrolyte analyses of biological fluids for the use in the Territory, whether inside or outside of the Field, the Fuji
may not elect to earlier terminate the manufacture of Products pursuant to this Section 9.5(b).
9.7 Survival. The following Articles and Sections shall survive termination of the Agreement: Articles 1, 5, 6, 7, 8, (except Section 8.3) 9 and 10.
The provision of Section 8.3 shall survive for three (3) years from the date of any expiration or termination of this Agreement. In addition, all provisions that
must survive in order for each Party to exercise the rights granted pursuant to Section 9.5(b) shall survive termination or expiration.
10.1 Notices. All written notices and other communications between the Parties shall be in the English language and shall be deemed effective on the
date they are received by certified air mail or confirmed facsimile addressed to the other Party at the address or facsimile number stated below.
ARTICLE 10. MISCELLANEOUS
[***] — Certain information on this page have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has
been requested with respect to the omitted portions.
If to Fuji:
With copy to:
If to Heska:
With copy to:
FUJIFILM Corporation
Attn:General Manager of Life Science Products Div.
26-30, Nishiazabu 2-chome Minato-ku,
Tokyo 106-8620 Japan
Facsimile Number: [***]
FUJIFILM Corporation
Attn:General Manager of Legal Div.
26-30, Nishiazabu 2-chome Minato-ku,
Tokyo 106-8620 Japan
Facsimile Number: [***]
Heska Corporation
Attn: Chief Executive Officer
3760 Rocky Mountain Avenue
Loveland, CO 80538
Facsimile Number: [***]
Heska Corporation
Attn: Executive Vice President, Intellectual Property and
Business Development
3760 Rocky Mountain Avenue
Loveland, CO 80538
Facsimile Number: [***]
With additional copy to:
Osborn Maledon, P.A.
Attn: Jonathan Ariano, Esq
.
2929 North Central Ave.
Suite 2100
Phoenix, AZ 85012
Facsimile Number: [***]
10.2 Binding Effect/Assignment. This Agreement shall be binding upon and inure to the benefit of the Parties hereto and their successors and assigns.
Neither Party shall have the right to assign any of its rights or obligations under this Agreement without the prior written consent of the other Party; provided,
however, that with a written notice to the other Party, either Party may assign this Agreement to an Affiliate of such Party or to a successor-in-interest in the
event of a merger, acquisition or sale of substantially all of the such Party’s assets or stock.
10.3 Waivers. Any waiver by either of the Parties hereto of any rights arising from a breach of any covenants or conditions of this Agreement shall not
be construed as a continuing waiver of other breaches of the same nature or other covenants or conditions of this Agreement. Any 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.
10.4 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 Heska and Fuji shall be that of buyer and seller. 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.
10.5 Force Majeure. Except for Heska’s obligation to make timely payment for the Products already shipped by Fuji, neither Party shall be liable to the
other Party or in default hereunder by reason of any delay or omission caused by fire, flood, strike, lockout, civil or military authority, insurrection, war,
embargo, container or transportation shortage or delay of suppliers due to such causes, and delivery dates shall be extended to the extent of any delays
resulting from the foregoing or similar causes. In the event of an occurrence of an event of force majeure the Party affected thereby shall give the other Party
prompt notice of the existence thereof, the causes thereof and an estimate of the reasonably anticipated delay or nonperformance under this Agreement that
may be caused thereby, and such Party shall use reasonable commercial efforts and discuss in good faith with the other Party to mitigate its effects. In spite of
such efforts and discussions, if it is reasonably judged that a Party is not or is not expected to be able to perform any material obligation under this Agreement
due to an event of force majeure for a period of ninety (90) days or more, either Party shall have the right to terminate this Agreement upon written notice to
the other Party.
10.6 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 Colorado. The United Nations Convention on Contracts for the International Sale of Goods (1980), as amended, is specifically
excluded from application to this Agreement.
10.7 Alternative Dispute Resolution. Any and all disputes, controversies, or claims arising out of or relating to this Agreement, or the breach,
termination, or invalidity thereof, shall be finally settled pursuant to the dispute resolution procedures set forth on Exhibit 10.7.
10.8 Entire Agreement. This Agreement, including the exhibits, constitutes the entire understanding of the Parties with respect to the subject matter
hereof, and supersedes all prior or contemporaneous writings or discussions, including but not limited to the Prior Agreement. Except as otherwise expressly
provided, no agreement varying or extending the terms of this Agreement shall be binding on either Party unless in a writing signed by an authorized
representative of each Party.
