|
|
---|---|
[ X ] |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
|
For the quarterly period ended June 30, 2005 |
OR |
|
[ ] |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________________ to _______________________
Delaware |
77-0192527 |
---|---|
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification Number) |
3760 Rocky Mountain Avenue | |
Loveland, Colorado | 80538 |
(Address of principal executive offices) | (Zip Code) |
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes [ X ] No [
]
Indicate by check mark whether the registrant
is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [ X
]
The number of shares of the Registrants Common Stock, $.001 par value, outstanding at August 12, 2005 was 49,813,912
Page | |||||
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PART I. FINANCIAL INFORMATION | |||||
Item 1. |
Financial Statements: |
||||
Condensed Consolidated Balance Sheets (Unaudited) as of December 31, 2004 and June 30, 2005 |
2 | ||||
Condensed Consolidated Statements of Operations (Unaudited) for the three months and six months ended June 30, 2004 and 2005 |
3 | ||||
Condensed Consolidated Statements of Cash Flows (Unaudited) for the six months ended June 30, 2004 and 2005 |
4 | ||||
Notes to Condensed Consolidated Financial Statements (Unaudited) |
5 | ||||
Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
11 | |||
Item 3. |
Quantitative and Qualitative Disclosures About Market Risk |
33 | |||
Item 4. |
Controls and Procedures |
33 | |||
PART II. OTHER INFORMATION |
|||||
Item 1. |
Legal Proceedings |
35 | |||
Item 2. |
Changes in Securities and Use of Proceeds |
35 | |||
Item 3. |
Defaults Upon Senior Securities |
35 | |||
Item 4. |
Submission of Matters to a Vote of Security Holders |
35 | |||
Item 5. |
Other Information |
36 | |||
Item 6. |
Exhibits |
36 | |||
Signatures |
37 |
i-STAT is a registered trademark of i-STAT Corporation. SPOTCHEM is a trademark of Arkray, Inc. TRI-HEART is a registered trademark of Schering-Plough Animal Health Corporation (SPAH) in the United States. HESKA, ALLERCEPT, AVERT, E.R.D.-HEALTHSCREEN, E-SCREEN, IMMUCHECK, SOLO STEP, VET/E-SIG AND VET/OX are registered trademarks and CBC-DIFF, ERD, FELINE ULTRANASAL, G2 DIGITAL, THYROMED and VET/IV are trademarks of Heska Corporation in the United States and/or other countries. This 10-Q also refers to trademarks and trade names of other organizations.
ASSETS | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
December 31,
2004 |
June 30,
2005 |
|||||||||||||||||||||
|
|
|||||||||||||||||||||
Current assets: | ||||||||||||||||||||||
Cash and cash equivalents | $ | 4,982 | $ | 4,637 | ||||||||||||||||||
Accounts receivable, net of allowance for doubtful accounts of
$95 and $106, respectively |
10,634 | 8,259 | ||||||||||||||||||||
Inventories, net | 11,726 | 11,219 | ||||||||||||||||||||
Other current assets | 1,100 | 672 | ||||||||||||||||||||
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|
|||||||||||||||||||||
Total current assets | 28,442 | 24,787 | ||||||||||||||||||||
Property and equipment, net | 7,925 | 8,098 | ||||||||||||||||||||
Intangible assets, net | 1,499 | 1,482 | ||||||||||||||||||||
Goodwill | 643 | 643 | ||||||||||||||||||||
Other assets | 215 | 237 | ||||||||||||||||||||
|
|
|||||||||||||||||||||
Total assets | $ | 38,724 | $ | 35,247 | ||||||||||||||||||
|
|
LIABILITIES AND STOCKHOLDERS EQUITY | ||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Current liabilities: | ||||||||||||||||||||||
Accounts payable | $ | 6,697 | $ | 7,858 | ||||||||||||||||||
Accrued liabilities | 3,187 | 2,223 | ||||||||||||||||||||
Current portion of deferred revenue | 2,708 | 2,531 | ||||||||||||||||||||
Line of credit | 10,375 | 9,872 | ||||||||||||||||||||
Current portion of long-term debt | 302 | 1,586 | ||||||||||||||||||||
|
|
|||||||||||||||||||||
Total current liabilities | 23,269 | 24,070 | ||||||||||||||||||||
Long-term debt, net of current portion | 1,466 | 23 | ||||||||||||||||||||
Deferred revenue, net of current portion, and other | 11,410 | 10,616 | ||||||||||||||||||||
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|
|||||||||||||||||||||
Total liabilities | 36,145 | 34,709 | ||||||||||||||||||||
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|
|||||||||||||||||||||
Commitments and contingencies | ||||||||||||||||||||||
Stockholdersequity: |
||||||||||||||||||||||
Preferred
stock, $.001 par value, 25,000,000 shares authorized; none issued
or outstanding |
-- | -- | ||||||||||||||||||||
Common stock,
$.001 par value, 75,000,000 shares authorized; 49,338,636 and
49,813,912 shares issued and outstanding, respectively |
49 | 50 | ||||||||||||||||||||
Additional paid-in capital | 212,533 | 212,854 | ||||||||||||||||||||
Deferred compensation | (67 | ) | (25 | ) | ||||||||||||||||||
Accumulated other comprehensive income (loss) | 170 | (161 | ) | |||||||||||||||||||
Accumulated deficit | (210,106 | ) | (212,180 | ) | ||||||||||||||||||
|
|
|||||||||||||||||||||
Total stockholdersequity | 2,579 | 538 | ||||||||||||||||||||
|
|
|||||||||||||||||||||
Total liabilities and stockholders equity | $ | 38,724 | $ | 35,247 | ||||||||||||||||||
|
|
See accompanying notes to condensed consolidated financial statements.
Three Months
Ended
June 30, |
Six Months
Ended
June 30, |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2004 | 2005 | 2004 | 2005 | |||||||||||
|
|
|||||||||||||
Revenue, net: | ||||||||||||||
Product revenue, net: | ||||||||||||||
Core companion animal health | $ | 13,308 | $ | 13,324 | $ | 27,422 | $ | 26,180 | ||||||
Other vaccines, pharmaceuticals and products | 4,123 | 2,847 | 6,428 | 6,827 | ||||||||||
|
|
|
|
|||||||||||
Total product revenue, net | 17,431 | 16,171 | 33,850 | 33,007 | ||||||||||
Research, development and other | 365 | 394 | 687 | 712 | ||||||||||
|
|
|
|
|||||||||||
Total revenue | 17,796 | 16,565 | 34,537 | 33,719 | ||||||||||
|
|
|
|
|||||||||||
Cost of revenue: |
||||||||||||||
Cost of products sold | 11,515 | 10,752 | 21,976 | 21,809 | ||||||||||
Cost of research, development and other | 94 | 288 | 229 | 467 | ||||||||||
|
|
|
|
|||||||||||
Total cost of revenue | 11,609 | 11,040 | 22,205 | 22,276 | ||||||||||
|
|
|
|
|||||||||||
Gross profit | 6,187 | 5,525 | 12,332 | 11,443 | ||||||||||
|
|
|
|
|||||||||||
Operating expenses: |
||||||||||||||
Selling and marketing | 3,792 | 3,428 | 8,240 | 7,227 | ||||||||||
Research and development | 1,571 | 950 | 3,284 | 2,177 | ||||||||||
General and administrative | 2,029 | 1,854 | 4,070 | 3,849 | ||||||||||
|
|
|
|
|||||||||||
Total operating expenses | 7,392 | 6,232 | 15,594 | 13,253 | ||||||||||
|
|
|
|
|||||||||||
Loss from operations | (1,205 | ) | (707 | ) | (3,262 | ) | (1,810 | ) | ||||||
Interest and other expense, net | 183 | 60 | 120 | 265 | ||||||||||
|
|
|
|
|||||||||||
Net loss | $ | (1,388 | ) | $ | (767 | ) | $ | (3,382 | ) | $ | (2,075 | ) | ||
|
|
|
|
|||||||||||
Basic and diluted net loss per share | $ | (0.03 | ) | $ | (0.02 | ) | $ | (0.07 | ) | $ | (0.04 | ) | ||
|
|
|
|
|||||||||||
Shares used to compute basic and diluted net loss per share | 48,996 | 49,521 | 48,950 | 49,448 | ||||||||||
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
Six Months Ended
June 30, |
||||||||
---|---|---|---|---|---|---|---|---|
|
||||||||
2004 | 2005 | |||||||
|
|
|||||||
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (3,382 | ) | $ | (2,075 | ) | ||
Adjustments to reconcile net loss to cash provided by (used in) operating activities: |
||||||||
Depreciation and amortization | 703 | 882 | ||||||
Amortization of intangible assets | 69 | 77 | ||||||
Stock based compensation | 46 | 39 | ||||||
(Gain) loss on disposal of assets | (11 | ) | 17 | |||||
Unrealized (gain) on sale on foreign currency translation | -- | (122 | ) | |||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 3,077 | 2,375 | ||||||
Inventories | 49 | 507 | ||||||
Other current assets | (47 | ) | 428 | |||||
Accounts payable | 794 | 1,161 | ||||||
Accrued liabilities | (591 | ) | (964 | ) | ||||
Deferred revenue and other long-term liabilities | (440 | ) | (984 | ) | ||||
Other | (4 | ) | (8 | ) | ||||
|
|
|||||||
Net cash provided by (used in) operating activities | 263 | 1,333 | ||||||
|
|
|||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Proceeds from licensing of technology and product rights | 400 | -- | ||||||
Purchase of property and equipment | (700 | ) | (1,078 | ) | ||||
Capitalized patent costs | (374 | ) | (60 | ) | ||||
|
|
|||||||
Net cash provided by (used in) investing activities | (674 | ) | (1,138 | ) | ||||
|
|
|||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Proceeds from issuance of common stock | 135 | 322 | ||||||
Proceeds from line of credit borrowings, net | 1,419 | (503 | ) | |||||
Repayments of debt and capital lease obligations | (506 | ) | (159 | ) | ||||
|
|
|||||||
Net cash provided by (used in) financing activities | 1,048 | (340 | ) | |||||
|
|
|||||||
EFFECT OF EXCHANGE RATE CHANGES ON CASH | (20 | ) | (200 | ) | ||||
|
|
|||||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 617 | (345 | ) | |||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 4,877 | 4,982 | ||||||
|
|
|||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 5,494 | $ | 4,637 | ||||
|
|
|||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
Cash paid for interest | $ | 272 | $ | 382 | ||||
|
|
See accompanying notes to condensed consolidated financial statements.
Heska Corporation (Heska or the Company) discovers, develops, manufactures, markets, sells, distributes and supports veterinary products. Heskas core focus is on the canine and feline companion animal health markets. The Company has devoted substantial resources to the research and development of innovative products in these areas, where it strives to provide high value products for unmet needs in veterinary medicine.
Heska is comprised of two reportable segments, Core Companion Animal Health and Other Vaccines, Pharmaceuticals and Products. The Core Companion Animal Health segment includes diagnostic and monitoring instruments and supplies as well as single use, stand alone diagnostic and other tests, vaccines and pharmaceuticals, primarily for canine and feline use. These products are sold directly by the Company as well as through independent third party distributors and other distribution relationships. The Other Vaccines, Pharmaceuticals and Products segment (OVP) includes private label vaccine and pharmaceutical production, primarily for cattle but also for other animals including small mammals, horses and fish. All OVP products are currently sold by third parties under third party labels.
The Company has incurred annual net losses since its inception and anticipates that it will continue to incur net losses in the near term. Cumulative net losses from inception of the Company in 1988 through June 30, 2005, have totaled $212.2 million. During the six months ended June 30, 2005, the Company incurred a loss of approximately $2.1 million and operations provided cash of approximately $1.3 million.
The Companys primary short-term needs for capital are based on its continuing sales and marketing, general and administrative and research and development activities, working capital associated with expected increased product sales and capital expenditures relating to maintaining and developing its manufacturing operations. The Companys ability to achieve sustained profitable operations will depend primarily upon its ability to successfully market its products, commercialize products that are currently under development and develop new products. There can be no guarantee that the Company will attain quarterly, annual, or sustained profitability in the future.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements are the responsibility of the Companys management and have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the instructions to Form 10-Q and rules and regulations of the Securities and Exchange Commission (the SEC). The condensed consolidated balance sheet as of June 30, 2005, the condensed consolidated statements of operations for three months and six months ended June 30, 2004 and 2005 and the condensed consolidated statements of cash flows for the six months ended June 30, 2004 and 2005 are unaudited, but include, in the opinion of management, all adjustments (consisting of normal recurring adjustments) which the Company considers necessary for a fair presentation of its financial position, operating results and cash flows for the periods presented. All material intercompany transactions and balances have been eliminated in consolidation. Although the Company believes that the disclosures in these financial statements are adequate to make the information presented not misleading, certain information and footnote disclosures normally included in complete financial statements prepared in accordance
with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the SEC.
Results for any interim period are not necessarily indicative of results for any future interim period or for the entire year. The accompanying financial statements and related disclosures have been prepared with the presumption that users of the interim financial information have read or have access to the audited financial statements for the preceding fiscal year. Accordingly, these financial statements should be read in conjunction with the audited financial statements and the related notes thereto for the year ended December 31, 2004, included in the Companys Annual Report on Form 10-K filed with the SEC on March 31, 2005.
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 effect 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 reported 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 Companys obligations are fulfilled under agreements to license product rights and/or technology rights, in determining the need for a valuation allowance on certain deferred tax assets and in evaluating long-lived assets for impairment.
Reclassifications
Certain prior year numbers have been reclassified to be consistent with the current year presentation. These reclassifications include certain amortized fees totaling approximately $65 thousand and $33 thousand for the six and three months ending June 30, 2004, respectively, previously reflected as Research, Development and Other Revenue which are now included in Product Revenue and certain costs previously reflected as Research and Development Expenses totaling approximately $229 thousand and $94 thousand for the six and three months ended June 30, 2004, respectively, which are now included in Cost of Research, Development and Other Revenue.
Basic and Diluted Net Loss Per Share
Basic net loss per common share is computed using the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed using the sum of the weighted average number of shares of common stock outstanding, and, if not anti-dilutive, the effect of outstanding common stock equivalents (such as stock options and warrants) determined using the treasury stock method. Due to the Companys net losses for all periods presented, all potentially dilutive securities are anti-dilutive and as a result, basic net loss per share is the same as diluted net loss per share for all periods presented. At June 30, 2004 and 2005, securities that have been excluded from diluted net loss per share because they would be anti-dilutive are outstanding options to purchase 9,967,688 and 11,299,168 shares, respectively, of the Companys common stock.
Stock Based Compensation
The Company accounts 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 SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123) and SFAS No. 148, Accounting for Stock-Based Compensation Transition and Disclosure (SFAS No. 148). Statement of Financial Accounting Standards No. 123 Share-Based Payments (SFAS No. 123R) was revised and promulgated in December 2004. The Company intends to adopt this standard when required. On April 14, 2005, the SEC deferred the date of required adoption for SFAS No. 123R for companies in Heskas position to fiscal years beginning after June 15, 2005. The Company originally intended to adopt SFAS No. 123R beginning on July 1, 2005, but based on the SECs
action on April 14, 2005 currently intends to adopt this standard on January 1, 2006. The Company intends to adopt SFAS No. 123R under the modified prospective method of adoption. At June 30, 2005, the Company had two stock-based compensation plans. The Company recorded compensation expense related to the Companys restricted stock of $46 thousand and $39 thousand for the six months ended June 30, 2004 and 2005, respectively and $23 thousand and $19 thousand for the three months ended June 30, 2004 and 2005, respectively.
Had compensation expense for the Companys 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 Companys net loss and net loss per share for the three and six months ended June 30, 2004 and 2005 would approximate the pro forma amounts as follows:
Three Months
Ended
June 30, |
Six Months
Ended
June 30, |
|||||||||||||
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|
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2004 | 2005 | 2004 | 2005 | |||||||||||
|
|
|||||||||||||
(in thousands,
except
per share amounts) |
(in thousands,
except
per share amounts) |
|||||||||||||
Net loss as reported |
$ | (1,388 | ) | $ | (767 | ) | $ | (3,382 | ) | $ | (2,075 | ) | ||
Stock-based
employee compensation
expense included in the determination of net loss, as reported |
23 | 19 | 46 | 39 | ||||||||||
Stock-based employee compensation
expense, as if the fair value based method had been applied to all awards |
(515 | ) | (243 | ) | (984 | ) | (1,927 | ) | ||||||
|
|
|
|
|||||||||||
Net loss, pro forma | $ | (1,880 | ) | $ | (991 | ) | $ | (4,320 | ) | $ | (3,963 | ) | ||
|
|
|
|
|||||||||||
Net loss per share: | ||||||||||||||
Basic and diluted - as reported | $ | (0.03 | ) | $ | (0.02 | ) | $ | (0.07 | ) | $ | (0.04 | ) | ||
|
|
|
|
|||||||||||
Basic and diluted - pro forma | $ | (0.04 | ) | $ | (0.02 | ) | $ | (0.09 | ) | $ | (0.08 | ) | ||
|
|
|
|
On February 24, 2005, the Companys Board of Directors considered the significant impact that the use of fair values, rather than intrinsic values, would have on the Companys 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 at below market levels, no management bonus payouts were made for 2004 and the 2005 management incentive plan calls for a performance in excess of the Companys internal budget before any bonus payments are made, and authorized the Companys Stock Option Committee, which currently consists solely of the Companys Chief Executive Officer, to accelerate the vesting of any outstanding but unvested stock options with a strike price that is not in-the-money through June 30, 2005 at its discretion. On March 30, 2005, the Companys 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 approximately 750 thousand options, approximately 55 thousand of which were held by the Companys Directors and Executive Officers. 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 expense related to these options, calculated under SFAS No. 123 of approximately $540 thousand was recorded in the first quarter of 2005 and included in the table above. In addition, options for approximately 2.5 million shares and approximately 360 thousand shares were issued and immediately vested during the six months ending June 30, 2005 and three months ending June 30, 2005, respectively.
