UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM 10-K
(Mark
One)
x
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For
the fiscal year ended December 31, 2006
OR
o
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For
the transition period from
to
Commission
file number: 0-22427
HESKA CORPORATION
(Exact name of
registrant as specified in its charter)
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Delaware
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77-0192527
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(State or other
jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification Number)
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3760
Rocky Mountain Avenue
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Loveland,
Colorado
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80538
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(Address of
principal executive offices)
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(Zip Code)
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Registrant’s
telephone number, including area code:
(970) 493-7272
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Securities registered pursuant to
Section 12(b) of the Act:
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Common
Stock, $.001 par value
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Nasdaq
Capital Market
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(Title of Class)
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(Name of Each
Exchange on Which Registered)
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Securities registered pursuant to Section 12(g)
of the Act: None
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Indicate by check mark if the registrant is a
well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
o
No
x
Indicate by check mark if the registrant is not required
to file reports pursuant to Section 13 or 15(d) of the Act. Yes
o
No
x
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90
days. Yes
x
No
o
Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of the registrant’s knowledge,
in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K.
x
Indicate by check mark whether the registrant is a
large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and
large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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Accelerated
filer
o
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Non-accelerated
filer
x
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Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Act). Yes
o
No
x
The aggregate market value of voting common stock held
by non-affiliates of the Registrant was approximately $45,215,637 as of June
30, 2006 based upon the closing price on the Nasdaq Capital Market reported for
such date. This calculation does not
reflect a determination that certain persons are affiliates of the Registrant
for any other purpose.
50,832,279 shares of the Registrant’s Common Stock,
$.001 par value, were outstanding at March 26, 2007.
DOCUMENTS INCORPORATED BY REFERENCE
Items
10 (as to directors), 11, 12, 13 and 14 of Part III incorporate by reference
information from the Registrant’s Proxy Statement to be filed with the
Securities and Exchange Commission in connection with the solicitation of
proxies for the Registrant’s 2007 Annual Meeting of Stockholders.
TABLE
OF CONTENTS
i-STAT is a registered
trademark of Abbott Laboratories.
SPOTCHEM is a trademark of Arkray, Inc.
TRI-HEART is a registered trademark of Schering-Plough Animal Health
Corporation (“SPAH”) in the United States and is a trademark of Heska
Corporation in other countries. HESKA,
ALLERCEPT, AVERT, E.R.D.-HEALTHSCREEN, E-SCREEN, FELINE ULTRANASAL,
SOLO STEP, THYROMED and VET/OX are registered trademarks and CBC-DIFF, ERD,
G2 DIGITAL and VET/IV are trademarks of Heska Corporation in the United
States and/or other countries. This 10-K
also refers to trademarks and trade names of other organizations.
i
Statement Regarding Forward Looking Statements
This Form 10-K contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended and
Section 21E of the Securities Exchange Act of 1934, as amended. For this purpose, any statements contained
herein that are not statements of current or historical fact may be deemed to
be forward-looking statements. Without
limiting the foregoing, words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,”
“estimates,” variations of such words and similar expressions are intended to
identify such forward-looking statements.
These statements are not guarantees of future performance and are
subject to certain risks, uncertainties and assumptions that are difficult to
predict. Therefore, actual results could
differ materially from those expressed or forecasted in any such
forward-looking statements as a result of certain factors, including those set
forth in “Risk Factors,” “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” “Business” and elsewhere in this Form
10-K. Readers are cautioned not to place
undue reliance on these forward-looking statements.
Although we believe that expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. We expressly disclaim any obligation or
undertaking to release publicly any updates or revisions to any forward-looking
statements contained herein to reflect any change in our expectations with
regard thereto or any change in events, conditions or circumstances on which
any such statement is based. These
forward-looking statements apply only as of the date of this Form 10-K or for
statements incorporated by reference from the 2007 definitive proxy statement
on Schedule 14A, as of the date of the Schedule 14A.
Internet Site
Our Internet address is www.heska.com. We make publicly available free of charge on
our Internet website our annual report on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of
1934 as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the Securities and Exchange Commission. Information contained on our website is not a
part of this annual report on Form 10-K.
Where You Can Find Additional
Information
You may review a copy of this annual report on Form
10-K, including exhibits and any schedule filed therewith, and obtain copies of
such materials at prescribed rates, at the Securities and Exchange Commission’s
Public Reference Room in Room 1580, 100 F Street, NE, Washington, D.C.