10.9 Headings. The headings of the paragraphs and subparagraphs of this Agreement have been added for the convenience of the parties and shall not be
deemed a part hereof.
10.10 Counterparts. This Agreement may be executed in any number of counterparts, all of which together shall constitute a single Agreement. In
proving this Agreement, it shall be necessary to produce or account for more than one counterpart signed by the Party with respect to whom proof is sought.
(Remainder of Page intentionally left blank)
IN WITNESS WHEREOF, each Party has caused this Clinical Chemistry Analyzer Agreement to be executed on its behalf by its duly authorized officer as of
the Effective Date.
FUJIFILM Corporation
Heska Corporation
By: /s/ Yuzo Toda
By:
/s/ Joseph H. Ritter
Its: Director, Corporate Vice President,
General Manager of Life Science
Products Div.
Its: Executive Vice President,
Global Business Operations
Date: January 30, 2007
Date: January 30, 2007
LIST OF EXHIBITS
Exhibit Number
Exhibit Name
1.13
3.3
3.10
4.3
6.2
9.7
Products and Purchase Prices
Countries to which the right of first refusal Under Section 3.3 will not apply
Bank Wire Transfer Information
Training
End User Warranties
Alternative Dispute Resolution
[***] — Certain information on this page have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has
been requested with respect to the omitted portions.
Products:
Exhibit 1.13
PRODUCTS AND PURCHASE PRICES
Fuji’s clinical chemistry analyzers (e.g., FDC4000i) (“Analyzers”), consumables (e.g., general chemistry slides, [***] slides, electrolyte slides,
[***] slides, calibrator and control solutions, heparin, other fluids, tips, cups, tubes, other consumable products) for use with Analyzers (“Consumables”), and
any improvements to Analyzers or Consumables.
Analyzers:
List Price:
Discounts:
[***] per Analyzer [***]. Such price includes any upgrades (software or hardware) and retrofits.
Development discount: [***]
Introductory discount: [***]
Loaner discounts: [***]
Field unit discounts: [***]
Consumables:
Spare Parts:
List Price: See Exhibit 1.13(A)
To be agreed upon by September 30, 2007
[***] — Certain information on this page have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has
been requested with respect to the omitted portions.
HESKA Product Name
Albumin
Alkaline Phosphatase
ALT (GPT)
Amylase
AST (GOT)
BUN
Calcium
Total Cholesterol
CK
Creatinine
GGT
Glucose
Magnesium
Phosphorous
Exhibit 1.13(A)
HESKA Abbreviated
Product Name
Quantity and
Package
Fuji Abbreviated
Product Name
ALB
ALP
ALT
AMY
AST
BUN
CA
CHOL
CK
CREA
GGT
GLU
MG
PHOS
24 Slides/box
24 Slides/box
24 Slides/box
24 Slides/box
24 Slides/box
24 Slides/box
24 Slides/box
24 Slides/box
24 Slides/box
24 Slides/box
24 Slides/box
24 Slides/box
24 Slides/box
24 Slides/box
ALB-P
ALP-P III
GPT/ALT-P III
AMYL-P
GOT/AST-P III
BUN-P III
Ca-P III
TCHO-P III
CPK-P IIII
CRE-P III
GGT-P III
GLU-P III
Mg-P III
IP-P
Fuji Product Name
FUJI DRI-CHEM SLIDE ALB-P
FUJI DRI-CHEM SLIDE ALP-P III
FUJI DRI-CHEM SLIDE GPT/ALT-P III
FUJI DRI-CHEM SLIDE AMYL-P
FUJI DRI-CHEM SLIDE GOT/AST-P III
FUJI DRI-CHEM SLIDE BUN-P III
FUJI DRI-CHEM SLIDE Ca-P III
FUJI DRI-CHEM SLIDE TCHO-P III
FUJI DRI-CHEM SLIDE CPK-P IIII
FUJI DRI-CHEM SLIDE CRE-P III
FUJI DRI-CHEM SLIDE GGT-P III
FUJI DRI-CHEM SLIDE GLU-P III
FUJI DRI-CHEM SLIDE Mg-P III
FUJI DRI-CHEM SLIDE IP-P
Price in
US$
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Total Bilirubin
Total Protein
Triglycerides
Uric Acid