The fair value of each option grant was estimated on the date of grant using the Black-Scholes option-pricing model, with the following weighted average assumptions for options granted in the three months and six months ended June 30, 2004 and 2005. The estimated total fair value of the options granted during the three months and six months ended June 30, 2004 was approximately $1.3 million and $2.8 million, respectively. The estimated total fair value of the options granted during the three months and six months ended June 30, 2005 was approximately $160 thousand and $1.2 million, respectively.
Three Months
Ended
June 30, |
Six Months
Ended
June 30, |
|||||||||||||
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|
|
|||||||||||||
2004 | 2005 | 2004 | 2005 | |||||||||||
|
|
|||||||||||||
Risk-free interest rate |
3.86% | 3.74% | 3.65% | 4.02% | ||||||||||
Expected lives | 4.6 years | 2.8 years | 4.6 years | 2.9 years | ||||||||||
Expected volatility | 75% | 86% | 76% | 86% | ||||||||||
Expected dividend yield | 0% | 0% | 0% | 0% |
A summary of the Companys stock option plans is as follows:
Year Ended
December 31, |
Six Months Ended
June 30, |
|||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
2004 | 2005 | |||||||||||||
|
||||||||||||||
Options |
Weighted
Average Exercise Price |
Options |
Weighted
Average Exercise Price |
|||||||||||
|
||||||||||||||
Outstanding at beginning of period | 7,954,648 | $ | 1.5163 | 9,350,959 | $ | 1.4509 | ||||||||
Granted at market | 2,575,830 | $ | 1.8890 | 2,464,517 | $ | 0.8748 | ||||||||
Granted above market | 418 | $ | 2.6300 | -- | $ | -- | ||||||||
Cancelled | (792,963 | ) | $ | 3.8742 | (198,117 | ) | $ | 1.8002 | ||||||
Exercised | (386,974 | ) | $ | 0.7476 | (318,191 | ) | $ | 0.6236 | ||||||
|
|
|||||||||||||
Outstanding at end of period | 9,350,959 | $ | 1.4509 | 11,299,168 | $ | 1.3424 | ||||||||
|
|
|||||||||||||
Exercisable at end of period | 7,939,567 | $ | 1.5532 | 10,903,713 | $ | 1.3668 | ||||||||
|
|
The following table summarizes information about stock options outstanding and exercisable at June 30, 2005.
Options Outstanding | Options Exercisable | ||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
||||||||||||||||
Exercise Prices |
Number of
Options Outstanding at June 30, 2005 |
Weighted
Average Remaining Contractual Life in Years |
Weighted Average Exercise Price |
Number of
Options Exercisable at June 30, 2005 |
Weighted Average Exercise Price |
||||||||||||
|
|||||||||||||||||
$0.34 - $0.80 | 2,071,619 | 7.53 | $ | 0.6292 | 1,676,164 | $ | 0.6191 | ||||||||||
$0.81 - $0.88 | 2,133,308 | 9.63 | $ | 0.8772 | 2,133,308 | $ | 0.8772 | ||||||||||
$0.92 - $1.20 | 2,543,244 | 6.47 | $ | 1.0567 | 2,543,244 | $ | 1.0567 | ||||||||||
$1.21 - $1.69 | 2,275,468 | 7.51 | $ | 1.4109 | 2,275,468 | $ | 1.4109 | ||||||||||
$1.75 - $13.75 | 2,275,529 | 7.04 | $ | 2.6788 | 2,275,529 | $ | 2.6788 | ||||||||||
|
|
||||||||||||||||
$0.34 - $13.75 | 11,299,168 | 7.58 | $ | 1.3424 | 10,903,713 | $ | 1.3668 | ||||||||||
|
|
At June 30, 2005, the Company had no remaining accrued restructuring expenses.
Shown below is a rollforward of accrued restructuring costs for the six months ended June 30, 2004 (in thousands):
|
Balance at
December 31, 2003 |
Payments for the
Six Months Ended June 30, 2004 |
Balance at
June 30, 2004 |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
||||||||||||
Leased facility closure costs | $ | 51 | $ | (18 | ) | $ | 33 | |||||||
Products and other | 70 | -- | 70 | |||||||||||
|
|
|
||||||||||||
Total | $ | 121 | $ | (18 | ) | $ | 103 | |||||||
|
|
|
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 and monitoring instruments and supplies, as well as single use, stand alone diagnostic and other tests, vaccines and pharmaceuticals, primarily for canine and feline use. These products are sold directly by the Company as well as through independent third party distributors and other distribution relationships. Core Companion Animal Health segment products manufactured at the Des Moines, Iowa production facility included in OVPs assets are transferred at cost and are not recorded as revenue for OVP. 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, horses and fish. All OVP products are currently sold by third parties under third party labels.
Additionally, the Company generates non-product revenue from sponsored research and development projects for third parties, licensing of technology and royalties. These revenues are attributed as appropriate between CCA and OVP.
Summarized financial information concerning the Companys reportable segments is shown in the following table (in thousands):
Total
Core Companion Animal Health |
Total
Other Vaccines, Pharmaceuticals and Products |
Total | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
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Three
Months Ended
June 30, 2004: |
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Total revenue | $ | 13,660 | $ | 4,136 | $ | 17,796 | ||||||||
Operating income (loss) | (1,540 | ) | 335 | (1,205 | ) | |||||||||
Total assets | 20,777 | 15,972 | 36,749 | |||||||||||
Capital expenditures | 450 | 115 | 565 | |||||||||||
Depreciation and amortization | 96 | 232 | 328 |
Three Months Ended June 30, 2005: |
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Total revenue | $ | 13,628 | $ | 2,937 | $ | 16,565 | ||||||||
Operating income (loss) | (756 | ) | 49 | (707 | ) | |||||||||
Total assets | 20,517 | 14,730 | 35,247 | |||||||||||
Capital expenditures | 326 | 86 | 412 | |||||||||||
Depreciation and amortization | 181 | 230 | 411 |
Total Core Companion Animal Health |
Total
Other Vaccines, Pharmaceuticals and Products |
Total | ||||||||||||
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Six
Months Ended
June 30, 2004: |
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Total revenue | $ | 28,084 | $ | 6,453 | $ | 34,537 | ||||||||
Operating income (loss) | (3,526 | ) | 264 | (3,262 | ) | |||||||||
Total assets | 20,777 | 15,972 | 36,749 | |||||||||||
Capital expenditures | 564 | 136 | 700 | |||||||||||
Depreciation and amortization | 224 | 479 | 703 |
Six Months Ended June 30, 2005: |
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Total revenue | $ | 26,760 | $ | 6,959 | $ | 33,719 | ||||||||
Operating income (loss) | (2,368 | ) | 558 | (1,810 | ) | |||||||||
Total assets | 20,517 | 14,730 | 35,247 | |||||||||||
Capital expenditures | 658 | 420 | 1,078 | |||||||||||
Depreciation and amortization | 364 | 518 | 882 |
Comprehensive income (loss) includes net income plus the results of certain stockholders equity changes not reflected in the Condensed Consolidated Statements of Operations. Such changes primarily include foreign currency translation items. Total comprehensive loss for the three months ended June 30, 2004 and 2005 was $1.360 million and $1.035 million, respectively. Total comprehensive loss for the six months ended June 30, 2004 and 2005 was $3.395 million and $2.406 million, respectively.
In July 2005, the Company entered into an amended credit and security agreement with Wells Fargo Business Credit, Inc. (Wells Fargo). The amended agreement provided the Company with $2.5 million in incremental capital, supported by two equipment notes a $2.0 million note secured by the Companys equipment in Des Moines, Iowa and a $500,000 note secured by the Companys equipment in Loveland, Colorado. In addition, the maturity date of the credit and security agreement was extended from May 31, 2006 to June 30, 2009. The Company's ongoing liquidity is dependent upon the availability of the revolving line of credit. This amended credit and security agreement contains financial and other covenants with which the Company must maintain compliance in order to have access to the revolving line of credit.
This discussion contains forward-looking statements that involve risks and uncertainties. Such statements, which include statements concerning future revenue, gross margins, selling and marketing expenses, research and development expenses, general and administrative expenses and capital needs, are subject to risks and uncertainties, including, but not limited to, those discussed below and elsewhere in this Form 10-Q, particularly in Factors that May Affect Results, that could cause actual results to differ materially from those anticipated herein. The forward-looking statements set forth in this Form 10-Q are as of August 15, 2005, and we undertake no duty, and specifically disclaim any obligation, to update this information.
Overview
We discover, develop, manufacture, market, sell, distribute and support veterinary products. Our business is comprised of two reportable segments, Core Companion Animal Health, which represented 81% and 79% of our product revenue for 2004 and the six months ended June 30, 2005, respectively, and Other Vaccines, Pharmaceuticals and Products, which represented 19% and 21% of our product revenue for 2004 and the six months ended June 30, 2005, respectively.
The Core Companion Animal Health segment includes diagnostic and monitoring instruments and supplies as well as single use, stand alone diagnostic and other tests, vaccines and pharmaceuticals, primarily for canine and feline use.
Diagnostic and monitoring instruments and supplies represented approximately 47% and 45% of our product revenue for 2004 and the six months ended June 30, 2005. 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. A loss of or disruption in supply of consumables we are selling to an installed base of instruments could substantially harm our business. Historically, most revenue growth from consumables has resulted from an increased number of instruments in the field and not greater revenue per instrument. Major products in this area include our handheld electrolyte instrument, our chemistry instrument and our hematology instrument and their affiliated consumables. 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.
Single use, stand alone diagnostic and other tests, vaccines and pharmaceuticals represented approximately 34% of our product revenue for both 2004 and the six months ended June 30, 2005, respectively, with the majority of revenue coming from diagnostic and other tests. 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. Major products in this area include our heartworm diagnostic tests, our heartworm preventive, our allergy diagnostic tests and our allergy immunotherapy. Products in this area are both supplied by third parties and provided by us.
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 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 have devoted substantial resources to the research and development of innovative products in Core Companion Animal Health, where we strive to provide high value products for unmet needs and advance the state of veterinary medicine.
All our Core Companion Animal Health products are ultimately sold 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. Core Companion Animal Health products are sold directly by us as well as through independent third party distributors and other distribution relationships. We believe that one of our largest competitors, IDEXX Laboratories, Inc. (IDEXX), effectively prohibits its distributors from selling competitors 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 line of products and significantly restrict our ability to market our products to veterinarians.
While we have decreased our operating expenses recently and anticipate we will have lower operating expenses in 2005 than we did in 2004, we expect operating expenses to increase as we grow our business in the intermediate term. We intend to reach sustained profitability through a combination of revenue growth and expense control. Accordingly, we closely monitor product revenue growth trends in our Core Companion Animal Health segment. While product revenue in this segment declined by 5% for the six months ended June 30, 2005 as compared to the prior year period, its level in the three months ended June 30, 2005 exceeded the prior year period's and we anticipate Core Companion Animal Health revenue will increase for 2005 as a whole when compared to 2004. Product revenue in our Core Companion Animal Health segment grew 11% in 2004 as compared to 2003 and has grown at a compounded annual growth rate of over 20% since 1998, our first full year as a public company.
The Other Vaccines, Pharmaceuticals and Products segment (OVP) includes our 168 thousand 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 handled there. Core Companion Animal Health segment products manufactured at this facility are transferred at cost and are not recorded as revenue for OVP. 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.
OVP includes private label vaccine and pharmaceutical production, primarily for cattle but also for other animals including small mammals, horses 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 Titanium® and MasterGuard® brands which are registered trademarks of AgriLabs. This agreement generates a significant portion of OVPs 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, China, Mexico and Taiwan until at least December 2009. This exclusivity may be extended under certain conditions. OVP also produces vaccines and pharmaceuticals for other third parties.
Additionally, we generate non-product revenues from sponsored research and development projects for third parties, licensing of technology and royalties. We perform these sponsored research and development projects for both companion animal and 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 sale of products, licensing of technology, 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 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 allowances. 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 unless sufficient historical experience exists and reasonable estimates of future returns can be calculated with appropriate allowances for such returns. 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. The estimate of these obligations is partially based on historical experience, but it also requires management to estimate the amount of product that particular customers will purchase in a given period of time. |
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. |
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. |
We recognize revenue from sponsored research and development over the life of the contract as research activities are performed. The revenue recognized is the lesser of revenue earned based on total expected revenues or actual non-refundable cash received to date under the agreement. |
Recognizing revenue for sponsored research and development requires us to make several estimates. The determination of revenue earned is generally based on actual hours incurred by research and development personnel and actual expenses incurred compared to total estimated hours and costs to be incurred. We believe that this proportional performance model is an appropriate method of determining the amount of service that has been delivered to the customer, and the amount of revenue that has been earned. These estimates must be updated each reporting period based on new information available to management. The estimates are generally based on historical experience and managements judgment. However, it is possible that there is little to no comparability between projects and we must make estimates based on our understanding of the contractual arrangement and actual experience on the contract to date. We recognize revenue on these sponsored research and development arrangements only to the extent that the revenue has been earned and cash has been received. |
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 the Companys 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
The Company maintains 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 clients past payment experience; (iii) a deterioration in the clients 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 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
The Company defers and capitalizes certain costs, including payments to third-party law firms for patent prosecution, related to the technology or patents underlying a variety of long-term licensing arrangements. No internal costs are capitalized. These capitalized costs are amortized over the same period as the licensing revenue related to those patents is recognized. Costs in excess of the amount of remaining related deferred licensing revenue are not capitalized, but are expensed as incurred. The Company capitalized approximately $374 thousand and $60 thousand for the six months ended June 30, 2004 and 2005, respectively and amortized approximately $69 thousand and $74 thousand for the same periods, respectively. The Company capitalized approximately $239 thousand and $0 for the three months ended June 30, 2004 and 2005, respectively and amortized approximately $37 thousand for both of the three month periods. |
Results of Operations
Revenue
Total revenue consists of two components: 1) product revenue and 2) research, development and other revenue. Total revenue decreased 2% to $33.7 million for the six months ended June 30, 2005 as compared to $34.5 million for the corresponding period in 2004. Product revenue decreased 2% to $33.0 million for the six months ended June 30, 2005 as compared to $33.9 million for the corresponding period in 2004. Total revenue decreased 7% to $16.6 million for the three months ended June 30, 2005 as compared to $17.8 million for the corresponding period in 2004. Product revenue decreased 7% to $16.2 million for the three months ended June 30, 2005 as compared to $17.4 million for the corresponding period in 2004.
Product revenue from our Core Companion Animal Health segment decreased 5% to $26.2 million for the six months ended June 30, 2005 as compared to $27.4 million for the corresponding period in 2004. Key factors in the decrease were lower sales of our hematology instruments, largely due to an offer to certain customers who had previously purchased a hematology analyzer from us to upgrade to our new hematology analyzer in the first half of 2004 which was not repeated in the first half of 2005, and lower sales of our heartworm diagnostic tests, somewhat offset by increased sales of our instrument consumables and our microalbumin laboratory packs, the latter of which we began to sell in 2005. Product revenue from our Core Companion Animal Health segment was $13.3 million for the three months ended June 30, 2005, a slight increase as compared to the corresponding period in 2004. Key factors in the increase were increased sales of our instrument consumables, our heartworm preventive and our microalbumin laboratory packs, the latter of which we began to sell in 2005, somewhat offset by lower sales of our hematology instruments, largely due to an offer to certain customers who had previously purchased a hematology analyzer from us to upgrade to our new hematology analyzer in the first half of 2004 which was not repeated in the first half of 2005, and lower sales of our heartworm diagnostic tests.
Product revenue from our Other Vaccines, Pharmaceuticals and Products segment (OVP) increased by 6% to $6.8 million for the six months ended June 30, 2005 as compared to $6.4 million for the corresponding period in 2004. The increase in product revenue was primarily due to greater sales of bovine vaccines under our contract with AgriLabs, somewhat offset by decreased sales of small mammal vaccines. Product revenue from our Other Vaccines, Pharmaceuticals and Products segment (OVP) decreased by 31% to $2.8 million for the three months ended June 30, 2005 as compared to $4.1 million for the corresponding period in 2004. The decrease in product revenue was due to lower sales of small mammal vaccines, bulk bovine biologicals and small mammal pharmaceuticals, somewhat offset by increased sales of bovine vaccines under our contract with AgriLabs.
Revenue from research, development and other increased 4% to $712 thousand for the six months ended June 30, 2005 from $687 thousand for the corresponding period in 2004. Revenue from research, development
and other increased 8% to $394 thousand for the three months ended June 30, 2005 from $365 thousand for the corresponding period in 2004. Both increases were primarily due to increased research and development activity for which we recognized revenue under an agreement with AgriLabs.