20549-0102. You may obtain information
on the operation of the Public Reference Room by calling the Securities and
Exchange Commission at 1-800-SEC-0330.
The Securities and Exchange Commission maintains a website
(http://www.sec.gov) that contains reports, proxy and information statements
and other information regarding registrants, such as Heska, that file
electronically with the Securities and Exchange Commission.
PART I
Item 1.
Business.
We discover, develop, manufacture, market, sell,
distribute and support veterinary products.
Our core focus is on the canine and feline companion animal health
markets where we strive to provide high value products for latent needs and
advance the state of veterinary medicine.
1
Our business is comprised of two reportable segments,
Core Companion Animal Health and Other Vaccines, Pharmaceuticals and
Products. The Core Companion Animal
Health segment (“CCA”) includes diagnostic and other instruments and supplies
as well as single use diagnostic and other tests, vaccines and pharmaceuticals,
primarily for canine and feline use.
These products are sold directly by us as well as through independent
third party distributors and other distribution relationships. The Other Vaccines, Pharmaceuticals and
Products segment (“OVP”), previously reported as Diamond Animal Health,
includes private label vaccine and pharmaceutical production, primarily for
cattle but also for other animals including small mammals and fish. All OVP products are sold by third parties
under third party labels.
Our
principal executive offices are located at 3760 Rocky Mountain Avenue,
Loveland, Colorado 80538, our telephone number is (970) 493-7272 and our
internet address is www.heska.com. We
were incorporated in California in 1988, and we reincorporated in Delaware in
1997.
Background
We were
incorporated as Paravax, Inc. in 1988 and conducted research on vaccines to
prevent infections by parasites. In
1991, we moved our headquarters from California to northern Colorado in order
to be located closer to the research facilities of the College of Veterinary
Medicine and Biomedical Sciences of Colorado State University. In 1995, we changed our name to Heska
Corporation. Between 1996 and 1998, we
expanded our business, making several acquisitions and significantly increasing
our sales and marketing activities.
During 1999 and 2000, we restructured and refocused our business, making
several divestitures. We continued to be
a research and development-focused company, devoting substantial resources to
the research and development of innovative products for the companion animal
health market.
We continued to
pursue operating efficiencies and rationalize our business in 2001 and
2002. In late 2001, we modified our
sales strategy to a distributor-focused model and entered into distribution
agreements with over 20 third-party veterinary distributors. We eliminated several direct sales positions
as a result. We also consolidated our
European operations into one facility in the fourth quarter of 2001. In the first half of 2002, we eliminated
several positions, primarily in research and development, to lower our expense
base. In July 2002, we licensed to
Intervet Inc. certain rights to patents, trademarks and know-how for our Flu
AVERT I.N. equine influenza vaccine, the world’s first intranasal influenza
vaccine for horses. This was the result
of a strategic decision to focus our resources on the canine and feline
veterinary markets. In the years since
2003, we have continued to focus our efforts on operating improvements, selling
consumables into the installed base of instruments we have built and
seeking new product opportunities with
third parties.
Core
Companion Animal Health Segment
We presently sell a variety of companion animal health
products and services, among the most significant of which are the following:
Veterinary
Instruments
We offer a line of veterinary diagnostic and other
instruments which are described below.
We also market and sell consumable supplies for these instruments. Our
line of veterinary instruments includes the following:
·
Electrolytes and Blood Gases.
The
i-STAT Handheld Clinical Analyzer is a handheld, portable clinical analyzer
that provides quick, easy analysis of blood gases and other key analytes, such
as sodium, potassium and glucose, in whole blood. In January 2007, we introduced the i-STAT 1
Handheld Clinical Analyzer, with improvements over the original analyzer
including expanded testing capabilities, upgraded storage capacity and
ergonomic improvements. We are supplied
2
these instruments and affiliated cartridges and
supplies under a contractual agreement with i-STAT Corporation (currently a
unit of Abbott Laboratories which is to be sold to General Electric Company
based on a January 17, 2007 announcement).
·
Blood Chemistry.
The
SPOTCHEM EZ Automated Dry Chemistry System is a compact benchtop system used to
measure common blood chemistry components that are vital to veterinary medical
diagnosis. It provides veterinarians
with an easy-to-use, flexible and economical in-clinic chemistry system. We are supplied this instrument and
affiliated test strips and supplies under a contractual agreement with Arkray
Global Business, Inc. (“Arkray”).