Electrolytes
Pre-Surgical Panel (ALP, ALT,
BUN, CREA, GLU, TP)
Kidney Panel (ALB, BUN, CA,
CREA, PHOS, TP)
Liver Panel (ALB, ALP, ALT, GGT,
GLU, T-Bili)
General Health Panel - Pre Surgical
Panel (ALP, ALT, BUN, CREA,
GLU, TP) plus T-BILI, ALB, PHOS,
CA, AMY, CHOL
TBILI
TP
TRIG
UA
LYTES
Pre-Surgical Panel
Kidney Panel
Liver Panel
General Health Panel
Electrolyte Control
LyteControl
Chemistry Control
AutoTips
Mixing Cups
Plain Tubes 0.5 ml
ChemControl
AutoTips
Mixing Cups
Plain Tubes 0.5 ml
24 Slides/box
24 Slides/box
24 Slides/box
24 Slides/box
24 Slides/box
24 Slides/box (4
Panels/box)
24 Slides/box (4
Panels/box)
24 Slides/box (4
Panels/box)
24 Slides/box (2
Panels/box)
10 amplues/box
(1ml/ampule)
2 bottles/box
(3ml/bottle)
480 pieces/box
100 pieces/box
500 pieces/box
TBIL-P II
TP-P III
TG-P III
UA-P III
Na-K-Cl
TBA
TBA
TBA
TBA
QE
FUJI DRI-CHEM SLIDE TBIL-P II
FUJI DRI-CHEM SLIDE TP-P III
FUJI DRI-CHEM SLIDE TG-P III
FUJI DRI-CHEM SLIDE UA-P III
FUJI DRI-CHEM SLIDE Na-K-Cl
TBA
TBA
TBA
TBA
FUJI DRI-CHEM ELECTROLYTE
CONTROL QE
QN
AUTO TIPS
MIX CUPS S
PLAIN TUBE 0.5
FUJI DRI-CHEM CONTROL QN
FUJI DRI-CHEM AUTO TIPS
FUJI DRI-CHEM MIXING CUPS S
FUJI PLAIN TUBE 0.5
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[***] — Certain information on this page have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has
been requested with respect to the omitted portions.
Exhibit 4.10
BANK WIRE TRANSFER INFORMATION
Bank Name:
Branch:
Bank Address:
Swift Code:
Official Name on the account:
Account No.:
THE BANK OF TOKYO-MITSUBISHI UFJ, LTD
HEAD OFFICE
2-7-1, MARUNOUCHI, CHIYODA-KU, TOKYO JAPAN
BOTKJPJT
FUJIFILM Corporation
[***]
[***] — Certain information on this page have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has
been requested with respect to the omitted portions.
Exhibit 3.3
Countries to which the right of first refusal under Section 3.3 will not apply
[***]
[***] — Certain information on this page have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has
been requested with respect to the omitted portions.
Exhibit 5.3
TRAINING
Fuji shall provide training at a time mutually agreed between Heska and Fuji, but prior to the Launch Date, at Fuji’s expenses of any costs associated with
Fuji’s employees’ airfare, hotel, and other per diem expenses and at Heska’s facilities. Such training shall include at least the following items:
[***]
Additionally, Fuji shall provide additional training (i) whenever there are significant changes made to the Analyzer and (ii) at least once every 2 years at
Heska’s facilities.
Should Heska request any training at Fuji’s facility, Fuji shall provide such training at Fuji’s expense; provided however that Heska shall pay any costs
associated with Heska employees’ airfare, hotel, and other per diem expenses.
[***] — Certain information on this page have been omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has
been requested with respect to the omitted portions.
Exhibit 7.2
END USER WARRANTIES
Analyzers: [***], such warranty to begin thirty (30) days after receipt of Analyzer by Heska, assuming Heska has accepted such Analyzer.
Exhibit 10.7
ALTERNATIVE DISPUTE RESOLUTION
The parties recognize that from time to time a dispute may arise relating to either Party’s rights or obligations under this Agreement (a “Dispute”). The Parties
agree that any such dispute shall be resolved by the provisions set forth in this Exhibit, the result of which shall be binding upon the parties.