For 2005, we expect to grow our Core Companion Animal Health segment product revenue as compared to 2004. We anticipate OVP product revenue to increase slightly as compared to 2004. We expect research, development and other revenue to decline slightly in 2005 as compared to 2004.
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 $22.3 million for the first six months of 2005, a slight increase as compared to $22.2 million for the corresponding period in 2004. Gross profit decreased 7% to $11.4 million for the six months ended June 30, 2005 as compared to $12.3 million in the prior year corresponding period. Gross Margin, i.e. gross profit divided by total revenue, declined to 33.9% for the six months ended June 30, 2005 as compared to 35.7% in the corresponding period in 2004. Cost of revenue totaled $11.0 million for the three months ended June 30, 2005, a 5% decrease as compared to $11.6 million for the corresponding period in 2004. Gross profit decreased 11% to $5.5 million for the three months ended June 30, 2005 as compared to $6.2 million in the prior year corresponding period. Gross Margin declined to 33.4% for the three months ended June 30, 2005 as compared to 34.8% in the corresponding period in 2004.
Cost of products sold decreased 1% to $21.8 million in the six months ended June 30, 2005 from $22.0 million in the prior year period. Gross profit on product revenue decreased 6% to $11.2 million for the six months ended June 30, 2005 from $11.9 million in the prior year period. Product Gross Margin, i.e. gross profit on product revenue divided by product revenue, declined to 33.9% in the six months ended June 30, 2005 as compared to 35.1% in the corresponding period in 2004. Certain supplier price increases were a key factor in the decline. Cost of products sold decreased 7% to $10.8 million in the three months ended June 30, 2005 as compared to $11.5 million in the prior year period. Gross profit on product revenue decreased 8% to $5.4 million for the three months ended June 30, 2005 from $5.9 million in the prior year period. Product Gross Margin declined to 33.5% in the three months ended June 30, 2005 as compared to 33.9% in the corresponding period in 2004. Key factors in the decline were certain supplier price increases and lower gross margins on our heartworm diagnostic tests, somewhat offset by increased gross margins due to product mix.
Cost of research, development and other revenue increased 104% to $467 thousand in the six months ended June 30, 2005 as compared to $229 thousand in the prior year period. Gross profit on research, development and other revenue decreased 46% to $245 thousand for the six months ended June 30, 2005 from $458 thousand in the prior year period. Other Gross Margin, i.e. gross profit on research, development and other revenue divided by research, development and other revenue, declined to 34.4% for the six months ended June 30, 2005 as compared to 66.7% in the prior year period. The primary reason for the decrease is a greater proportion of technology or patent-related costs being expensed as incurred as these costs are in excess of the amount of remaining affiliated deferred licensing revenue in the six months ended June 30, 2005 as compared to the prior year period. Cost of research, development and other revenue increased 206% to $288 thousand in the three months ended June 30, 2005 as compared to $94 thousand in the prior year period. Gross profit on research, development and other revenue decreased 61% to $106 thousand for the three months ended June 30, 2005 from $271 thousand in the prior year period. Other Gross Margin declined to 26.9% for the three months ended June 30, 2005 as compared to 74.2% in the prior year period. The primary reason for the decrease is a greater proportion of technology or patent-related costs being expensed as incurred as these costs are in excess of the amount of remaining affiliated deferred licensing revenue in the three months ended June 30, 2005 as compared to the prior year corresponding period.
We expect Product Gross Margins to increase in the second half of 2005 as compared to the first six months of the year and to be in the same range for the full year 2005 that it was in full year 2004. We expect
Other Gross Margin to decrease for full year 2005 as compared to full year 2004 as we expect a greater proportion of technology or patent-related costs will be expensed as incurred because the costs are in excess of remaining affiliated deferred licensing revenue.
Operating Expenses
Total operating expenses decreased 15% to $13.3 million in the six months ended June 30, 2005 as compared to $15.6 million in the prior year period. Total operating expenses decreased 16% to $6.2 million in the three months ended June 30, 2005 as compared to $7.4 million in the prior year period.
Selling and marketing expenses consist primarily of salaries, commissions and benefits for sales and marketing personnel and expenses related to product advertising and promotion. Selling and marketing expenses decreased 12% to $7.2 million in the six months ended June 30, 2005 as compared to $8.2 million in the corresponding period in 2004. The decrease was primarily due to heavier marketing spending related to the launch of our new hematology instrument in the six months ended June 30, 2004. Selling and marketing expenses decreased 10% to $3.4 million in the three months ended June 30, 2005 as compared to $3.8 million in the corresponding period in 2004. The decrease was primarily due to heavier marketing spending related to the launch of our new hematology instrument and higher spending on outside consulting services in the three months ended June 30, 2004.
Research and development expenses declined 34% to $2.2 million for the six months ended June 30, 2005 from $3.3 million during the corresponding period in 2004. Research and development expenses declined 40% to $950 thousand for the three months ended June 30, 2005 from $1.6 million during the corresponding period in 2004. These declines were primarily due to lower costs on clinical trials and lower compensation and benefits costs primarily due to reductions in headcount.
General and administrative expenses were $3.8 million in the six months ended June 30, 2005, down 5% from $4.1 million in the prior year period. Key factors in the decrease include lower consulting and legal expenses, somewhat offset by increased rent expense. General and administrative expenses were $1.9 million in the three months ended June 30, 2005, down 9% from $2.0 million in the prior year period. The decrease was due primarily to lower consulting expenses, somewhat offset by increased rent expense.
In 2005, we expect total operating expenses to decrease as compared to 2004.
Interest and Other Expense, Net
Interest and other expense increased $145 thousand to $265 thousand for the six months ended June 30, 2005 as compared to interest and other expense of $120 thousand during the corresponding period in 2004. The increase in interest and other expense was due to higher interest expense in 2005 as we utilized more of our revolving line of credit, incurred higher interest rates on our borrowings as well as the receipt of certain prior years tax credits in 2004 which did not occur in 2005. These increases in interest expense were partially offset by gains on foreign currency translation of approximately $122 thousand for the three months ended June 30, 2005. This foreign currency translation gain resulted from transactions in the first six months of 2005 whereby funds were transferred from the Companys Swiss subsidiary to the United States, via an intercompany receivable/payable. Because this intercompany loan is to be repaid in the foreseeable future, changes in the amount receivable by the Swiss subsidiary resulting from changes in foreign currency exchange rates must be recorded through earnings or loss. For the six months ended June 30, 2005, the impact of the foreign currency exchange rate changes resulted in a gain. It is reasonably possible that future changes could result in a loss which would also be reflected in earnings or loss. Interest and other expense decreased to $60 thousand for the three months ended June 30, 2005 as compared to $183 thousand during the corresponding period in 2004 due to the gain on foreign currency translation discussed above. We expect this line item to be a net expense for 2005 and to primarily consist of net interest expense. We expect this line item to increase in 2005 as compared to 2004 as
we use our revolving credit facility more extensively and have higher interest rates on our outstanding loans due to the increase in interest rates resulting from modifications to our credit facility agreement.
Net Loss
Our net loss decreased 39% to $2.1 million in the six months ended June 30, 2005 compared to $3.4 million during the corresponding period in 2004. Our net loss decreased 45% to $767 thousand for the three months ended June 30, 2005 compared to $1.4 million during the corresponding period in 2004. The improvement in 2005 from 2004 was the result of lower operating expenses, somewhat offset by lower gross profit. In 2005, we expect increased revenue and lower operating expenses to contribute to a lower net loss for the full year as compared to 2004.
Liquidity and Capital Resources
We have incurred net negative cash flow from operations since our inception in 1988. For the six months ended June 30, 2005, we had a net loss of $2.1 million. During the six months ended June 30, 2005, our operations provided cash of $1.3 million. At June 30, 2005, we had $4.6 million of cash and cash equivalents, $717 thousand of working capital, $9.9 million of outstanding borrowings under our revolving line of credit agreement and we had fully utilized the available borrowing capacity based upon eligible accounts receivable and eligible inventory under the credit facility agreement. Our working capital has decreased from $5.2 million at December 31, 2004, to $717 thousand at June 30, 2005 primarily due to the classification of all our long-term debt obligations as current at June 30, 2005 and because of decreases in accounts receivable and inventories and increases in accounts payable.
At June 30, 2005, we had a $12.0 million asset-based revolving line of credit which had a maturity date of May 31, 2006 as part of our credit and security agreement with Wells Fargo. At June 30, 2005, $9.9 million was outstanding under this line of credit. Our ability to borrow under this facility varies based upon available cash, eligible accounts receivable and eligible inventory. On June 30, 2005, interest was charged at a stated rate of prime plus 2.75% and 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 existing or future covenants, representations or warranties could result in our being in default on the loan and could cause all outstanding amounts payable to Wells Fargo as well as others, including those discussed below, 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. On July 26, 2005, we signed an amendment to our credit and security agreement under which, among other changes, Wells Fargo waived technical covenant non-compliance and extended the maturity of our revolving line of credit to June 30, 2009. We would not have been in compliance with certain financial covenants at June 30, 2005 under the terms of the prior amended agreement with Wells Fargo. Under the July 26, 2005 amendment we were in compliance with all financial covenants as of June 30, 2005. At June 30, 2005, we had fully utilized the available borrowing capacity based upon eligible accounts receivable and eligible inventory under our revolving line of credit.
At June 30, 2005, we also had outstanding obligations for long-term debt and capital leases totaling approximately $1.6 million primarily related to a term loan with Wells Fargo and a subordinated promissory note with a significant customer with the proceeds used for facilities enhancements. The term loan is secured by real estate and had an outstanding balance at June 30, 2005 of approximately $1.1 million due in monthly installments of $17,658 plus interest, with a balloon payment of approximately $834 thousand due on May 31, 2006. The term loan has a stated interest rate of prime plus 2.75%. Under the amendment to our credit and security agreement with Wells Fargo signed on July 26, 2005, the maturity of this term loan will be extended to June 30, 2009 and a balloon payment of approximately $622 thousand will be due on that date following receipt of a real property evaluation acceptable to Wells Fargo, an event we anticipate will occur in 2005. The subordinated
promissory note is secured by our production facility, has a stated interest rate of prime plus 1.0% and a remaining balance of $500 thousand payable in May 2006. In addition, we have a promissory note to the City of Des Moines with an outstanding balance at June 30, 2005 of approximately $69 thousand, due in monthly installments through June 2006. The promissory note has a stated interest rate of 3.0%. The note is secured by first security interests in essentially all of OVPs assets and the lender has subordinated its first security interest to Wells Fargo. Our capital lease obligations totaled approximately $30 thousand at June 30, 2005. At June 30, 2005, all of our obligations for long-term debt are classified as current. The terms of our debt agreement includes provisions where non-compliance with certain covenants could, in specified circumstances, result in acceleration of the repayment of these borrowings. Under the amendment to our credit and security agreement with Wells Fargo signed on July 26, 2005, we were provided with $2.5 million in incremental capital, supported by two equipment notes a $2.0 million note secured by our equipment in Des Moines, Iowa and a $500,000 note secured by our equipment in Loveland, Colorado.
Net cash provided by operating activities was $1.3 million for the six months ended June 30, 2005 as compared to $263 thousand during the corresponding period in 2004. The increase in cash provided by operations for the six months ended June 30, 2005 as compared to the same period of 2004 is due to the $1.2 million decrease in our net loss for the six months ended June 30, 2005 as compared to the same period in 2004; a $475 thousand larger decrease in other current assets for the six months ended June 30, 2005 as compared to the same period in 2004 due to $272 thousand of prepaid inventory at June 30, 2004 as compared to no prepaid inventory at June 30, 2005 as well as lower prepaid expense balances being amortized at December 31, 2004 as compared to December 31, 2003; and a $458 thousand larger decrease in inventories for the first half of 2005 as compared to the first half of 2004 as we began to utilize the inventories built up in the second half of 2004; offset by a lesser cyclical decrease in accounts receivable of approximately $702 thousand for the six months ended June 30, 2005 as compared to the same period in 2004 due to the record revenue we recognized in the fourth quarter of 2003 and a larger decrease in deferred revenue of approximately $558 thousand for the first half of 2005 as compared to the first half of 2004 due to amounts being received from various transactions in 2004 which offset significant portions of the amortization during the first six months of that 2004 with no corresponding transactions in the same period of 2005. Our cash from operations fluctuates from period to period primarily due to our periodic net income (loss) and changes in working capital.
Net cash flows from investing activities used cash of $1.1 million in the six months ended June 30, 2005, compared to $674 thousand during the corresponding period in 2004, with the change due primarily to increased capital expenditures in 2005 as compared to 2004, lower capitalized patent costs in 2005 as compared to 2004 and proceeds from the licensing of technology and product rights totaling $400 thousand in 2004 with no corresponding proceeds in 2005.
Net cash flows from financing activities used cash of $340 thousand during the six months ended June 30, 2005 as compared to providing $1.0 million during the corresponding period in 2004. In 2005, the cash was used primarily to repay amounts outstanding on our line of credit. In 2004, the cash was provided primarily from net borrowings under our revolving credit facility.
At June 30, 2005, we had intangible assets of approximately $1.5 million related to deferred patent costs. These deferred patent costs are being recognized as research and development costs on a straight-line basis over the remaining lives of the agreements, products, patents or technology. We also had total deferred revenue and other long-term liabilities, net of current portion, of approximately $10.6 million. Included in this total is approximately $10.4 million of deferred revenue related to up-front licensing fees that have been received for certain product rights and technology rights out-licensed during the six months ended June 30, 2005 and prior. These deferred amounts are being recognized on a straight-line basis over the remaining lives of the agreements, products, patents or technology. The remaining approximately $153 thousand is related to pension liabilities for a defined benefit pension plan which was frozen in October 1992.
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, the extent to which currently planned products and/or technologies under research or development are successfully developed, the extent of the market acceptance of any new products and other factors.
Based on our current operating plan, we believe our available cash and cash equivalents, together with cash from operations and borrowings expected to be available under our revolving line of credit should be sufficient to fund our operations through 2006. Our current operating plan anticipates we will be profitable in both the third and fourth quarters of 2005 and for 2006 as a whole. If our actual performance deviates from our operating plan, we may be required to raise additional capital in the future. If necessary, we expect to raise these additional funds through one or more of the following: (1) sale of equity securities; (2) refinancing of real property assets; (3) licensing of technology; and (4) sale of assets, products or marketing rights. 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. See Factors that May Affect Results.
Net Operating Loss Carryforwards
As of December 31, 2004, we had a net domestic operating loss carryforward, or NOL, of approximately $169.5 million, a domestic alternative minimum tax credit of approximately $23 thousand and a domestic research and development tax credit carryforward of approximately $584 thousand. The NOL and tax credit carryforwards are subject to alternative minimum tax limitations and to examination by the tax authorities. In addition, we have 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, and most restrictive, 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 had net operating loss carryforwards in Switzerland of approximately $3.7 million at December 31, 2004 related to losses previously recorded by Heska AG.
Recent Accounting Pronouncements
Recent accounting pronouncements that are relevant to us include Statement of Financial Accounting Standards (SFAS) No. 123R and SFAS No. 154.
SFAS No. 123R, Share-Based Payment (Revised 2004)
Statement of Financial Accounting Standards No. 123 Share-Based Payments (SFAS No. 123R) was revised and promulgated in December 2004. We intend to adopt this standard when required. On April 14, 2005, the SEC issued a release amending the compliance dates for SFAS No. 123R. Under the SECs new rule, companies in our position may 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 SECs action on April 14, 2005, we currently intend to adopt this standard on January 1, 2006 the first day of our next fiscal year. We intend to adopt 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, allows for the continued measurement of compensation cost for 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 are 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. Upon adoption of SFAS No. 123R, we will be 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 will result in 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 at 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 currently consists 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 are reported in the footnotes to our 2005 financial statements. This action effected approximately 750 thousand options, approximately 55 thousand of which were held by our Directors and Executive Officers. Had this action not been taken, and had all approximately 750 thousand options continued to vest according to the vesting schedules in place prior to the acceleration, we would have recorded incremental compensation related to these options of approximately $275 thousand on a pro forma basis for the nine months ending December 31, 2005. This follows a similar action for similar reasons in December 2004 under which approximately 2.2 million outstanding but unvested stock options were immediately vested. Had the December action not been taken, and had all approximately 2.2 million options continued to vest according to the vesting schedules in place prior to the acceleration, we would have recorded incremental compensation related to these options of approximately $870 thousand on a pro forma basis for the year ending December 31, 2005. We also have an employee stock purchase plan under which we will recognize compensation expense under SFAS No. 123R beginning on January 1, 2006.