·
Hematology.
The HESKA
CBC-DIFF Veterinary Hematology System is an easy-to-use blood analyzer that
measures such key parameters as white blood cell count, red blood cell count,
platelet count and hemoglobin levels in animals. We are supplied this instrument and
affiliated reagents and supplies under a contractual agreement with Boule
Medical AB (“Boule”).
·
IV Pumps.
The VET/IV 2.2 infusion pump is a compact,
affordable IV pump that allows veterinarians to easily provide regulated
infusion of fluids, drugs or nutritional products for their patients.
Point-of-Care
Diagnostic and Other Tests
Heartworm
Diagnostic Products
.
Heartworm infections of dogs and cats are caused by the parasite
Dirofilaria immitis
.
This parasitic worm is transmitted in larval form to dogs and cats
through the bite of an infected mosquito.
Larvae develop into adult worms that live in the pulmonary arteries and
heart of the host, where they can cause serious cardiovascular, pulmonary,
liver and kidney disease. Our canine and
feline heartworm diagnostic tests use monoclonal antibodies or a recombinant
heartworm antigen, respectively, to detect heartworm antigens or antibodies
circulating in the blood of an infected animal.
We currently
market and sell heartworm diagnostic tests for both dogs and cats. SOLO STEP CH for dogs and SOLO STEP FH for
cats are available in point-of-care, single use formats that can be used by
veterinarians on site. We also offer
SOLO STEP CH Batch Test Strips, a rapid and simple point-of-care antigen
detection test for dogs that allows veterinarians in larger practices to run
multiple samples at the same time. We
obtain SOLO STEP CH, SOLO STEP FH and SOLO STEP Batch Test Strips under a
contractual agreement with Quidel Corporation (“Quidel”).
Early
Renal Damage Detection Products
. Renal damage is a leading cause of death in
both dogs and cats. Several
inflammatory, infectious or neoplastic diseases can damage an animal’s
kidneys. It is estimated that 70% to 80%
of kidney function is already destroyed before veterinarians can detect renal
damage using traditional tests. Early
detection is key to eliminate the causes and to mitigate the effects of kidney
damage. Identification and treatment of the underlying cause of kidney damage
can slow the progression of disease and add quality years to an animal’s life.
Our
E.R.D.-HEALTHSCREEN Canine Urine Test and our E.R.D.-HEALTHSCREEN Feline Urine
Test are rapid in-clinic immunoassay tests designed to detect microalbuminuria,
the most sensitive indicator of renal damage.
Veterinary
Diagnostic Laboratory Services and Products
Allergy Diagnostic Services.
Allergy is common in companion animals,
and it has been estimated to affect approximately 10% to 15% of dogs. Clinical symptoms of allergy are variable,
but are often manifested as persistent and serious skin disease in dogs and
cats. Clinical management of allergic
disease is
3
problematic, as there are
a large number of allergens that may give rise to these conditions. Although skin testing is often regarded as
the most accurate diagnostic procedure, such tests can be painful, subjective and
inconvenient. The effectiveness of the
immunotherapy that is prescribed to treat allergic disease is inherently
limited by inaccuracies in the diagnostic process.
We have veterinary diagnostic laboratories in
Loveland, Colorado and Fribourg, Switzerland.
Both diagnostic laboratories offer blood testing using our ALLERCEPT
Definitive Allergen Panels, which provide the most accurate determination of
the specific allergens to which an animal, such as a dog, cat or horse, is
reacting. The panels use a highly
specific recombinant version of the natural IgE receptor to test the serum of
potentially allergic animals for IgE directed against a panel of known
allergens. A typical test panel consists
primarily of various pollen, grass, mold, insect and mite allergens. The test results serve as the basis for
prescription ALLERCEPT Allergy Treatment Sets, discussed later in this
document. In our Fribourg diagnostic
laboratory, we also offer preliminary blood testing to screen for the presence
of allergen-specific IgE using products based on our ALLERCEPT Definitive
Allergen Panels. Animals testing
positive for allergen-specific IgE are candidates for further evaluation using
our ALLERCEPT Definitive Allergen Panels.
Other Products and Services.