To begin the process, a Party first must send written notice to the other Party in accordance with the terms of the Agreement describing the dispute and
requesting attempted resolution by good faith negotiations between their respective president or principal executive officer (or their designees) of the affected
subsidiaries, divisions, or business units within twenty-eight (28) days after such notice is received. If the matter has not been resolved within twenty-eight
(28) days of the notice of dispute, or if the parties fail to meet within such twenty-eight (28) days, either Party may initiate an ADR proceeding as provided
herein. The parties shall have the right to be represented by counsel in such a proceeding.
Subject to the foregoing, a Party may seek arbitration of an unresolved Dispute in Denver, Co, in accordance with the Rules of the American Arbitration
Association (“AAA”) governing commercial transactions. The arbitration tribunal shall consist of three (3) arbitrators. The Party initiating arbitration shall
nominate one arbitrator (who shall be knowledgeable in the industry but not be affiliated with such Party) in the request for arbitration and the other Party
shall nominate a second arbitrator (who shall be knowledgeable in the industry but not be affiliated with such Party) in the answer thereto. The two
arbitrators so named will then jointly appoint the third arbitrator (who shall be knowledgeable in the industry but shall not be affiliated with either Party) as
chairman of the arbitration tribunal. If either Party fails to nominate its arbitrator, or if the arbitrators named by the parties fail to agree on the person to be
named as chairman within sixty (60) days, the office of the AAA in Denver, CO shall make the necessary appointments of an arbitrator or the chairman of the
arbitration tribunal. The award of the arbitration tribunal shall be final and judgment upon such an award may be entered in any competent court or
application may be made to any competent court for judicial acceptance of such an award and an order of enforcement.
Notwithstanding anything herein to the contrary, nothing in this Exhibit shall preclude any Party from seeking interim or provisional relief, in the form of a
temporary restraining order, preliminary injunction or other interim equitable relief concerning the Dispute, either prior to or during the Mediation if
necessary to protect the interests of such Party, or to obtain specific performance of obligations under this Agreement. Further, this Section shall be
specifically enforceable. Bringing or defending an action for such relief shall not constitute waiver of the right or avoid the obligation to mediate or arbitrate
contained in this Agreement.
SUBSIDIARIES OF COMPANY
Exhibit 21.1
Diamond Animal Health, Inc., an Iowa corporation
Sensor Devices, Inc., a Wisconsin Corporation (inactive)
Heska AG, a corporation incorporated under the laws of Switzerland
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23.1
We hereby consent to the incorporation by reference in the Registration Statements Nos. 333-102871, 333-30951, 333-34111, 333-39448, 333-47129, 333-
72155, 333-38138, 333-55112, 333-82096, 333-89738, 333-106679, 333-112701, 333-115995, 333-123196 and 333-132916 of Heska Corporation (the
“Company”) on Form S-8, of our report dated March 3, 2008, relating to the consolidated financial statements of the Company, appearing in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2007. We also consent to the reference to us under the caption “Experts” in the Registration
Statements.
/s Ehrhardt Keefe Steiner & Hottman PC
March 3, 2008
Denver, Colorado
Exhibit 31.1
I, Robert B. Grieve, certify that:
1. I have reviewed this annual report on Form 10-K of Heska Corporation;
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-
15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles; and
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
Date:
March 3, 2008
/s/ Robert B. Grieve
ROBERT B. GRIEVE
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
I, Jason A. Napolitano, certify that:
1. I have reviewed this annual report on Form 10-K of Heska Corporation;
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e))and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles; and
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
Date:
March 3, 2008
/s/ Jason A. Napolitano
JASON A. NAPOLITANO
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
I, Robert B. Grieve, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual
Report of Heska Corporation on Form 10-K for the year ended December 31, 2007 fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 and that information contained in such Form 10-K fairly presents in all material respects the financial condition and results
of operations of Heska Corporation.
By:
Name:
Title:
/s/ Robert B. Grieve
ROBERT B. GRIEVE
Chairman of the Board and Chief
Executive Officer
I, Jason A. Napolitano, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual
Report of Heska Corporation on Form 10-K for the year ended December 31, 2007 fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 and that information contained in such Form 10-K fairly presents in all material respects the financial condition and results
of operations of Heska Corporation.
A signed original of this written statement required by Section 906 has been provided to Heska Corporation and will be retained by Heska Corporation and
furnished to the Securities and Exchange Commission or its staff upon request.
By:
Name:
Title:
/s/ Jason A. Napolitano
JASON A. NAPOLITANO
Executive Vice President and
Chief Financial Officer