There are four key inputs to the Black-Scholes model which we use to value our options: expected term, expected volatility, risk-free interest rate and expected dividends, all of which require us to make estimates. Our 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 fair value calculated for the option. Our expected term input was estimated based on our historical time from grant to exercise experience for all employees in 2005 and a software program to which an input was our current employee exercise experience in 2004; we treated all employees in one grouping in both years. Our expected volatility input was estimated based on our historical stock price volatility in 2005 and a combination of our historical price volatility and a peer group volatility in 2004. Our risk-free interest rate input was determined based on the U.S. Treasury yield curve at the time of option issuance in both 2005 and 2004. Our expected dividends input was zero in both 2005 and 2004. Different assumptions could materially impact the resulting option value calculated. In the six months ended June 30, 2005, we had pro forma employee stock option compensation of approximately $1.888 million on approximately 3.3 million stock options. The underlying assumptions of these stock options, weighted by number of options and stock fair value at the time of grant, were as follows: expected term of 3.3 years, expected volatility of 94%, risk-free interest rate of 3.8% and expected dividends of zero. A tranche of at-the-money options granted under these assumptions in the same number as above would require a fair value price of approximately $0.90 per share (the Benchmark Tranche) to yield the same value as above (the Benchmark Value). The following table represents the approximate change, in dollars, of the value of the Benchmark Tranche under different expected term and expected volatility assumptions assuming all other inputs are the same. For example, the Benchmark Tranche is approximately 3.3 million at-the-money options with a fair market stock value of $0.90 per share, and if the Benchmark Tranche is valued using an expected term of 3.3 years, expected volatility of 94%, a risk-free interest rate of 3.8% and expected dividends of zero, we obtain a fair value of approximately $1.888 million the
Benchmark Value. If we value the Benchmark Tranche under the same assumptions, except we assume an expected term of 5.0 years instead of 3.3 years and an expected volatility of 60% instead of 94%, we obtain a value of approximately $1.726 million, or a decrease of approximately $162 thousand as compared to the Benchmark Value. All amounts in the table below are in thousands of dollars.
Volatility | |||||||||||||||||||||||||||||||||||
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15% | 30% | 45% | 60% | 75% | 90% | 105% | 120% | 135% | 150% | |||||||||||||||||||||||||
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1 | 1,584 | 1,415 | 1,246 | 1,077 | 912 | 752 | 597 | 447 | 305 | 176 | |||||||||||||||||||||||||
2 | 1,432 | 1,207 | 978 | 756 | 540 | 338 | 149 | (27 | ) | (189 | ) | (322) | |||||||||||||||||||||||
Time to | 3 | 1,299 | 1,037 | 772 | 517 | 275 | 53 | (149 | ) | (328 | ) | (484 | ) | (607) | |||||||||||||||||||||
Expiration | 4 | 1,177 | 895 | 603 | 325 | 70 | (159 | ) | (361 | ) | (534 | ) | (666 | ) | (786) | ||||||||||||||||||||
(in years) | 5 | 1,064 | 766 | 454 | 162 | (99 | ) | (328 | ) | (524 | ) | (683 | ) | (799 | ) | (902) | |||||||||||||||||||
6 | 955 | 646 | 325 | 27 | (239 | ) | (464 | ) | (646 | ) | (792 | ) | (895 | ) | (981) | ||||||||||||||||||||
7 | 855 | 540 | 212 | (93 | ) | (355 | ) | (570 | ) | (742 | ) | (875 | ) | (961 | ) | (1,034) | |||||||||||||||||||
8 | 759 | 441 | 106 | (196 | ) | (454 | ) | (663 | ) | (822 | ) | (938 | ) | (1,011 | ) | (1,071) | |||||||||||||||||||
9 | 666 | 351 | 13 | (288 | ) | (540 | ) | (736 | ) | (882 | ) | (984 | ) | (1,047 | ) | (1,094) | |||||||||||||||||||
10 | 580 | 265 | (70 | ) | (371 | ) | (613 | ) | (799 | ) | (931 | ) | (1,024 | ) | (1,077 | ) | (1,114) |
The current six-month period pro forma compensation expense of approximately $1.843 million may not be indicative of the future impact of SFAS No. 123R. Assuming all options vest according to the vesting schedule currently in place, we currently have approximately $85 thousand of compensation cost to be recognized after 2005 underlying employee stock options granted, approximately $80 thousand of which is to be recognized in 2006. The Compensation Committee of our Board of Directors is currently considering alternatives regarding different forms of long-term compensation for future use, including the continued use of stock options. The decisions of the Compensation Committee of our Board of Directors regarding stock options is likely to be a key factor in the future impact of SFAS No. 123R on our financial statements.
SFAS No. 154, Accounting Changes and Error Corrections
Statement of Financial Accounting Standards No. 154 Accounting Changes and Error Corrections (SFAS No. 154) was issued in May 2005 and is effective for us beginning on January 1, 2006. SFAS No. 154 requires that all voluntary changes in accounting principles are retrospectively applied to prior financial statements as if that principle had always been used, unless it is impracticable to do so. When it is impracticable to calculate the effects on all prior periods, SFAS No. 154 requires that the new principle be applied to the earliest period practicable. The adoption of SFAS No. 154 is not anticipated to have a material effect on our financial position or results of operations.
Factors That May Affect Results
Our future operating results may vary substantially from period to period due to a number of factors, many of which are beyond our control. The following discussion highlights these factors and the possible impact of these factors on future results of operations. If any of the following factors actually occur, our business, financial condition or results of operations could be harmed. In that case, the price of our common stock could decline and you could experience losses on your investment.
Our common stock is listed on the Nasdaq SmallCap 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 SmallCap Market. We have received a communication from Nasdaq advising us that we have been afforded a grace period ending on November 1, 2005 to regain compliance with the $1.00 minimum bid requirement, which would require us to have a minimum bid price of $1.00 or more for at least 10 consecutive business days. We cannot assure you that we will be able to obtain the aforementioned minimum bid price requirement or maintain our listing on the Nasdaq stock market, which includes additional quantitative and qualitative requirements in addition to a $1.00 minimum bid price, such as market value of listed securities. On July 7, 2005, we received a communication from Nasdaq advising us that we failed to comply with the $35 million minimum market value of listed securities required for 10 consecutive trading days and that we had been afforded a 30 calendar day grace period in order to regain compliance. While we received a communication from Nasdaq on August 4, 2005 stating we have regained compliance and the matter is closed, there can be no assurance we will continue to meet the minimum market value of listed securities or other Nasdaq listing criteria in the future. In addition, the Nasdaq staff retains significant discretion in matters related to listing. If we are delisted from the Nasdaq SmallCap Market, our common stock will be considered a penny stock under the regulations of the Securities and Exchange Commission 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.
We have historically not consistently generated positive cash flow from operations and may need additional capital and any required capital may not be available on acceptable terms or at all.
If our actual performance deviates from our operating plan, which anticipates we will be profitable in both the third and fourth quarters of 2005 and for 2006 as a whole, we may be required to raise additional capital in the future. If necessary, we expect to raise these additional funds through one or more of the following: (1) sale of equity securities; (2) refinancing of real property assets; (3) licensing of technology; and (4) sale of assets, products or marketing rights. 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. 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. We may not find any third parties interested in licensing our intellectual property or purchasing any of our assets, products or marketing rights in a timely manner, or at all. 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, amounts 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.
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 as well as our stock price to decline.
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 of such relationships; |
| the introduction of new products by our competitors or by us; |
| competition and pricing pressures from competitive products; |
| our distribution strategy and our ability to maintain relationships with distributors; |
| large customers failing to purchase at historical levels; |
| fundamental shifts in market demand; |
| manufacturing delays; |
| shipment problems; |
| 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, marketing and new product development. 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.
We may be unable to successfully market, sell and distribute our products.
The market for companion animal healthcare products is highly fragmented. Because our Core Companion Animal Health proprietary products are generally available only by prescription and our medical instruments require technical training, we sell our Core Companion Animal Health products only ultimately to or through veterinarians. The acceptance of our products by veterinarians is critical to our success. Therefore, we may fail to reach a substantial segment of the potential market.
We currently market our Core Companion Animal Health products in the United States to veterinarians through approximately 14 independent third-party distributors who carry our full line of Core Companion Animal Health products, approximately 9 independent third-party distributors who carry portions of our Core Companion Animal Health product line and through a direct sales force of approximately 28 individuals. To be successful, we will have to effectively market our products and continue to develop and train our direct sales force as well as sales personnel of our distributors and rely on other arrangements with third parties to market, distribute and sell our products. In addition, most of our distributor agreements can be terminated on 60 days notice and we believe that IDEXX, one of our largest competitors, effectively prohibits its distributors from selling competitive products, including our diagnostic instruments and heartworm diagnostic tests. We believe this restriction significantly limits our ability to engage national distributors to sell our full line of products and significantly restricts our ability to market our products to veterinarians. In 2002, one of our largest distributors informed us that they were going to carry IDEXX products and that they no longer would carry our diagnostic instruments and heartworm diagnostic tests. In late 2004, this distributor acquired another of our distributors. We believe IDEXX effectively prohibits this distributor from carrying our diagnostic instruments and heartworm diagnostic tests as a condition for having access to buy the IDEXX product line.
We may not successfully develop and maintain marketing, distribution or sales capabilities, and we may not be able to make arrangements with third parties to perform these activities on satisfactory terms. If our marketing, sales and distribution strategy is unsuccessful, our ability to sell our products will be negatively impacted and our revenues will decrease.
We may not be able to achieve sustained profitability.
We have incurred net losses on an annual basis since our inception in 1988 and, as of June 30, 2005, we had an accumulated deficit of $212.2 million. Notwithstanding a profitable quarter in both 2002 and 2003 and our expectation of profitability in the third and fourth quarters of 2005 and for 2006 as a whole, we have never achieved profitability on an annual basis. Our ability 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 at least
limit the increase in our operating expenses to a reasonable level. Even if we achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. If we cannot achieve or sustain profitability for an extended period, we may not be able to fund our expected cash needs or continue our operations.
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.
We currently rely on third party suppliers to manufacture those products we do not manufacture ourselves. We currently rely on third party suppliers for our veterinary diagnostic and patient monitoring instruments and consumable supplies for these instruments, for certain of 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 products they manufacture which are responsible for more than 5% or more of our revenue are i-STAT Corporation (acquired in 2004 by Abbott Laboratories), Arkray Global Business, Inc., Boule Medical AB and Quidel Corporation (Quidel). We often purchase products from our suppliers under agreements that are of limited duration or can be terminated on an annual basis. We believe we have agreements in place to ensure supply of our major product offerings through at least the end of 2005 and we believe we are in full compliance with such agreements. There can be no assurance, however, that our suppliers will be able to meet their obligations under these agreements or that we will be able to compel them to do so. Risks of relying on suppliers include:
| 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 could be significant if we have built a significant installed base, further harming our sales prospects and opportunities. Even if we were able to find an alternate supply, 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. If we need to change to other commercial manufacturing contractors for certain of our products, additional regulatory licenses or approvals must be obtained for these contractors prior to our use. This would require new testing and compliance inspections 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. In addition, in certain lines of instruments, we would lose the consumable revenues from the installed base of those instruments if we were to switch to a competitive instrument. |
| 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. |
| 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 an increased drain on our financial resources and liquidity. |
| Loss of exclusivity. Our 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 in the future and maintain exclusivity over the distribution and sale of these products. If we are not the exclusive distributor of these products, competition may increase. |
| 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. |
| 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. |
| 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 windows of opportunity. |
| Limited intellectual property rights. We may 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.
We operate in a highly competitive industry, which could render our products obsolete or substantially limit the volume of products that we sell. This would limit our ability to compete and achieve profitability.
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., AGEN Biomedical, Ltd. and Synbiotics Corporation. Other companies with a significant presence in the companion animal health market, such as Bayer AG, Fort Dodge Animal Health (a division of Wyeth), Intervet International bv (a unit of Akzo Nobel N.V.), Merial Ltd., Novartis AG, Pfizer Inc., SPAH (a unit of Schering-Plough Corporation), and Virbac S.A., may be marketing or developing products that compete with our products or would compete with them if developed. These and other 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. 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, distribution or support capabilities to compete successfully. Novartis has a marketing agreement with us, but the agreement does not restrict its ability to develop and market competing products. We believe that one of our largest competitors, IDEXX, effectively prohibits its distributors from selling competitive products, including our diagnostic instruments and heartworm diagnostic tests. 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 customers. Competitors may have facilities with similar capabilities to our OVP segment, which they may operate at a lower unit price to their customers, which could cause us to lose customers. 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.
We have granted third parties substantial marketing rights to certain of our existing products as well as products under development. If the third parties are not successful in marketing our products our sales may not increase.
Our agreements with our corporate marketing partners generally contain no or very 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 Chewable Tablets. Novartis Agro K.K. markets and distributes our SOLO STEP CH heartworm test in Japan. Leo Animal Health A/S currently exclusively distributes both E.R.D.-HEALTHSCREEN Urine Tests and SOLO STEP CH in Europe. AgriLabs has the exclusive right to sell certain of our bovine vaccines in the United States, Africa, China, Mexico and Taiwan. In addition, Nestle Purina Petcare has exclusive rights to license our technology for nutritional applications for dogs and cats. In addition, we have entered into agreements granting Novartis certain rights to market or co-market certain of the products that we are currently developing. 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, our agreements with SPAH and AgriLabs requires us to potentially pay penalties if we are unable to supply product over an extended period of time.
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, and Quidel manufactures these products. 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.
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 $0.56 to a high of $1.86. 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 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 in our relationships with collaborative partners; |
| 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 companys securities, securities class action litigation has often been instituted. If a securities class action suit is filed against us, it is likely we would incur substantial legal fees and our managements attention and resources would be diverted from operating our business in order to respond to the litigation.
The loss of significant customers could harm our operating results.
Revenue from one contract with AgriLabs comprised approximately 15% of consolidated revenue in 2003. Revenue from this customer represented less than 10% of our consolidated revenue for the year ended December 31, 2004 and for the six months ended June 30, 2004 and 2005, respectively. While we do not have any other customers who have represented more than 10% of revenues over the last three years, 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. As an example, in late 2004 one of our largest distributors who has historically carried our full product line informed us they were being acquired by a distributor who does not carry our full product line. We believe purchases from the acquired distributor will be significantly lower in 2005 than in 2004, which we are unlikely to completely recover through direct sales and sales through other distributors.
We may face costly intellectual property or other legal disputes, or our technology or that of our suppliers or collaborators may become the subject of legal action.
Our ability to compete effectively will depend in part on our ability to develop and maintain proprietary aspects of our technology and either to operate without infringing the proprietary rights of others or to obtain rights to technology owned by third parties. We have United States and foreign-issued patents and are currently prosecuting patent applications in the United States and various foreign countries. Our pending patent applications may not result in the issuance of any patents or any issued patents that will offer protection against competitors with similar technology. Patents we receive may be challenged, invalidated or circumvented in the
future or the rights created by those patents may not provide a competitive advantage. We also rely on trade secrets, technical know-how and continuing invention to develop and maintain our competitive position. Others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets.
We may become subject to additional patent infringement claims and litigation in the United States or other countries or interference proceedings conducted in the United States Patent and Trademark Office, or USPTO, to determine the priority of inventions. The defense and prosecution of intellectual property suits, USPTO interference proceedings, and related legal and administrative proceedings are costly, time-consuming and distracting. We may also need to pursue litigation to enforce any patents issued to us or our collaborative partners, to protect trade secrets or know-how owned by us or our collaborative partners, or to determine the enforceability, scope and validity of the proprietary rights of others. Any litigation or interference proceeding will result in substantial expense to us and significant diversion of the efforts of our technical and management personnel. Any adverse determination in litigation or interference proceedings could subject us to significant liabilities to third parties. Further, as a result of litigation or other proceedings, we may be required to seek licenses from third parties which may not be available on commercially reasonable terms, if at all.
We license technology from a number of third parties, including Corixa Corporation, Hybritech Inc., New England Biolabs, Inc., Roche Molecular Systems, Inc. and Synbiotics Corporation, as well as a number of research institutions and universities. The majority of these license agreements impose due diligence or milestone obligations on us, and in some cases impose minimum royalty and/or sales obligations on us, in order for us to maintain our rights under these agreements. Our products may incorporate technologies that are the subject of patents issued to, and patent applications filed by, others. As is typical in our industry, from time to time we and our collaborators have received, and may in the future receive, notices from third parties claiming infringement and invitations to take licenses under third party patents. We currently do not have any unresolved notices of infringement. Any legal action against us or our collaborators may require us or our collaborators to obtain one or more licenses in order to market or manufacture affected products or services. However, we or our collaborators may not be able to obtain licenses for technology patented by others on commercially reasonable terms, or at all, we may not be able to develop alternative approaches if unable to obtain licenses, or current and future licenses may not be adequate for the operation of our businesses. Failure to obtain necessary licenses or to identify and implement alternative approaches could prevent us and our collaborators from commercializing our products under development and could substantially harm our business.
We may also face legal disputes relating to other areas of our business. These disputes may require significant expenditures on our part and could have material adverse consequences on our business in the case of an unfavorable ruling or settlement.
We must maintain various financial and other covenants under our credit facility agreement in order to borrow and fund our operations.
Under our credit and security agreement with Wells Fargo, as amended in July 2005 and under prior agreements, we are required to comply with various financial and non-financial covenants in order to borrow under the agreement. The borrowings under this agreement are 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. We believe we will be able to maintain compliance with all these covenants, and covenants we may negotiate in the future, although there can be no assurance thereof. We have not always been able to maintain compliance with all covenants in the past, including in the first four months of 2005 and on June 30, 2005. Wells Fargo has subsequently granted us a waiver of non-compliance in each case. However, there can be no assurance we will be able to obtain similar waivers or other modifications if needed in the future.
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 under the loan and could cause all outstanding
amounts and loans with our other lenders, 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.
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.