Outside of the United States, we sell kits to conduct
blood testing using our ALLERCEPT Definitive Allergen Panels to third-party
veterinary diagnostic laboratories. We
also sell products to screen for the presence of allergen-specific IgE to third
party veterinary diagnostic laboratories outside of the United States — we sell
kits to conduct preliminary blood testing using products based on our ALLERCEPT
Definitive Allergen Panels as well as a similar test requiring less technical
sophistication, our ALLERCEPT E-SCREEN Test.
We sell ERD Reagent Packs used to detect
microalbuminuria, the most sensitive indicator of renal damage, to Antech
Diagnostics, the laboratory division of VCA Antech, Inc., for use in its
veterinary diagnostic laboratories.
Our Loveland veterinary diagnostic laboratory
currently also offers testing using our canine and feline heartworm, renal
damage, immune status and flea bite allergy assays as well as other diagnostic
services including polymerase chain reaction, or PCR, based tests for certain
infectious diseases. Our Loveland
diagnostic laboratory is currently staffed by medical technologists experienced
in animal disease and several additional technical staff.
We
intend to continue to use our Loveland veterinary diagnostic laboratory both as
a stand-alone service center for our customers and as an adjunct to our product
development efforts. Many of the assays
which we intend to develop for in-clinic use are initially validated in the
veterinary diagnostic laboratory and may be offered commercially in this format
in the future.
Vaccines and other
Biologicals
Allergy Treatment
. Veterinarians
who use our ALLERCEPT Definitive Allergen Panels often purchase ALLERCEPT
Allergy Treatment Sets for those animals with positive test results. These prescription immunotherapy treatment
sets are formulated specifically for each allergic animal and contain only the
allergens to which the animal has significant levels of IgE antibodies. The prescription formulations are
administered in a series of injections, with doses increasing over several
months, to ameliorate the allergic condition of the animal. Immunotherapy is generally continued for an
extended time. We offer canine, feline
and equine immunotherapy treatment products.
Feline Respiratory Disease
.
The use of injectable vaccines in cats has become controversial due to
the frequency of injection site-associated side effects. The most serious of these side effects are
injection site
4
sarcomas, tumors which,
if untreated, are nearly always fatal.
While there is one competitive non-injectable two-way vaccine, all other
competitive products are injectable formulations.
We sell the FELINE ULTRANASAL FVRCP Vaccine, a
three-way modified live vaccine combination to prevent disease caused by the
three most common respiratory viruses of cats:
calicivirus, rhinotracheitis virus and panleukopenia virus. Our two-way modified live vaccine
combination, FELINE ULTRANASAL FVRC, prevents disease caused by calicivirus and
rhinotracheitis. These vaccines are
administered without needle injection by dropping the liquid preparation into
the nostrils of cats. Our vaccines avoid
injection site side effects, and we believe they are very efficacious.
Pharmaceuticals
and Supplements
Heartworm Prevention
. We have an agreement with Schering-Plough
Animal Health Corporation (“SPAH”), the worldwide animal health care business
of Schering-Plough Corporation, granting SPAH the distribution and marketing
rights in the United States for TRI-HEART Plus Chewable Tablets, our canine
heartworm prevention product. TRI-HEART
Plus Chewable Tablets (ivermectin/pyrantel) are indicated for use as a monthly
preventive treatment of canine heartworm infection and for treatment and
control of ascarid and hookworm infections.
We manufacture TRI-HEART Plus Chewable Tablets at our Des Moines, Iowa
production facility. Our TRI-HEART Plus Chewable Tablets also have been approved
for sale in Japan and South Korea.
Nutritional Supplements
.
We sell a novel fatty acid supplement, HESKA F.A. Granules. The source of the fatty acids in this
product, flaxseed oil, leads to high omega-3:omega-6 ratios of fatty
acids. Diets high in omega-3 fatty acids
are believed to lead to lower levels of inflammatory mediators. The HESKA F.A. Granules include vitamins and
are formulated in a palatable flavor base that makes the product convenient and
easy to administer.
Hypothyroid Treatment
.
We sell a chewable thyroid supplement, THYROMED Chewable Tablets, for
treatment of hypothyroidism in dogs.
Hypothyroidism is one of the most common endocrine disorders diagnosed
in older dogs, treatment of which requires a daily hormone supplement for the
lifetime of the animal. THYROMED
Chewable Tablets contain the active ingredient
Levothyroxine
Sodium
, which is a clinically proven replacement for the naturally
occurring hormone secreted by the thyroid gland. The chewable formulation makes this daily
supplement convenient and easy to administer.