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. We may be required to obtain an audit of our internal controls for the year ending December 31, 2006 and, if so, our general and administrative costs are likely to increase. Actions by other entities, such as enhanced rules to maintain our listing on the Nasdaq SmallCap Market could also increase our general and administrative costs, as could further legislative action.
We must obtain and maintain costly regulatory approvals in order to market certain 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 regulatory authorities. These regulations govern, among other things, the development, testing, manufacturing, labeling, storage, pre-market approval, advertising, promotion, sale and distribution of our products. Satisfaction of these requirements can take several years and time needed to satisfy them may vary substantially, based on the type, complexity and novelty of the product.
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 products 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. Our manufacturing facilities and those of our third party manufacturers must also conform to certain other manufacturing regulations, which include requirements relating to quality control and quality assurance as well as maintenance of records and documentation. The USDA, FDA and foreign regulatory authorities strictly enforce manufacturing regulatory requirements through periodic inspections. If any regulatory authority determines that our manufacturing facilities or those of our third party manufacturers do not conform to appropriate manufacturing requirements, we or the manufacturers of our products may be subject to sanctions, including warning letters, 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.
Our future revenues depend on successful research, development, commercialization and/or market acceptance, any of which can be slower than we expect or may not occur.
The research, development and regulatory approval process for many of our 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 research or 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.
Even if we are successful in the research and development of a product, we may experience delays in commercialization and/or market acceptance. For example, there may be delays in producing large volumes of a product or veterinarians may be slow to adopt a product. The latter 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, market acceptance of the product has been significantly slower 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.
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, particularly Dr. Robert B. Grieve, our Chairman and Chief Executive Officer. 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 Dr. Grieve, he is an at-will employee, which means that either party may terminate his employment at any time without prior notice. If we lose the services of, or fail to recruit, key personnel, the growth of our business could be substantially impaired. We do not maintain key person life insurance for any of our key personnel.
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 Financial Accounting Standards Board, the American Institute of Certified Public Accountants, the Securities and Exchange Commission and various bodies formed to interpret and create appropriate 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 may face product returns and product liability litigation and the extent of our insurance coverage is limited. If we become subject to product liability claims resulting from defects in our products, we may fail to achieve market acceptance of our products and our sales could decline.
The testing, manufacturing and marketing of our current products as well as those currently under development entail an inherent risk of product liability claims and associated adverse publicity. Following the introduction of a product, adverse side effects may be discovered. Adverse publicity regarding such effects could affect sales of our other products for an indeterminate time period. To date, we have not experienced any
material product liability claims, but any claim arising in the future could substantially harm our business. Potential product liability claims may exceed the amount of our insurance coverage or may be excluded from coverage under the terms of the policy. We may not be able to continue to obtain adequate insurance at a reasonable cost, if at all. In the event that we are held liable for a claim against which we are not indemnified or for damages exceeding the $10 million limit of our insurance coverage or which results in significant adverse publicity against us, we may lose revenue, be required to make substantial payments which could exceed our financial capacity and/or lose or fail to achieve market acceptance. Furthermore, our agreements with some suppliers of our instruments contain limited warranty provisions, which may subject us to liability if a supplier fails to meet its warranty obligations if a defect is traced to our instrument or if we cannot correct errors reported during the warranty period. If our contractual limitations are unenforceable in a particular jurisdiction, a successful claim could require us to pay substantial damages.
We may be held liable for the release of hazardous materials, which could result in extensive clean up costs or otherwise harm our business.
Our products and development programs involve the controlled use of hazardous and biohazardous materials, including chemicals, infectious disease agents and various radioactive compounds. Although we believe that our safety procedures for handling and disposing of such materials comply with the standards prescribed by applicable local, state and federal regulations, we cannot eliminate the risk of accidental contamination or injury from these materials. In the event of such an accident, we could be held liable for any fines, penalties, remediation costs or other damages that result. Our liability for the release of hazardous materials could exceed our resources, which could lead to a shutdown of our operations. In addition, we may incur substantial costs to comply with environmental regulations if we choose to expand our manufacturing capacity.
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 June 30, 2005, approximately $11.4 million was outstanding on these lines of credit and other borrowings with a weighted average interest rate of 8.92%. We also had approximately $4.6 million of cash and cash equivalents at June 30, 2005, the majority of which was invested in liquid interest bearing accounts. 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 $67 thousand based on our outstanding balances as of June 30, 2005. We had no interest rate hedge transactions in place on June 30, 2005.
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 June 30, 2005.
We have a wholly-owned subsidiary in Switzerland which uses the Swiss Franc as its functional currency. In addition, due to borrowings by our United States entity from our Swiss subsidiary, we will be required to report changes in the translated amount of this intercompany borrowing through earnings. 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 results of operations for the most recent 12 months, 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 $1.3 million.
(a) 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 end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our chief executive officer and our 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 SECs 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 required disclosure.
(b) Changes in Internal Control over Financial Reporting . There was no change in our internal control over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
At June 30, 2005, we did not meet the definition of accelerated filer, as defined by Rule 12b-2 of the Exchange Act and, therefore, we will not be required by the Sarbanes-Oxley Act of 2002 to include an assessment of our internal control over financial reporting and attestation from our independent registered public accounting firm in our Annual Report on Form 10-K for our fiscal year ending December 31, 2005.
From time to time, we may be involved in litigation relating to claims arising out of our operations. As of June 30, 2005, we were not party to any legal proceedings that are expected, individually or in the aggregate, to have a material effect on our business, financial condition or operating results.
Our 2005 annual meeting of stockholders (the 2005 Annual Meeting) was held on May 10, 2005 in Fort Collins, Colorado. Two proposals, as described in our Proxy Statement dated April 13, 2005, were voted on at the meeting. Following is a brief description of the matters voted upon and the results of the voting:
1. | Election of Directors: |
Nominee : | Number of Shares |
A. Barr Dolan |
For
Withheld |
42,144,052
1,165,330 |
Robert B. Grieve, Ph.D. |
For
Withheld |
32,716,213
10,593,169 |
John F. Sasen, Sr. |
For
Withheld |
41,931,276
1,378,106 |
Ratification of Directors: |
Appointee : | Number of Shares |
Elisabeth DeMarse |
For
Withheld |
37,446,419
5,862,963 |
Tina S. Nova, Ph.D. |
For
Withheld |
37,450,519
5,858,863 |
2. | Ratification of the Appointment of KPMG LLP as Heska's Independent Registered Public Accounting Firm. |
For
43,113,391 |
Against
165,965 |
Abstain
30,026 |
(a) Exhibits
Number | Notes | Description | |||
---|---|---|---|---|---|
10.1 | H |
Ninth Amendment to
Second Amended and Restated Credit and Security
Agreement between Registrant, Diamond Animal Health, Inc. and Wells Fargo Business Credit, Inc., dated May 10, 2005. |
|||
10.2 | H |
Tenth Amendment to
Second Amended and Restated Credit and Security
Agreement between Registrant, Diamond Animal Health, Inc. and Wells Fargo Business Credit, Inc., dated July 26, 2005. |
|||
10.3 | 1997 Employee Stock Purchase Plan of Registrant, as amended. | ||||
10.4 |
First Amendment to Net Lease
Agreement and Development Agreement
between Registrant and CCMRED 40, LLC, dated February 11, 2005. |
||||
10.5 |
Second Amendment to Net Lease
Agreement
between Registrant and CCMRED 40, LLC, dated July 14, 2005. |
||||
31.1 | Certification Under Section 302 of Sarbanes-Oxley Act. | ||||
31.2 | Certification Under Section 302 of Sarbanes-Oxley Act. | ||||
32.1 | Certification Under Section 906 of Sarbanes-Oxley Act. |
Notes
H
Confidential treatment has been requested with respect to certain portions of this agreement.
Pursuant to the requirements 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.
HESKA CORPORATION
Date: August 15, 2005 |
By
/s/ Robert B. Grieve
ROBERT B. GRIEVE Chairman of the Board and Chief Executive Officer (on behalf of the Registrant and as the Registrants Principal Executive Officer) |
Date: August 15, 2005 |
By
/s/ Jason A. Napolitano
JASON A. NAPOLITANO Executive Vice President and Chief Financial Officer (on behalf of the Registrant and as the Registrants Principal Financial Officer) |
Exhibit 10.1
[***] 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.
This Amendment, dated as of May 10, 2005, 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 Business Credit, Inc., a Minnesota corporation (the Lender).
Recitals
The Borrowers and the Lender are parties to a Second Amended and Restated Credit and Security Agreement dated as of June 14, 2000 (as amended to date and 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:
Liquidity means the sum of Cash plus Excess Collateral Base less Past Due Payables. |
Past Due Payables means accounts payable (other than accounts payable to Affiliates) that are 60 days or more past due. |
2. Accounts Payable . The last two sentences of Section 6.5 of the Credit Agreement are deleted and replaced by the following sentence:
From May 31, 2005 through September 30, 2005, the Borrowers on a consolidated basis will at all times maintain Past Due Payables at not more than $750,000; and at all other times, no Borrower will have any Past Due Payables. |
3. Minimum Capital . Section 6.12 of the Credit Agreement is hereby amended to read in its entirety as follows:
[***] 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.
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: |
Date
April 30, 2005 May 31, 2005 June 30, 2005 July 31, 2005 August 31, 2005 September 30, 2005 October 31, 2005 November 30, 2005 December 31, 2005 January 31, 2006 February 28, 2006 March 31, 2006 April 30, 2006 May 31, 2006 |
Minimum Capital
[***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] |
4. Indebtedness to Subsidiary . Section 7.2(c) of the Credit Agreement is hereby amended to read in its entirety as follows:
(c) indebtedness of such Borrower (i) relating to liens of such Borrower permitted in accordance with Section 7.1, (ii) arising out of guaranties of such Borrower permitted under Section 7.3, (iii) arising for such Borrower as a result of an investment in or loan to such Borrower by another Borrower in accordance with Section 7.4, or (iv) in the case of Heska, at all times on or before December 31, 2005, indebtedness to Heska Holding AG in an amount not to exceed $1,500,000, and thereafter, zero. |
5. Compliance Certificate . Exhibit G to the Credit Agreement is replaced in its entirety by Exhibit A to this Amendment.
6. 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.
7. Waiver of Defaults . The Borrowers are in default of (a) Section 6.5 of the Credit Agreement for all periods from January 31, 2005 through April 30, 2005, (b) Section 7.2 of the Credit Agreement as of February 28, 2005, as a result of Heskas incurrence of approximately $900,000 of indebtedness to Heska Holding AG (collectively, the Existing Defaults). Upon the terms and subject to the conditions set forth in this Amendment, the Lender hereby waives the Existing Defaults. This waiver shall be effective only in this specific instance and for the specific purpose for which it is given, and this waiver shall not entitle the Borrowers to any other or further waiver in any similar or other circumstances.
8. Conditions Precedent . This Amendment, including the waiver set forth in paragraph 7, shall be effective when the Lender shall have received an executed original hereof.
9. 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. |
10. No Other Waiver . Except as set forth in paragraph 7, 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.
11. 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.
12. 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
[***] 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.
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.
13. 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 Jason Napolitano Its Chief Financial Officer WELLS FARGO BUSINESS CREDIT, INC. By /s/ [***] [***], Vice President |
DIAMOND ANIMAL HEALTH, INC.
By /s/ JASON NAPOLITANO Jason Napolitano Its Chief Financial Officer |
Exhibit A to Ninth Amendment
To:
Wells Fargo Business Credit, Inc.
Date:
, 20
Subject: Heska Corporation
Financial Statements
In accordance with our Second Amended and Restated Credit and Security Agreement dated as of June 14, 2000 (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):
[ ] |
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 [ ] satisfies [ ] does not satisfy the requirement that the Borrowers have no more than $750,000 in Past Due Payables during the period from May 31, 2005 through September 30, 2005, and no Past Due Payables at all other times. |
[***] 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.
2. Spread . Pursuant to Section 2.7 of the Credit Agreement, as of the Reporting Date, Heskas Permanent Capital was, on a consolidated basis, $_________________, which [ ] exceeds [ ] does not exceed the corresponding Minimum Capital covenant (set forth in paragraph 3 below) by at least $1,000,000. |
3. Minimum Capital . Pursuant to Section 6.12 of the Credit Agreement, as of the Reporting Date, Heskas Capital was, on a consolidated basis, $_________________, which [ ] satisfies [ ] does not satisfy the requirement that such amount be not less than $_____________ on the Reporting Date, as set forth in the table below: |
Date
April 30, 2005 May 31, 2005 June 30, 2005 July 31, 2005 August 31, 2005 September 30, 2005 October 31, 2005 November 30, 2005 December 31, 2005 January 31, 2006 February 28, 2006 March 31, 2006 April 30, 2006 May 31, 2006 |
Minimum Capital
[***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] [***] |
4. Minimum Net Income . Pursuant to Section 6.13 of the Credit Agreement, as of the Reporting Date, Heskas Net Income was, on a consolidated basis, $_________________, which [ ] satisfies [ ] does not satisfy the requirement that such amount be no less than $______________ on the Reporting Date, as set forth in the table below: |
Period
Twelve months ended December 31, 2004 Three months ending March 31, 2005 Six months ending June 30, 2005 Nine months ending September 30, 2005 Twelve months ending December 31, 2005 Fifteen months ending March 31, 2006 |
Minimum Net Income
[***] [***] [***] [***] [***] [***] |
5. Minimum Liquidity . Pursuant to Section 6.14 of the Credit Agreement, as of the Reporting Date, Heskas Liquidity was, on a consolidated basis, $_________________, which [ ] satisfies [ ] does not satisfy the requirement that such amount be no less than $1,500,000 on the Reporting Date. |
[***] 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.
6. Minimum Individual Book Net Worth . Pursuant to Section 6.15 of the Credit Agreement, as of the Reporting Date, Heskas Book Net Worth was $_________________ and Diamonds Book Net Worth was $_________________, which [ ] satisfies [ ] does not satisfy the requirement that such amounts be no less than zero on the Reporting Date. |
7. Capital Expenditures . Pursuant to Section 7.10 of the Credit Agreement, as of the Reporting Date, Heskas Capital Expenditures were, in the aggregate and on a consolidated basis, $_______________ which [ ] satisfies [ ] 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: |
Period
Twelve months ended December 31, 2004 Three months ending March 31, 2005 Twelve months ending December 31, 2005 Four months ending April 30, 2006 Five months ending May 31, 2006 |
Maximum Capital Expenditures
[***] [***] [***] [***] [***] |
Attached hereto are all relevant facts in reasonable detail to evidence, and the computations of the financial covenants referred to above. These computations were made in accordance with GAAP.
HESKA CORPORATION
By Its |
Exhibit 10.2
[***] 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.
This Amendment, dated as of July 26, 2005, 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 Business Credit, Inc., a Minnesota corporation (the Lender).
Recitals
The Borrowers and the Lender are parties to a Second Amended and Restated Credit and Security Agreement dated as of June 14, 2000 (as amended to date and 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 means any of the following received by a Borrower on or after June 30, 2005: (a) net cash proceeds from issuance of Heska common stock, including common stock issued under an employee stock purchase plan or as a result of the exercise of options or warrants, (b) net cash proceeds from issuance of Heska preferred stock, subject to approval by Wells Fargo with respect to payment terms of such preferred stock, (c) net cash proceeds from a Borrowers issuance of debt instruments subject to a subordination agreement acceptable to Wells Fargo in its sole discretion, and (d) net cash proceeds from the licensing or sale of Non-Core IP. |
Advance means a Revolving Advance, an Equipment Advance, or a Term Loan B Advance. |
Book Net Worth of a Borrower means the aggregate of the common and preferred stockholders equity in such Borrower, determined in accordance with GAAP, but excluding (a) the non-cash impact of expensing options, restricted stock or other stock-based compensation under APB 25, SFAS 123, SFAS 123R and/or SFAS 148, and |
[***] 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.
(b) the non-cash impact of income or expense relating to deferred tax assets and liabilities caused by the use of net loss carry-forwards for Heska AG, in each case after December 31, 2004. |
Borrowing Base for a Borrower means, at any time the lesser of: |
(a) the Maximum Line; or |
(b) subject to change from time to time in the Lender's sole discretion: |
(i) 85% of Eligible Accounts of such Borrower, plus |
(ii) the lesser of (A) the sum of (1) Eligible Inventory of such Borrower consisting of raw materials multiplied by the Raw Materials Advance Rate plus (2) 55% of Eligible Inventory of such Borrower consisting of finished goods, or (B) the difference of (1) $4,000,000 less (2) the aggregate amount of Advances made to all Borrowers other than such Borrower in reliance on Eligible Inventory. |
Borrower means Heska or Diamond, and Borrowers means Heska and Diamond. |
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 Borrowers balance sheet, whether financed or unfinanced, but excluding expenditures to purchase [***]. |
Diamond Equipment Note means the promissory note payable to the order of the Lender in substantially the form of Exhibit B to the Tenth Amendment, and any note or notes issued in substitution therefor, as the same may hereafter be amended, supplemented or restated from time to time. |
Eligible Equipment of a Borrower means Equipment owned by such Borrower and designated by the Lender as eligible from time to time in its sole discretion but excluding any Equipment having any of the following characteristics: |
(i) Equipment that is subject to any Lien other than in favor of the Lender; |
(ii) Equipment that has not been delivered to the Premises; |
(iii) Equipment in which the Lender does not hold a first priority security interest; |
(iv) Equipment that is obsolete or not currently saleable; |
[***] 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.
(v) Equipment that is not covered by standard all risk insurance for an amount equal to its forced liquidation value; |
(vi) Equipment that requires proprietary software in order to operate in the manner in which it is intended when such software is not freely assignable to the Lender or any potential purchaser of such Equipment; |
(vii) Equipment consisting of computer hardware, software, tooling, or molds; |
(viii) Equipment consisting of [***]; and |
(ix) Equipment otherwise deemed unacceptable to Lender in its sole discretion. |
Equipment Advance has the meaning given in Section 2.3. |
Equipment Note means the Heska Equipment Note or the Diamond Equipment Note. |
Guarantors shall mean Diamond and any other Person who executes a guaranty of all or any part of the Obligations for the benefit of the Lender. |
Heska Equipment Note means the promissory note payable to the order of the Lender in substantially the form of Exhibit A to the Tenth Amendment, and any note or notes issued in substitution therefor, as the same may hereafter be amended, supplemented or restated from time to time. |
Inventory of a Borrower means all of such Borrowers inventory, as such term is defined in the UCC, whether now owned or hereafter acquired, whether consisting of whole goods, spare parts or components, supplies or materials, whether acquired, held or furnished for sale, for lease or under service contracts or for manufacture or processing, and wherever located, and including, without limitation, all [***]. |
Liquidity means the sum of Cash (excluding Cash located in accounts outside the United States or owned by any entity not incorporated in the United States) plus Excess Collateral Base less Past Due Payables. |
Maturity Date means June 30, 2009. |
Net Income for a Borrower means, for any period, after-tax net income from continuing operations (that is, not including extraordinary items, or gains or losses from unusual items or discontinued operations), in each case for such Borrower for such period, as determined in accordance with GAAP, but excluding (a) the non-cash impact of expensing options, restricted stock or other stock-based compensation under APB 25, SFAS 123, SFAS 123R and/or SFAS 148, and (b) the non-cash impact of income or expense relating to deferred tax assets and liabilities caused by the use of net loss carry-forwards for Heska AG. |
[***] 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.
Non-Core IP means intellectual property (including, without limitation, any patent, trademark, trade name, or copyrighted material) of any Borrower that is unrelated to the Borrowers veterinary product sales and the sale of which would not have a material adverse effect on any Borrower. |
Note means a Revolving Note, an Equipment Note, or the Term Loan B Note, and Notes means the Revolving Notes, the Equipment Notes, and the Term Loan B Note. |
Past Due Payables means accounts payable (other than accounts payable to Affiliates) that are 60 days or more past due; provided, however, that for purposes of calculating Past Due Payables as of June 30, 2005, accounts payable to Boule Medical AB shall be excluded from such calculation. |
Prepayment Factor means three percent (3%) at all times unless one of the following conditions applies: (a) if Heska achieves, on a consolidated basis, Net Income greater than $0 for its fiscal year ending December 31, 2006, Prepayment Factor shall mean two percent (2%) from July 1, 2006 through and including June 30, 2007; and (b) if Heska achieves, on a consolidated basis, Net Income greater than $0 for its fiscal year ending December 31, 2007, Prepayment Factor shall mean two percent (2%) from July 1, 2007 through and including June 30, 2008; and (c) if Heska achieves, on a consolidated basis, Net Income greater than $0 for its fiscal year ending December 31, 2008, Prepayment Factor shall mean one percent (1%) from July 1, 2008 through and including June 30, 2009. |
Real Property Maturity Date means May 31, 2006; provided, however, that upon notice to the Borrower that the Lender has received a real property evaluation with respect to the Farm Property and the Factory Property, and that such evaluation is acceptable to the Lender in its sole discretion, Real Property Maturity Date shall mean June 30, 2009. |
[***]. |
Revolving Note means the Heska Revolving Note or the Diamond Revolving Note. |
Tenth Amendment means the Tenth Amendment to Second Amended and Restated Credit Agreement, dated as of July 26, 2005, by and among the Borrowers and the Lender. |
Term Advances means the Equipment Advance and the Term Loan B Advances. |
2. Deletion of Obsolete Definitions . Section 1.1 of the Credit Agreement is further amended by deleting the definitions Expanded Heska Borrowing Base, Limited
[***] 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 Borrowing Base, Permanent Capital, Term Loan A Advance and Term Loan A Note.
3. Replacement of Term Loan A Advance and Term Loan A Note with Equipment Advance and Equipment Note . Sections 2.12, 2.14, and 6.10(b) are amended by replacing each occurrence of the terms Term Loan A Advance and Term Loan A Note with Equipment Advance and Equipment Note, respectively.
4. [***] Eligibility . The definition of Eligible Inventory found in Section 1.1 of the Credit Agreement is amended by deleting the word and from the end of clause (viii), changing the number on clause (ix) to (x)", and inserting a new clause (ix), which shall read in its entirety as follows:
(ix) all [***] that has been delivered to, or is in transit to, a customer, and all [***] that is not substantially the same in functionality and quality as other Inventory carried for sale by the Borrower; and |
5. Revolving Advances . Section 2.2 of the Credit Agreement is hereby amended by deleting the initial paragraph thereof in its entirety and replacing such initial paragraph with the following:
The Lender agrees, on the terms and subject to the conditions herein set forth, to make advances (the Revolving Advances) to any Borrower from time to time from the date the Inactive Period ends (the Funding Date) to the Termination Date, on the terms and subject to the conditions herein set forth. The Lender shall have no obligation to make a Revolving Advance to a Borrower if, after giving effect to such requested Revolving Advance, (a) the sum of the outstanding and unpaid Revolving Advances to such Borrower exceed such Borrowers Borrowing Base, or (b) the sum of the outstanding and unpaid Revolving Advances would exceed the Aggregate Borrowing Base. Each Borrowers obligation to pay the Revolving Advances shall be evidenced by such Borrowers Revolving Note and shall be secured by the Collateral as provided in Article III and the Mortgaged Property as defined in each of the Factory Mortgage and the Farm Mortgage. Within the limits set forth in this Section 2.2, each Borrower may borrow, prepay pursuant to Section 2.12 and reborrow. Each Borrower agrees to comply with the following procedures in requesting Revolving Advances under this Section 2.2: |
6. Equipment Advances and Payment . Sections 2.3 and 2.4 of the Credit Agreement are amended to read in their entireties as follows:
Section 2.3 Equipment Advances . |
(a) The Lender agrees, subject to the terms and conditions of this Agreement, on the date all of the conditions precedent to the Tenth Amendment have been fulfilled, to make an advance to Diamond in the amount of $2,000,000 and to make an advance to Heska in the amount of $500,000 (each an Equipment Advance). Each Borrowers obligation to pay the Equipment Advances shall be evidenced by such Borrowers Equipment Note and shall be secured by the |
[***] 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.
Collateral as provided in Article III and the Mortgaged Property as defined in each of the Factory Mortgage and the Farm Mortgage. |
Section 2.4 Payment of Equipment Note . The outstanding principal balance of each Equipment Note shall be due and payable as follows: |
(a) On February 1, 2006, and the first day of each month thereafter, Diamond shall pay monthly installments of $37,037.04; and |
(b) On February 1, 2006, and the first day of each month thereafter, Heska shall pay monthly installments of $9,259.26; and |
(c) On the Maturity Date, the entire unpaid principal balance of each Equipment Note, and all unpaid interest accrued thereon, shall in any event be due and payable. |
7. Payment of Term Loan B Note . Section 2.6(b) of the Credit Agreement is amended to read in its entirety as follows:
(b) On the Real Property Maturity Date, the entire unpaid principal balance of the Term Loan B Note, and all unpaid interest accrued thereon, shall in any event be due and payable. |
8. Spread . Section 2.7 of the Credit Agreement is amended to read in 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 Borrower delivers to the Lender its audited financial statements for the prior fiscal year; provided, however, that so long as no Default Period then exists, if Heska raises Additional Capital of not less than [***], the Spread shall be decreased by 0.75% below the otherwise-applicable rate, effective as of the first day of the month following the month in which such Additional Capital is raised; and provided further that if Heska does not raise at least [***] of Additional Capital on or before January 1, 2006, the Spread shall be increased by 0.25% above the otherwise-applicable rate, effective as of January 1, 2006; and provided further that if Heska does not raise at least [***] of Additional Capital on or before July 1, 2006, the Spread shall be increased by 0.75% (including, and not in addition to, the 0.25% increase described in the proviso above) above the otherwise-applicable rate, effective as of July 1, 2006; and provided further that in no case shall any decrease in the Spread occur during a Default Period: |
[***] 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.
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% |
9. Spread . Section 2.8(b) of the Credit Agreement is amended to read in its entirety as follows:
(b) Equipment Note. Except as set forth in Sections 2.8(e), 2.8(f) and 2.8(g), the outstanding principal balance of the Equipment Note shall bear interest at the Term Floating Rate. |
10. Termination and Prepayment Fees . Section 2.13 is amended to read in its entirety as follows:
Section 2.13 Termination, Line Reduction and Prepayment Fees; Waiver of Termination, Prepayment and Line Reduction Fees . |
(a) Termination and Line Reduction Fees. If the Credit Facility is terminated for any reason as of a date other than the Maturity Date, or Heska reduces the Maximum Line, the Borrowers shall pay the Lender a fee in an amount equal to the Prepayment Factor multiplied by the Maximum Line (or the reduction, as the case may be). |
(b) Prepayment Fees. If the Equipment Note is prepaid for any reason except in accordance with Section 2.4, the Borrowers shall pay to the Lender a fee in an amount equal to the Prepayment Factor multiplied by the amount prepaid. If the Term Loan B Note is prepaid for any reason except in accordance with Section 2.6, the Borrowers shall pay to the Lender a fee in an amount equal to one percent (1%) of the amount prepaid. |
(c) Waiver of Termination and Line Reduction Fees. The Borrowers will not be required to pay the termination or line reduction fees otherwise due under this Section 2.13 if such termination or line reduction is made (i) because of refinancing of the Borrowers by Wells Fargo Bank, National Association, (ii) within 60 days after any demand for payment upon any Borrower in accordance with Section 2.11, or (iii) within 60 days after any Discretionary Reduction Date. |
11. Minimum Capital . Sections 6.12 through 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 [***]: |
[***] 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
June 30, 2005 July 31, 2005 August 31, 2005 September 30, 2005 October 31, 2005 November 30, 2005 December 31, 2005 January 31, 2006 and the last day of each month thereafter |
Minimum Capital
[***] [***] [***] [***] [***] [***] [***] [***] |
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
Six months ending June 30, 2005 Nine months ending September 30, 2005 Twelve months ending December 31, 2005 |
Minimum Net Income
[***] [***] [***] |
Section 6.14 Minimum Liquidity . Heska will maintain, on a consolidated basis, as of the last day of each month, its Liquidity at an amount not less than $1,500,000. |
Section 6.15 Minimum Individual Book Net Worth . Each Borrower shall at all times maintain its Book Net Worth, calculated without regard to any Subsidiary or other Affiliate, as shown on the Total stockholders equity line for each Borrower in Exhibit D, at an amount greater than $0. |
Section 6.16 New Covenants . On or before November 30, 2005, the Borrowers and the Lender shall agree on new covenant levels for Sections 6.12, 6.13, 6.14, 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. |
12. Contributions . Sections 7.4(a)(iv) and (v) of the Credit Agreement are amended in their entireties to read as follows:
(iv) unless a Default Period exists or would exist immediately after or as a result of any such loan, advance or capital contribution, loans, advances or capital contributions by Heska to any Subsidiary that is also a Borrower; |
(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, 2005, by Heska to any Subsidiary that is not a Borrower; provided, however, that (A) both before and after such advance or contribution Heskas |
[***] 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.
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 fiscal year ending December 31, 2005; |
13. Dividends . Section 7.5 of the Credit Agreement is hereby amended in its entirety to read as follows:
Section 7.5 Dividends . Such Borrower will not declare or pay any dividends (other than dividends payable solely in stock of such Borrower) on any class of its stock or make any payment on account of the purchase, redemption or other retirement of any shares of such stock or make any distribution in respect thereof, either directly or indirectly; provided, however, that so long as no Default Period then exists or would occur immediately following or as a result of such action, (A) any Borrower that is a Subsidiary of Heska may pay dividends to Heska so long as such Subsidiarys Tangible Net Worth both before and after such dividend equals or exceeds $100,000; and (B) Heska may repurchase capital stock of Heska held by any employee provided Heska is required to do so pursuant to any employee equity subscription agreement, stock ownership plan or stock option agreement in effect from time to time; and provided further that the aggregate price paid for all such repurchased, redeemed, acquired or retired capital shall not exceed $100,000 during any fiscal year. Notwithstanding the foregoing, the exercise of stock options for the purchase of Heskas capital stock shall not, by means of any deemed repurchase of shares as a result of a cashless exercise or otherwise, cause a breach of this Section 7.5. |
14. 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 any period described below in excess of the amount set forth opposite such period: |
Period
Six months ending June 30, 2005 Seven months ending July 31, 2005 Eight months ending August 31, 2005 Nine months ending September 30, 2005 Ten months ending October 31, 2005 Eleven months ending November 30, 2005 Twelve months ending December 31, 2005 |
Maximum Capital
Expenditures [***] [***] [***] [***] [***] [***] [***] |
15. Compliance Certificate . Exhibit G to the Credit Agreement is replaced in its entirety by Exhibit C to this Amendment.
16. Notice Addresses . In accordance with Section 9.5 of the Credit Agreement, the following shall serve as notice addresses for all purposes for the Borrowers and Lender:
[***] 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 the Borrowers:
Heska Corporation 3760 Rocky Mountain Avenue Loveland, Colorado 80538 Telecopier: [***] Attention: Chief Financial Officer Diamond Animal Health, Inc. c/o Heska Corporation 3760 Rocky Mountain Avenue Loveland, Colorado 80538 Telecopier: [***] Attention: Chief Financial Officer If to the Lender: Wells Fargo Business Credit, Inc. MAC C7300-210 1740 Broadway Denver, Colorado 80202 Telecopier: [***] Attention: [***] |
17. 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.
18. Waiver of Defaults . The Borrowers are in default of Section 6.5 of the Credit Agreement as a result of Heskas failure to timely pay franchise taxes to the State of Delaware and of Section 5.1 of the Credit Agreement as a result of Heskas failure to maintain its corporate good standing with the State of Delaware (collectively, the Existing Defaults). Upon the terms and subject to the conditions set forth in this Amendment, the Lender hereby waives the Existing Defaults. This waiver shall be effective only in this specific instance and for the specific purpose for which it is given, and this waiver shall not entitle the Borrowers to any other or further waiver in any similar or other circumstances.
19. Consent to Refinancing of Real Property . So long as no Default Period then exists, the Lender consents to the following:
(a) Diamond's grant of a security interest in the Farm Mortgaged Property to secure existing indebtedness payable to Agri Laboratories, Ltd. or new indebtedness for borrowed money of not less than $250,000 nor more than $750,000, in each case on terms acceptable to the Lender in its reasonable discretion, but in no event on terms less favorable to the Borrowers than the terms of the Term Loan B Note. Upon funding of |
such new indebtedness or the grant of such security interest to Agri Laboratories, Ltd., the Lender will release its security interst in the Farm Mortgaged Property. |
(b) Diamonds incurrence of indebtedness not less than $1,000,000 nor more than $3,000,000, and grant of a security interest in the Factory Mortgaged Property to secure such indebtedness, each in connection with a refinancing of the Term Loan B Note, provided that (a) the proceeds of such indebtedness are sufficient to repay, and in fact are used to repay, the Term Loan B Note in its entirety, with the balance of such proceeds (if any) being deposited in Diamonds Collateral Account for repayment of Revolving Advances, and (b) the terms of such indebtedness are acceptable to the Lender in its reasonable discretion, but in no event on terms less favorable to the Borrowers than the terms of the Term Loan B Note. In the case of such a refinancing, the Lender agrees that it will release its security interest in the Factory Mortgaged Property upon receipt of the proceeds of such permitted refinancing. This consent shall be effective only in this specific instance and for the specific purpose for which it is given, and this consent shall not entitle the Borrowers to any other or further consent in any similar or other circumstances. All previous consents with respect to refinancing of the Farm Mortgage or the Factory Mortgage are withdrawn and replaced with the consents described in this paragraph 19. |
20. Conditions Precedent . This Amendment, including the waiver set forth in paragraph 18 and the consents set forth in paragraph 19, 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 Equipment Notes in the form set forth in Exhibits A and B to this Amendment. |
(b) Amendments to the Farm Mortgage and the Factory Mortgage to reflect the Equipment Notes. |
(c) Appraisals of the Eligible Equipment. |
(d) A Patent and Trademark Security Agreement, properly executed by Diamond. |
(e) Evidence that Heska is in good standing with the State of Delaware and has paid all corporate taxes and fees. |
(f) A landlord disclaimer for the Borrowers office in Loveland, Colorado. |
(g) Such other matters as the Lender may require. |
21. 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. |
22. No Other Waiver . Except as set forth in paragraph 18, 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.
23. 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.
24. 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
[***] 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.
apply the proceeds of any loan, for the purpose of paying any such fees, disbursements, costs and expenses.