Other
Vaccines, Pharmaceuticals and Products Segment
We have developed our own line of bovine vaccines that
are licensed by the United States Department of Agriculture (“USDA”). We have a long-term agreement with a
distributor, Agri Laboratories, Ltd., (“AgriLabs”), for the marketing and sale
of certain of these vaccines which are sold primarily under the Titanium
Ò
and
MasterGuard
Ò
brands — registered trademarks of
AgriLabs. AgriLabs has rights to sell
these bovine vaccines in the United States, Africa, China, Mexico and Taiwan to
December 2013. Subject to minimum
purchase requirements, AgriLabs’ rights in these regions will be exclusive at
least to December 2009 and could remain exclusive up to December 2013 based on
other contractual arrangements. We have
the right to sell these bovine vaccines to any party of our choosing in other
regions of the world. AgriLabs has non-exclusive rights to these vaccines in
Canada to December 2009. We also
manufacture other bovine products not covered under the agreement with
AgriLabs.
We manufacture biological and pharmaceutical products
for a number of other animal health companies.
We manufacture products for animals including small mammals and
fish. Our offerings range from providing
complete turnkey services which include research, licensing, production,
labeling and
5
packaging of products to
providing any one of these services as needed by our customers as well as
validation support and distribution services.
Marketing,
Sales, Distribution and Customer Support
We
estimate that there are approximately 40,000 veterinarians in the
United States whose practices are devoted principally to small animal
medicine. Those veterinarians practice
in approximately 20,000 clinics in the United States. In 2006, our products were sold to
approximately 13,500 such clinics in the United States. Veterinarians may obtain our products
directly from us or indirectly from others, such as independent third-party
distributors. All our Core Companion
Animal Health Products are 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.
We currently market our Core Companion Animal Health
products in the United States to veterinarians through a direct sales force, a
telephone sales force, independent third-party distributors, as well as through
trade shows and print advertising and other distribution relationships, such as
SPAH in the case of our heartworm preventive.
Our direct sales force currently consists of 26 territory managers and 3
regional managers responsible for sales in various parts of the United
States. Our inside sales force consists
of 23 persons.
Our independent third-party distributors in the U.S.
purchase and market our Core Companion Animal Health products utilizing their
direct sales forces. We currently have
agreements with 18 regional distributors with approximately 721 field
representatives. We believe that one of
our largest competitors, IDEXX Laboratories, Inc. (“IDEXX”), in effect
prohibits its distributors from selling competitive products, including our
diagnostic instruments and heartworm diagnostic tests. As a result, 11 of these 18 regional
distributors with approximately 158 field representatives carry our full
distribution product line. We believe
the IDEXX restrictions limit our ability to engage national independent third
party distributors to sell our full distribution line of products.
We have a staff dedicated to customer and product
support in our Core Companion Animal Health segment including veterinarians,
technical support specialists and service technicians. Individuals from our research and development
group may also be used as a resource in responding to certain product
inquiries.
Internationally, we market our Core Companion Animal
Health products to veterinarians primarily through third-party veterinary
diagnostic laboratories, independent third-party distributors and Novartis Agro
K.K., Tokyo (“Novartis Japan”). These
entities typically have distribution rights and provide customer support. Novartis Japan exclusively markets and
distributes SOLO STEP CH and has exclusive marketing rights to our TRI-HEART
Plus Chewable Tablets in Japan.
All OVP products are marketed and sold by third
parties under third party labels.
AgriLabs currently has exclusive sales and marketing rights to certain
of our bovine vaccines, which are sold primarily under the Titanium
Ò
and
MasterGuard
Ò
labels, in the United States and certain
international regions.
We grant third parties rights to certain of our
existing products as well as to our intellectual property, with our
compensation often taking the form of royalties and/or milestone payments. For example, we have an agreement with
Nestlé Purina PetCare Company (“Purina”), a unit of Nestlé S.A.,
under which Purina pays royalties on certain pet food products it markets based
on our patent-protected science.
6
Manufacturing
The majority of
our product revenue is from proprietary products manufactured by third
parties. Third parties manufacture our
veterinary instruments, including affiliated consumables and supplies, as well
as other products including our heartworm point-of-care diagnostic tests, our
allergy treatment products and our E.R.D.-HEALTHSCREEN Urine Tests. Our handheld analyzers and affiliated
supplies are supplied under a contractual agreement with i-STAT Corporation
(currently a unit of Abbott Laboratories which is to be sold to General
Electric Company based on a January 17, 2007 announcement), our chemistry
analyzers and affiliated supplies are supplied under a contractual agreement
with Arkray, and our hematology analyzers and affiliated supplies are supplied
under a contractual agreement with Boule.
ALK-Abelló, Inc. manufactures our immunotherapy treatment
products. Diagnostic Chemicals Limited
manufactures our ERD Reagent Packs used to detect microalbuminuria in
veterinary diagnostic laboratories and our E.R.D.- HEALTHSCREEN Urine Tests. Quidel and we, at our Des Moines facility,
manufacture our heartworm point-of-care diagnostic tests.
Our facility in
Des Moines, Iowa is a USDA, Food and Drug Administration (“FDA”), and Drug
Enforcement Agency (“DEA”) licensed biological and pharmaceutical manufacturing
facility. This facility currently has
the capacity to manufacture more than 50 million doses of vaccine each
year. We expect that we will manufacture
most or all of our biological and pharmaceutical products at this facility, as
well as most or all of our recombinant proteins and other proprietary reagents
for our diagnostic tests. We currently
manufacture our canine heartworm prevention product, our FELINE ULTRANASAL
Vaccines and all our OVP segment products at this facility. Our OVP segment’s customers purchase products
in both bulk and finished format, and we perform all phases of manufacturing,
including growth of the active bacterial and viral agents, sterile filling,
lyophilization and packaging at this facility.
We manufacture our various allergy diagnostic products at our Des Moines
facility, our Loveland facility and our Fribourg facility. We believe the raw materials for products we
manufacture are available from several sources.
Product
Development
We are committed to providing innovative products to
address latent health needs of companion animals. We may obtain such products from external
sources, external collaboration or internal research and development.
We are committed
to identifying external product opportunities and creating business and
technical collaborations that lead to high value veterinary products. We believe that our active participation in
scientific networks and our reputation for investing in research enhances our
ability to acquire external product opportunities. We have collaborated, and intend to continue
to do so, with a number of companies and universities. Examples of such collaborations include:
·
Quidel
for the development of SOLO STEP CH Cassettes, SOLO STEP CH Batch Test Strips
and SOLO STEP FH Cassettes;
·
Diagnostic
Chemicals, Ltd., for the development of the canine and feline
E.R.D.-HEALTHSCREEN Urine Tests and ERD Reagent Packs to detect
microalbuminuria;
·
Boule
Medical AB for the development of veterinary applications for the HESKA
CBC-DIFF Hematology System and associated reagents.
Internal research and development is managed on a
case-by-case basis. We employ
individuals with microbiology, immunology, genetics, biochemistry, molecular
biology, parasitology as well as veterinary expertise and will form
multidisciplinary product-associated teams as appropriate. We incurred expenses of
7
$5.9 million, $3.7
million and $3.5 million in the years ended December 31, 2004, 2005 and
2006, respectively, in support of our research and development activities.
Intellectual
Property
We believe that
patents, trademarks, copyrights and other proprietary rights are important to
our business. We also rely upon trade
secrets, know-how, continuing technological innovations and licensing
opportunities to develop and maintain our competitive position. The proprietary technologies of our OVP
segment and Heska AG, our operating subsidiary in Switzerland, are primarily
protected through trade secret protection of, for example, our manufacturing
processes in these areas.
We actively seek
patent protection both in the United States and abroad. Our issued and pending patent portfolios
primarily relate to allergy, flea control, heartworm control, infectious
disease vaccines, diagnostic and detection tests, immunomodulators, instrumentation,
nutrition, pain control and vaccine delivery technologies. As of December 31, 2006, we owned, co-owned
or had rights to 157 issued U.S. patents and 50 pending U.S. patent
applications expiring at various dates from June 2008 to August 2022. Applications corresponding to pending U.S.
applications have been or will be filed in other countries. Our corresponding foreign patent portfolio as
of December 31, 2006 included 58 issued patents and 57 pending applications in
various foreign countries.