25. 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 Jason Napolitano Its Chief Financial Officer WELLS FARGO BUSINESS CREDIT, INC. By /s/ [***] [***], Vice President |
DIAMOND ANIMAL HEALTH, INC.
By /s/ JASON NAPOLITANO Jason Napolitano Its Chief Financial Officer |
Exhibit A to Tenth Amendment
$500,000 |
July 26, 2005
Denver, Colorado |
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 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 Five Hundred Thousand Dollars ($500,000) or the aggregate unpaid principal amount of all Equipment 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 Second Amended and Restated Credit and Security Agreement dated as of June 14, 2000 (as the same may hereafter be amended, supplemented or restated from time to time, the Credit Agreement) by and between the Lender, the Borrower, and Diamond Animal Health, Inc., an Iowa corporation. 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 the Heska Equipment 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 /s/ JASON NAPOLITANO Jason Napolitano Its Chief Financial Officer |
Exhibit B to Tenth Amendment
$2,000,000 |
July 26, 2005
Denver, Colorado |
For value received, the undersigned, Diamond Animal Health, Inc., an Iowa corporation (Diamond) and Heska Corporation, a Delaware corporation (collectively, the Borrower), hereby promise, jointly and severally, 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 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 Two Million Dollars ($2,000,000) or the aggregate unpaid principal amount of all Equipment 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 Second Amended and Restated Credit and Security Agreement dated as of June 14, 2000 (as the same may hereafter be amended, supplemented or restated from time to time, the Credit Agreement) by and between 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 the Diamond Equipment 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.
By /s/ JASON NAPOLITANO Jason Napolitano Its Chief Financial Officer HESKA CORPORATION By /s/ JASON NAPOLITANO Jason Napolitano Its Chief Financial Officer |
Exhibit C to Tenth Amendment
To:
Wells Fargo Business Credit, Inc.
Date:
, 20
Subject: Heska Corporation
Financial Statements
In accordance with our Second Amended and Restated Credit and Security Agreement dated as of June 14, 2000 (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):
[ ] |
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 [ ] satisfies [ ] does not satisfy the requirement that the Borrowers have no more than $750,000 in Past Due Payables during the period from May 31, 2005 through September 30, 2005, and no Past Due Payables at all other times. |
[***] 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.
2. Spread . Pursuant to Section 2.7 of the Credit Agreement, as of the Reporting Date, Heskas prior-fiscal-year Net Income was, on a consolidated basis, $_________________, which determines a base Spread of _____% pursuant to the table below. Heska [ ] has [ ] has not raised at least [***] in Additional Capital as of the Reporting Date, leading to an [ ] increase [ ] 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, Heskas Capital was, on a consolidated basis, $_____________, which [ ] satisfies [ ] does not satisfy the requirement that such amount be not less than $________________on the Reporting Date, as set forth in the table below: |
Date
June 30, 2005 July 31, 2005 August 31, 2005 September 30, 2005 October 31, 2005 November 30, 2005 December 31, 2005 January 31, 2006 and the last day of each month thereafter |
Minimum Capital
[***] [***] [***] [***] [***] [***] [***] [***] |
4. Minimum Net Income . Pursuant to Section 6.13 of the Credit Agreement, as of the Reporting Date, Heskas Net Income was, on a consolidated basis, $______________, which [ ] satisfies [ ] does not satisfy the requirement that such amount be no less than $_________________on the Reporting Date, as set forth in the table below: |
Period
Six months ending June 30, 2005 Nine months ending September 30, 2005 Twelve months ending December 31, 2005 |
Minimum Net Income
[***] [***] [***] |
5. Minimum Liquidity . Pursuant to Section 6.14 of the Credit Agreement, as of the Reporting Date, Heskas Liquidity was, on a consolidated basis, $________________, which [ ] satisfies [ ] does not satisfy the requirement that such amount be no less than $1,500,000 on the Reporting Date. |
[***] 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.
6. Minimum Individual Book Net Worth . Pursuant to Section 6.15 of the Credit Agreement, as of the Reporting Date, Heskas Book Net Worth was $________________ and Diamonds Book Net Worth was $________________, which [ ] satisfies [ ] 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, Heskas fiscal year-to-date aggregate contributions to non-Borrower Subsidiaries was $_______________, which [ ] satisfies [ ] 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, as of the Reporting Date, Heskas Capital Expenditures were, in the aggregate and on a consolidated basis, $______________ which [ ] satisfies [ ] 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: |
Period
Six months ending June 30, 2005 Seven months ending July 31, 2005 Eight months ending August 31, 2005 Nine months ending September 30, 2005 Ten months ending October 31, 2005 Eleven months ending November 30, 2005 Twelve months ending December 31, 2005 |
Maximum Capital
Expenditures [***] [***] [***] [***] [***] [***] [***] |
Attached hereto are all relevant facts in reasonable detail to evidence, and the computations of the financial covenants referred to above. These computations were made in accordance with GAAP.
HESKA CORPORATION
By Its |
Exhibit 10.3
AS
AMENDED, EFFECTIVE JULY 1, 2005
Page | |||||
---|---|---|---|---|---|
SECTION 1. |
PURPOSE OF THE PLAN | 1 | |||
SECTION 2. |
ADMINISTRATION OF THE PLAN | 1 | |||
(a) Committee Composition | 1 | ||||
(b) Committee Responsibilities | 1 | ||||
SECTION 3. |
ENROLLMENT AND PARTICIPATION | 1 | |||
(a) Offering Periods | 1 | ||||
(b) Enrollment | 1 | ||||
(c) Duration of Participation | 1 | ||||
SECTION 4. |
EMPLOYEE CONTRIBUTIONS | 2 | |||
(a) Frequency of Payroll Deductions | 2 | ||||
(b) Amount of Payroll Deductions | 2 | ||||
(c) Changing Withholding Rate | 2 | ||||
(d) Discontinuing Payroll Deductions | 2 | ||||
(e) Limit on Number of Elections | 2 | ||||
SECTION 5. |
WITHDRAWAL FROM THE PLAN | 3 | |||
(a) Withdrawal | 3 | ||||
(b) Re-Enrollment After Withdrawal | 3 | ||||
SECTION 6. |
CHANGE IN EMPLOYMENT STATUS | 3 | |||
(a) Termination of Employment | 3 | ||||
(b) Leave of Absence | 3 | ||||
(c) Death | 3 | ||||
SECTION 7. |
PLAN ACCOUNTS AND PURCHASE OF SHARES | 3 | |||
(a) Plan Accounts | 3 | ||||
(b) Purchase Price | 3 | ||||
(c) Number of Shares Purchased | 4 | ||||
(d) Available Shares Insufficient | 4 | ||||
(e) Issuance of Stock | 4 | ||||
(f) Unused Cash Balances | 4 |
SECTION 8. | LIMITATIONS OF STOCK OWNERSHIP | 4 | |||
(a) Five Percent Limit | 4 | ||||
(b) $25,000 Limit | 5 | ||||
SECTION 9. |
RIGHTS NOT TRANSFERABLE | 5 | |||
SECTION 10. |
NO RIGHTS AS AN EMPLOYEE | 5 | |||
SECTION 11. |
NO RIGHTS AS A STOCKHOLDER | 5 | |||
SECTION 12. |
STOCK OFFERED UNDER THE PLAN | 5 | |||
(a) Authorized Shares | 5 | ||||
(b) Anti-Dilution Adjustments | 6 | ||||
(c) Reorganizations | 6 | ||||
SECTION 13. |
AMENDMENT OR DISCONTINUANCE | 6 | |||
SECTION 14. |
DEFINITIONS | 6 | |||
(a) Board | 6 | ||||
(b) Change in Control | 6 | ||||
(c) Code | 7 | ||||
(d) Committee | 7 | ||||
(e) Company | 7 | ||||
(f) Compensation | 7 | ||||
(g) Eligible Employee | 7 | ||||
(h) Exhange Act | 7 | ||||
(i) Fair Market Value | 7 | ||||
(j) Offering Period | 8 | ||||
(k) Participant | 8 | ||||
(l) Participating Company | 8 | ||||
(m) Plan | 8 | ||||
(n) Plan Account | 8 | ||||
(o) Purchase Price | 8 | ||||
(p) Stock | 8 | ||||
(q) Subsidiary | 8 | ||||
SECTION 15. |
EXECUTION | 8 |
The Plan was adopted by the Board on April 23, 1997. The purpose of the Plan is to provide Eligible Employees with an opportunity to increase their proprietary interest in the success of the Company by purchasing Stock from the Company on favorable terms and to pay for such purchases through payroll deductions. The Plan is intended to qualify under section 423 of the Code.
The Plan was amended and restated on May 16, 2002 and February 6, 2004. On February 24, 2005, the Plan was further amended to eliminate the look-back provision effective July 1, 2005.
(a) Committee Composition . The Plan shall be administered by the Committee. The Committee shall consist exclusively of one or more directors of the Company, who shall be appointed by the Board.
(b) Committee Responsibilities . The Committee shall interpret the Plan and make all other policy decisions relating to the operation of the Plan. The Committee may adopt such rules, guidelines and forms as it deems appropriate to implement the Plan. The Committees determinations under the Plan shall be final and binding on all persons.
(a) Offering Periods . While the Plan is in effect, two Offering Periods shall commence in each calendar year. Beginning on July 1, 2005, the Offering Periods shall consist of the six-month periods commencing on each January 1 and July 1.
(b) Enrollment . Any individual who, on the day preceding the first day of an Offering Period, qualifies as an Eligible Employee may elect to become a Participant in the Plan for such Offering Period by executing the enrollment form prescribed for this purpose by the Committee. The enrollment form shall be filed with the Company at the prescribed location not later than 10 days prior to the commencement of such Offering Period.
(c) Duration of Participation . Once enrolled in the Plan, a Participant shall continue to participate in the Plan and shall automatically be re-enrolled in subsequent Offering Periods until he or she ceases to be an Eligible Employee, withdraws from the Plan under Section 5(a) or reaches the end of the Offering Period in which his or her employee contributions were discontinued under Section 4(b), 4(d) or 8(b). A Participant who discontinued employee
contributions under Section 4(d) or withdrew from the Plan under Section 5(a) may again become a Participant, if he or she then is an Eligible Employee, by following the procedure described in Subsection (b) above. A Participant whose employee contributions were discontinued automatically under Section 4(b) or 8(b) shall automatically resume participation at the beginning of the earliest Offering Period ending in the next calendar year, if he or she then is an Eligible Employee.
(a) Frequency of Payroll Deductions . A Participant may purchase shares of Stock under the Plan solely by means of payroll deductions. Payroll deductions, as designated by the Participant pursuant to Subsection (b) below, shall occur on each payday during participation in the Plan.
(b) Amount of Payroll Deductions . An Eligible Employee shall designate on the enrollment form the portion of his or her Compensation that he or she elects to have withheld for the purchase of Stock. Such portion shall be a whole percentage of the Eligible Employees Compensation, but not less than 1% nor more than 10%. Any other provision of the Plan notwithstanding, no Participant shall have more than $21,250 withheld in the aggregate during all Offering Periods ending in the same calendar year. If a Participant is precluded by this Subsection (b) from making additional employee contributions, then his or her employee contributions shall automatically be discontinued and shall resume at the beginning of the earliest Offering Period ending in the next calendar year (if he or she then is an Eligible Employee).
(c) Changing Withholding Rate . If a Participant wishes to change the rate of payroll withholding, he or she may do so by filing a new enrollment form with the Company at the prescribed location at any time. The new withholding rate shall be effective as soon as reasonably practicable after such form has been received by the Company. The new withholding rate shall be a whole percentage of the Eligible Employees Compensation, but not less than 1% nor more than 10%.
(d) Discontinuing Payroll Deductions . If a Participant wishes to discontinue employee contributions entirely, he or she may do so by filing a new enrollment form with the Company at the prescribed location at any time. Payroll withholding shall cease as soon as reasonably practicable after such form has been received by the Company. (In addition, employee contributions may be discontinued automatically pursuant to Section 4(b) or 8(b).) A Participant who has discontinued employee contributions may resume such contributions by filing a new enrollment form with the Company at the prescribed location. Payroll withholding shall resume as soon as reasonably practicable after such form has been received by the Company.
(e) Limit on Number of Elections . No Participant shall make more than two elections under Subsection (c) or (d) above during any Offering Period.
(a) Withdrawal . A Participant may elect to withdraw from the Plan by filing the prescribed form with the Company at the prescribed location at any time before the last day of an Offering Period. As soon as reasonably practicable thereafter, payroll deductions shall cease and the entire amount credited to the Participants Plan Account shall be refunded to him or her in cash, without interest. No partial withdrawals shall be permitted.
(b) Re-Enrollment After Withdrawal . A former Participant who has withdrawn from the Plan shall not be a Participant until he or she re-enrolls in the Plan under Section 3(b). Re-enrollment may be effective only at the commencement of an Offering Period.
(a) Termination of Employment . Termination of employment as an Eligible Employee for any reason, including death, shall be treated as an automatic withdrawal from the Plan under Section 5(a). (A transfer from one Participating Company to another shall not be treated as a termination of employment.)
(b) Leave of Absence . For purposes of the Plan, employment shall not be deemed to terminate when the Participant goes on a military leave, a sick leave or another bona fide leave of absence, if the leave was approved by the Company in writing and if continued crediting of service for such purpose is expressly required by the terms of such leave or by applicable law (as determined by the Company). Employment, however, shall be deemed to terminate 90 days after the Participant goes on a leave, unless a contract or statute protects his or her right to return to work. Employment shall be deemed to terminate in any event when the approved leave ends, unless the Participant immediately returns to work.
(c) Death . In the event of the Participants death, the amount credited to his or her Plan Account shall be paid to a beneficiary designated by him or her for this purpose on the prescribed form or, if none, to the Participants estate. Such form shall be valid only if it was filed with the Company at the prescribed location before the Participants death.
(a) Plan Accounts . The Company shall maintain a Plan Account on its books in the name of each Participant. Whenever an amount is deducted from the Participants Compensation under the Plan, such amount shall be credited to the Participants Plan Account. Amounts credited to Plan Accounts shall not be trust funds and may be commingled with the Companys general assets and applied to general corporate purposes. No interest shall be credited to Plan Accounts.
(b) Purchase Price . The Purchase Price for each share of Stock purchased at the close of an Offering Period shall be 85% of the Fair Market Value of such share on the last trading day in such Offering Period.
(c) Number of Shares Purchased . As of the last day of each Offering Period, each Participant shall be deemed to have elected to purchase the number of shares of Stock calculated in accordance with this Subsection (c), unless the Participant has previously elected to withdraw from the Plan in accordance with Section 5(a). The amount then in the Participants Plan Account shall be divided by the Purchase Price, and the number of shares that results shall be purchased from the Company with the funds in the Participants Plan Account. The foregoing notwithstanding, no Participant shall purchase more than 2,500 shares of Stock with respect to any Offering Period nor more than the amounts of Stock set forth in Sections 8(b) and 12(a). The Committee may determine with respect to all Participants that any fractional share, as calculated under this Subsection (c), shall be rounded down to the next lower whole share.
(d) Available Shares Insufficient . In the event that the aggregate number of shares that all Participants elect to purchase during an Offering Period exceeds the maximum number of shares remaining available for issuance under Section 12(a), then the number of shares to which each Participant is entitled shall be determined by multiplying the number of shares available for issuance by a fraction, the numerator of which is the number of shares that such Participant has elected to purchase and the denominator of which is the number of shares that all Participants have elected to purchase.
(e) Issuance of Stock . Certificates representing the shares of Stock purchased by a Participant under the Plan shall be issued to him or her as soon as reasonably practicable after the close of the applicable Offering Period, except that the Committee may determine that such shares shall be held for each Participants benefit by a broker designated by the Committee (unless the Participant has elected that certificates be issued to him or her). Shares may be registered in the name of the Participant or jointly in the name of the Participant and his or her spouse as joint tenants with right of survivorship or as community property.
(f) Unused Cash Balances . An amount remaining in the Participants Plan Account that represents the Purchase Price for any fractional share shall be carried over in the Participants Plan Account to the next Offering Period. Any amount remaining in the Participants Plan Account that represents the Purchase Price for whole shares that could not be purchased by reason of Subsection (c) above, Section 8(b) or Section 12(a) shall be refunded to the Participant in cash, without interest.
(a) Five Percent Limit . Any other provision of the Plan notwithstanding, no Participant shall be granted a right to purchase Stock under the Plan if such Participant, immediately after his or her election to purchase such Stock, would own stock possessing more than 5% of the total combined voting power or value of all classes of stock of the Company or any parent or Subsidiary of the Company. For purposes of this Subsection (a), the following rules shall apply:
(i) Ownership of stock shall be determined after applying the attribution rules of section 424(d) of the Code;
(ii) Each Participant shall be deemed to own any stock that he or she has a right or option to purchase under this or any other plan; and
(iii) Each Participant shall be deemed to have the right to purchase 2,500 shares of Stock under this Plan with respect to each Offering Period.
(b) $25,000 Limit . Any other provision of the Plan notwithstanding, no Participant shall purchase Stock with a Fair Market Value (determined as of the beginning of the applicable Offering Period) in excess of $25,000 during any calendar year under this Plan and all other employee stock purchase plans of the Company or any parent or Subsidiary of the Company. For purposes of this Subsection (b), employee stock purchase plans not described in section 423 of the Code shall be disregarded. If a Participant is precluded by this Subsection (b) from purchasing additional Stock under the Plan, then his or her employee contributions shall automatically be discontinued and shall resume at the beginning of the earliest Offering Period ending in the next calendar year (if he or she then is an Eligible Employee).