We have entered
into a number of out-licensing agreements to realize additional value in
certain of our intellectual property assets in fields outside of our core
focus. For example, in 1998 we obtained
rights from ImmuLogic Pharmaceutical Corporation to an intellectual property
portfolio including a number of major allergens and the genes that encode them
for use in veterinary as well as human allergy applications. In order to realize additional value from
that portfolio, we granted licenses and options for licenses to several
companies for the use of those allergens in the fields of diagnosis and
treatment of human allergy. In December
2006, we sold this intellectual property portfolio to Allergopharma Joachim Ganzer
KG and obtained an exclusive license to veterinary rights for this intellectual
property portfolio as part of the agreement.
We also have
obtained exclusive and non-exclusive licenses for numerous other patents held
by academic institutions and biotechnology and pharmaceutical companies.
Seasonality
We expect the last six months of the year will
outperform the first half of the year, both in terms of revenue and
profitability. We expect to experience
less seasonality than we have in the past due to factors including increased
instrument consumable revenue, which does not tend to be seasonal, and changes
in the timing of certain product promotions.
Government
Regulation
Although the
majority of our product revenue is from the sale of unregulated items, many of
our products or products that we may develop are, or may be, subject to
extensive regulation by governmental authorities in the United States,
including the USDA and the FDA, and by similar agencies in other
countries. These regulations govern, among
other things, the development, testing, manufacturing, labeling, storage,
pre-market approval, advertising, promotion, sale and distribution of our
products. Satisfaction of these
requirements can take several years to achieve and the time needed to satisfy
them may vary substantially, based on the type, complexity and novelty of the
product. Any product that we develop
must receive all relevant regulatory approval or clearances, if required,
before it may be marketed in a particular country. The following summarizes the U.S. government agencies
that regulate animal health products:
8
·
USDA
. Vaccines and
certain single use, point-of-care diagnostics are considered veterinary
biologics and are therefore regulated by the Center for Veterinary Biologics,
or CVB, of the USDA. Industry data indicate
that it takes approximately four years and $1.0 million to license a
conventional vaccine for animals from basic research through licensing. In contrast to vaccines, single use,
point-of-care diagnostics can typically be licensed by the USDA in about two
years, at considerably less cost.
However, vaccines or diagnostics that use innovative materials, such as
those resulting from recombinant DNA technology, usually require additional
time to license. The USDA licensing
process involves the submission of several data packages. These packages include information on how the
product will be manufactured, information on the efficacy and safety of the
product in laboratory and target animal studies and information on performance
of the product in field conditions.
·
FDA
. Pharmaceutical
products, which generally include synthetic compounds, are approved and
monitored by the Center for Veterinary Medicine of the FDA. Industry data indicate that developing a new
drug for animals requires approximately 11 years from commencement of research
to market introduction and costs approximately $5.5 million. Of this time, approximately three years is
spent in animal studies and the regulatory review process. However, unlike human drugs, neither
preclinical studies nor a sequential phase system of studies are required. Rather, for animal drugs, studies for safety
and efficacy may be conducted immediately in the species for which the drug is
intended. Thus, there is no required
phased evaluation of drug performance, and the Center for Veterinary Medicine
will review data at appropriate times in the drug development process. In addition, the time and cost for developing
companion animal drugs may be significantly less than for drugs for livestock
animals, as food safety issues relating to tissue residue levels are not
applicable.
·
EPA
. Products that
are applied topically to animals or to premises to control external parasites
are regulated by the Environmental Protection Agency, or EPA.
After we have
received regulatory licensing or approval for our products, numerous regulatory
requirements typically apply. Among the
conditions for certain regulatory approvals is the requirement that our
manufacturing facilities or those of our third-party manufacturers conform to
current Good Manufacturing Practices or other manufacturing regulations, which
include requirements relating to quality control and quality assurance as well
as maintenance of records and documentation.
The USDA, FDA and foreign regulatory authorities strictly enforce
manufacturing regulatory requirements through periodic inspections.
A number of our
animal health products are not regulated.
For example, certain products such as our E.R.D.-HEALTHSCREEN Urine
Tests and our ALLERCEPT panels, as well as other reference lab tests, are not
regulated by either the USDA or FDA.
Similarly, none of our veterinary instruments requires regulatory
approval to be marketed and sold in the United States. Additionally, various botanically derived
products, various nutritional products and supportive care products are exempt
from significant regulation as long as they do not bear a therapeutic claim
that represents the product as a drug.