The rights of any Participant under the Plan, or any Participants interest in any Stock or moneys to which he or she may be entitled under the Plan, shall not be transferable by voluntary or involuntary assignment or by operation of law, or in any other manner other than by beneficiary designation or the laws of descent and distribution. If a Participant in any manner attempts to transfer, assign or otherwise encumber his or her rights or interest under the Plan, other than by beneficiary designation or the laws of descent and distribution, then such act shall be treated as an election by the Participant to withdraw from the Plan under Section 5(a).
Nothing in the Plan or in any right granted under the Plan shall confer upon the Participant any right to continue in the employ of a Participating Company for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Participating Companies or of the Participant, which rights are hereby expressly reserved by each, to terminate his or her employment at any time and for any reason, with or without cause.
A Participant shall have no rights as a stockholder with respect to any shares of Stock that he or she may have a right to purchase under the Plan until such shares have been purchased on the last day of the applicable Offering Period.
(a) Authorized Shares . The aggregate number of shares of Stock available for purchase under the Plan shall be 2,750,000, subject to adjustment pursuant to this Section 12.
(b) Anti-Dilution Adjustments . The aggregate number of shares of Stock offered under the Plan, the 2,500-share limitation described in Section 7(c) and the price of shares that any Participant has elected to purchase shall be adjusted proportionately by the Committee for any increase or decrease in the number of outstanding shares of Stock resulting from a subdivision or consolidation of shares or the payment of a stock dividend, any other increase or decrease in such shares effected without receipt or payment of consideration by the Company, the distribution of the shares of a Subsidiary to the Companys stockholders or a similar event.
(c) Reorganizations . Any other provision of the Plan notwithstanding, immediately prior to the effective time of a Change in Control, the Offering Period then in progress shall terminate and shares shall be purchased pursuant to Section 7. In the event of a merger or consolidation to which the Company is a constituent corporation and which does not constitute a Change in Control, the Plan shall continue unless the plan of merger or consolidation provides otherwise. The Plan shall in no event be construed to restrict in any way the Companys right to undertake a dissolution, liquidation, merger, consolidation or other reorganization.
The Board shall have the right to amend, suspend or terminate the Plan at any time and without notice. Except as provided in Section 12, any increase in the aggregate number of shares of Stock to be issued under the Plan shall be subject to approval by a vote of the stockholders of the Company. In addition, any other amendment of the Plan shall be subject to approval by a vote of the stockholders of the Company to the extent required by an applicable law or regulation.
SECTION 14. DEFINITIONS.
(a) Board means the Board of Directors of the Company, as constituted from time to time.
(b) Change in Control means:
(i) The consummation of a merger or consolidation of the Company with or into another entity or any other corporate reorganization, if more than 50% of the combined voting power of the continuing or surviving entitys securities outstanding immediately after such merger, consolidation or other reorganization is owned by persons who were not stockholders of the Company immediately prior to such merger, consolidation or other reorganization; or
(ii) The sale, transfer or other disposition of all or substantially all of the Companys assets or the complete liquidation or dissolution of the Company.
A transaction shall not constitute a Change in Control if its sole purpose is to change the state of the Companys incorporation or to create a holding company that will be owned in substantially the same proportions by the persons who held the Companys securities immediately before such transaction.
(c) Code means the Internal Revenue Code of 1986, as amended.
(d) Committee means a committee of the Board, as described in Section 2.
(e) Company means Heska Corporation, a Delaware corporation.
(f) Compensation means (i) the total compensation paid in cash to a Participant by a Participating Company, including salaries, wages, bonuses, incentive compensation, commissions and overtime pay, plus (ii) any pre-tax contributions made by the Participant under Section 401(k) or 125 of the Code. Compensation shall exclude moving or relocation allowances, car allowances, imputed income attributable to cars or life insurance, fringe benefits, contributions to employee benefit plans and similar items. The Committee shall determine whether a particular item is included in Compensation.
(g) Eligible Employee means any employee of a Participating Company whose customary employment is for more than five months per calendar year and for more than 20 hours per week. The foregoing notwithstanding, an individual shall not be considered an Eligible Employee if his or her participation in the Plan is prohibited by the law of any country which has jurisdiction over him or her or if he or she is subject to a collective bargaining agreement that does not provide for participation in the Plan.
(h) Exchange Act means the Securities Exchange Act of 1934, as amended.
(i) Fair Market Value means the market price of Stock, determined by the Committee as follows:
(i) If Stock was traded over-the-counter on the date in question but was not traded on The Nasdaq Stock Market or The Nasdaq National Market, then the Fair Market Value shall be equal to the mean between the last reported representative bid and asked prices quoted for such date by the principal automated inter-dealer quotation system on which Stock is quoted or, if the Stock is not quoted on any such system, by the Pink Sheets published by the National Quotation Bureau, Inc.;
(ii) If Stock was traded over-the-counter on the date in question and was traded on The Nasdaq Stock Market or The Nasdaq National Market, then the Fair Market Value shall be equal to the last-transaction price quoted for such date by The Nasdaq Stock Market or The Nasdaq National Market;
(iii) If the Stock was traded on a stock exchange on the date in question, then the Fair Market Value shall be equal to the closing price reported by the applicable composite transactions report for such date; and
(iv) If none of the foregoing provisions is applicable, then the Fair Market Value shall be determined by the Committee in good faith on such basis as it deems appropriate.
Whenever possible, the determination of Fair Market Value by the Committee shall be based on the prices reported in The Wall Street Journal or as reported directly to the
Company by Nasdaq or a comparable exchange. Such determination shall be conclusive and binding on all persons.
(j) Offering Period means the six-month period with respect to which the right to purchase Stock may be granted under the Plan and during which contributions may be made toward the purchase of Stock under the Plan, as determined pursuant to Section 3(a).
(k) Participant means an Eligible Employee who elects to participate in the Plan, as provided in Section 3(b).
(l) Participating Company means (i) the Company and (ii) each present or future Subsidiary designated by the Committee as a Participating Company.
(m) Plan means this Heska Corporation 1997 Employee Stock Purchase Plan, as it may be amended from time to time.
(n) Plan Account means the account established for each Participant pursuant to Section 7(a).
(o) Purchase Price means the price at which Participants may purchase Stock under the Plan, as determined pursuant to Section 7(b).
(p) Stock means the Common Stock of the Company.
(q) Subsidiary means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company, if each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in such chain.
SECTION 15. EXECUTION.
To record the most recent amendment of the Plan by the Board on February 24, 2005, effective July 1, 2005, the Company has caused its authorized officer to execute the same.
HESKA CORPORATION
By /s/ ROBERT GRIEVE Robert Grieve Title: Chairman and Chief Executive Officer |
Exhibit 10.4
FIRST
AMENDMENT TO NET LEASE AGREEMENT
AND DEVELOPMENT AGREEMENT
THIS FIRST AMENDMENT TO NET LEASE AGREEMENT AND DEVELOPMENT AGREEMENT (First Amendment) is made and entered into by and between CCMRED 40, LLC, a Colorado Limited Liability Company (Landlord), and HESKA CORPORATION, a Delaware Corporation (Tenant).
RECITALS
1. The Landlord and the Tenant previously entered into a Net Lease Agreement dated May 24, 2004 (Lease), and a Development Agreement dated May 24, 2004 (Development Agreement), both of which relate to the lease by the Landlord to the Tenant of approximately five and fifty-two one/hundredths (5.52) acres of real property (Real Property) and the construction of an office, laboratory and warehouse building thereon.
2. The Lease and the Development Agreement require the Landlord to complete the Base Building Improvements no later than one hundred forty-six (146) business days following the issuance of a building permit for the construction of the Base Building Improvements.
3. The Lease further provides for the payment of liquidated damages in the event the Landlord shall fail to deliver possession of the substantially completed Base Building Improvements to the Tenant within said one hundred forty-six (146) business day period.
4. The parties desire to extend the date for the completion of the Base Building Improvements and the imposition of liquidated damages upon the terms set forth hereinafter.
5. The parties further desire to extend the date for the completion of landscaping on the Real Property upon the terms set forth hereinafter.
6. Initially capitalized terms used herein and defined in the Lease and/or the Development Agreement shall have the meanings contained in the Lease and/or the Development Agreement, unless otherwise defined herein.
NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby confessed and acknowledged, each of the parties hereto hereby agrees as follows:
1. Extension of Landlords Completion Date and Commencement of Liquidated Damages. The Lease and the Development Agreement are hereby modified and amended to grant to the Landlord one hundred seventy-five (175) business days (i.e., until May 19, 2005) (Extended Landlords Completion Date) rather than one hundred forty-six (146) business days for the Completion of the Base Building Improvements and for delivery of possession of the substantially completed Base Building Improvements to the Tenant, provided that such extension shall not materially adversely impact the Tenants ability to obtain certificates of occupancy for the Building or utilize the Building for Tenants intended use. All provisions to the contrary set forth in the Lease and the Development Agreement are hereby modified accordingly.
2. Landscaping. The Plans and Specifications for the Project include the completion of certain landscaping as more fully set forth in the Development Agreement. As a result of certain work performed by the City of Loveland, Colorado (City), on Rocky Mountain Avenue adjacent to the Real Property, the installation of landscaping on the Real Property will be delayed to a date subsequent to the Extended Landlords Completion Date. Therefore, the parties agree that the Landlord may install such landscaping subsequent to the Extended Landlords Completion Date provided that (i) the Landlord shall post a letter of credit or other acceptable security required by the City to secure the Landlords obligations to complete the remaining landscaping and (ii) the Landlord will complete all remaining landscaping as soon as commercially reasonable following completion of the Citys work on Rocky Mountain Avenue and subject to any delays caused by adverse weather conditions. All provisions to the contrary set forth in the Lease and the Development Agreement are hereby modified accordingly.
3. Effect of Amendment. Except as amended by this First Amendment, all of the terms and provisions of the Lease and the Development Agreement shall remain in full force and effect and the validity of the Lease and the Development Agreement, as amended hereby, is hereby reaffirmed by the parties hereto.
4. Conflicting Provisions. Whenever the terms and provisions of this First Amendment and the terms and provisions of either the Lease or the Development Agreement conflict, the terms and provisions of this First Amendment shall be deemed to supersede the conflicting terms and provisions of the Lease and/or the Development Agreement. Each party agrees that it shall continue to be bound by all of the terms and conditions of the Lease and the Development Agreement, as amended hereby.
5. Counterparts. This First Amendment shall be deemed to have been fully executed and delivered when the undersigned have executed at least one (1) counterpart, but not necessarily the same counterpart.
6. Facsimile Signature. Execution of this First Amendment may occur by facsimile and a facsimile signature of this instrument shall be deemed effective in the same manner and to the same extent as an original signature hereon.
IN WITNESS WHEREOF, the undersigned have executed this First Amendment to Net Lease Agreement and Development Agreement on the date set opposite their respective signatures.
Date: February 11, 2005 Date: February 11, 2005 Date: February 11, 2005 |
CCMRED 40, LLC, a Colorado
Limited Liability Company By: McWhinney Real Estate Services, Inc., a Colorado Corporation, Manager By /s/ DOUGLAS L. HILL Douglas L. Hill Chief Operating Officer Landlord HESKA CORPORATION, a Delaware Corporation By: /s/ JASON NAPOLITANO Print Name: Jason Napolitano Print Title: Executive Vice President, Chief Financial Officer and Secretary ATTEST: By: /s/ MICHAEL A. BENT Print Name: Michael A. Bent Print Title: Vice President, Principal Accounting Officer and Controller Tenant |
Exhibit 10.5
This document (the Second Amendment) is the second amendment to, and shall be considered an integral part of, the Net Lease Agreement dated effective as of May 24, 2004 between CCMRED 40, LLC and Heska Corporation, as amended by First Amendment to Net Lease Agreement and Development Agreement dated February 11, 2005 (the Amended Document). All defined terms from the Amended Document shall apply to the Second Amendment. To the extent the Amended Document and the Second Amendment conflict, the Second Amendment shall rule.
PRINCIPAL TERMS Terms appearing in quotations below are definitions of such terms as used in the Lease and shall have the defined meaning whenever used.
May Payment: | Tenant shall pay Landlord $13,929.15 for access to the Building during the month of May 2005. |
Commencement Date:: | 12:01 a.m., June 1, 2005 |
Expiration Date:: | 12:00 midnight, May 31, 2023 |
Lease Year:: | Each year during the Term of the Lease beginning on the Commencement Date or an anniversary of the Commencement Date. An individual Lease Year shall be abbreviated as LYxx. For example, the year beginning on the Commencement Date (June 1, 2005 to May 31, 2006) is LY05 and the year beginning on the first anniversary of the Commencement Date (June 1, 2006 to May 31, 2007) is LY06. |
CPI:: | For each Lease Year, the level of the U.S. Consumer Price Index -All Urban Consumers - All Items (CPI-U) U.S. City Average (1982-84=100) for March of the year in which the Lease Year begins. For example, the LY05 CPI is equal to the March 2005 U.S. Consumer Price Index - All Urban Consumers - All Items (CPI-U) U.S. City Average (1982-84=100) (193.3). |
CPI Increase:: | For each Lease Year, beginning with LY07, the CPI Increase for the then current Lease Year will be equal to the sum of (a) the current Lease Years CPI divided by the previous Lease Years CPI and (b) negative 1. For example, if the LY07 CPI is 200.0 and the LY06 CPI is 193.3, then the LY07 CPI Increase is 0.03466 ((200.0/193.3)-1)). |
CPI Adjustment:: | For each Lease Year, beginning with LY07, the CPI Adjustment is the greater of (a) twenty (20) times the Lease Years CPI Increase |
plus one (1), or (b) one (1). For example, if the LY07 CPI Increase is 0.03466, the LY07 CPI Adjustment is 1.6932 ((20 x 0.03466) + 1)), which is greater than 1); similarly, if the LY07 CPI Increase is -0.01, the LY07 CPI Adjustment would be equal to 1 (because ((20 x -0.01) + 1) equals 0.80, which is less than 1). |
Rent Adjustment:: | For each Lease Year, beginning with LY07, the Rent Adjustment is the lesser of (a) the Lease Years CPI Adjustment, or (b) 1.03. For example, if the LY07 CPI Adjustment is 1.6932, the LY07 Rent Adjustment is 1.03 (1.03 is less than 1.6932). |
LY05 Annual Base Rent:: | $1,151,476.20 |
LY06 Annual Base Rent:: | $1,220,564.77 |
Annual Base Rent:: | For each Lease Year, beginning with LY07, the Annual Base Rent is equal to the product of (a) the previous Lease Years Annual Base Rent times (b) the current Lease Years Rent Adjustment. For example, if the LY07 Rent Adjustment is 1.03, the LY07 Annual Base Rent would be $1,257,181.71 (LYO6 Annual Base Rent of $1,220,564.77 times the current Lease Years Rent Adjustment of 1.03). |
Monthly Base Rent:: | For each Lease Year, an amount equal to the Lease Year's Annual Base Rent divided by 12. For example, the LY05 Monthly Base Rent is equal to $95,956.35 ($1,151,476.20 divided by 12). |
This document may be executed in counterparts, each of which shall constitute the original.
HESKA CORPORATION,
a Delaware Corporation By: /s/ ROBERT B. GRIEVE Robert B. Grieve Chairman and Chief Executive Officer ATTEST: By: /s/ JASON NAPOLITANO Jason A. Napolitano Executive Vice President, Chief Financial Officer & Secretary Tenant |
CCMRED 40, LLC,
a Colorado Limited Liability Company By: McWhinney Real Estate Services, Inc., a Colorado Corporation, Manager By: /s/ DOUGLAS L. HILL Douglas L. Hill Chief Operating Officer Landlord |
Exhibit 31.1
I, Robert B. Grieve, Chief Executive Officer of Heska Corporation, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Heska Corporation; |
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 registrants 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)) 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. | Evaluated the effectiveness of the registrants 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 |
c. | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants 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 registrants 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 registrants internal control over financial reporting. |
Date: August 15, 2005 |
/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, Chief Financial Officer of Heska Corporation, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Heska Corporation; |
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 registrants 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-15e)) 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. | Evaluated the effectiveness of the registrants 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 |
c. | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants 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 registrants 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 registrants internal control over financial reporting. |
Date: August 15, 2005 |
/s/
Jason A. Napolitano
JASON A. NAPOLITANO Executive Vice President and Chief Financial Officer (Principal Financial Officer) |
Exhibit 32.1
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
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 Quarterly Report of Heska Corporation on Form 10-Q for the quarterly period ended June 30, 2005 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-Q fairly presents in all material respects the financial condition and results of operations of Heska Corporation.
By:
/s/ Robert
B. Grieve
Name: ROBERT B. GRIEVE Title: 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 Quarterly Report of Heska Corporation on Form 10-Q for the quarterly period ended June 30, 2005 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-Q fairly presents in all material respects the financial condition and results of operations of Heska Corporation.
By:
/s/ Jason A.
Napolitano
Name: JASON A. NAPOLITANO Title: Executive Vice President and Chief Financial Officer |
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.