We have pursued
regulatory approval outside the United States based on market demographics of
foreign countries. For marketing outside
the United States, we are subject to foreign regulatory requirements governing
regulatory licensing and approval for many of our products. Licensing and approval by comparable
regulatory authorities of foreign countries must be obtained before we can
market products in those countries.
Product licensing approval processes and requirements vary from country
to country and the time required for such approvals may differ substantially
from that required in the United States.
We cannot be certain that approval of any of our products in one country
will result in approvals in any other country.
To date, we or our distributors have sought regulatory approval for
certain of our products in Canada, which is governed by the Canadian Food
Inspection Agency, or CFIA; in Japan, which is governed by the Japanese
9
Ministry of Agriculture,
Forestry and Fisheries, or MAFF; and in certain European and other Asian
countries requiring such approval.
Core
Companion Animal Health products previously discussed which have received
regulatory approval in the United States and/or elsewhere are summarized below.
|
Products
|
|
Country
|
|
Regulated
|
|
Agency
|
|
Status
|
|
E.R.D.-HEALTHSCREEN
Canine Urine Test
|
|
United
States
|
|
No
|
|
MAFF
|
|
Licensed
|
|
|
|
EU
|
|
No-in
most countries
|
|
|
|
|
|
|
|
Canada
|
|
No
|
|
|
|
|
|
|
|
Japan
|
|
Yes
|
|
|
|
|
|
E.R.D.-HEALTHSCREEN
Feline Urine Test
|
|
United
States
|
|
No
|
|
MAFF
|
|
Licensed
|
|
|
|
EU
|
|
No-in
most countries
|
|
|
|
|
|
|
|
Canada
|
|
No
|
|
|
|
|
|
|
|
Japan
|
|
Yes
|
|
|
|
|
|
FELINE
ULTRANASAL FVRC Vaccine
|
|
United
States
|
|
Yes
|
|
USDA
|
|
Licensed
|
|
FELINE
ULTRANASAL FVRCP Vaccine
|
|
United
States
|
|
Yes
|
|
USDA
|
|
Licensed
|
|
SOLO
STEP CH
|
|
United
States
|
|
Yes
|
|
USDA
|
|
Licensed
|
|
|
|
EU
|
|
No-in
most countries
|
|
CFIA
|
|
Licensed
|
|
|
|
Canada
|
|
Yes
|
|
MAFF
|
|
Licensed
|
|
|
|
Japan
|
|
Yes
|
|
|
|
|
|
SOLO
STEP CH Batch Test Strips
|
|
United
States
|
|
Yes
|
|
USDA
|
|
Licensed
|
|
|
|
Canada
|
|
Yes
|
|
CFIA
|
|
Licensed
|
|
SOLO
STEP FH
|
|
United
States
|
|
Yes
|
|
USDA
|
|
Licensed
|
|
TRI-HEART
Plus Heartworm Preventive
|
|
United
States
|
|
Yes
|
|
FDA
|
|
Licensed
|
|
|
|
Japan
|
|
Yes
|
|
MAFF
|
|
Licensed
|
|
|
|
South
Korea
|
|
Yes
|
|
NVRQS
|
|
Licensed
|
Competition
The market in which we compete is intensely
competitive. Our competitors include
independent animal health companies and major pharmaceutical companies that
have animal health divisions. We also
compete with independent, third party distributors, including distributors who
sell products under their own private labels.
In the point-of-care diagnostic testing market, our major competitors
include IDEXX, Abaxis, Inc. and Synbiotics Corporation. The products manufactured by our OVP segment
for sale by third parties compete with similar products offered by a number of
other companies, some of which have substantially greater financial, technical,
research and other resources than us and may have more established marketing,
sales, distribution and service organizations than our OVP segment’s
customers. Companies with a significant
presence in the animal health market such as Bayer AG, Intervet International
bv (a unit of Akzo Nobel), Merial Limited, Novartis AG, Pfizer Inc.,
Schering-Plough Corporation, Virbac S.A. and Wyeth may be marketing or
developing products that compete with our products or would compete with them
if successfully developed. These and
other competitors and potential competitors may have substantially greater
financial, technical, research and other resources and larger, more established
marketing, sales, distribution and service organizations than we do. Our competitors may offer broader product
lines and have greater name recognition than we do. We believe that one of our largest
competitors, IDEXX, in effect prohibits its distributors from selling
competitive products, including our diagnostic instruments and heartworm
diagnostic tests.
Environmental Regulation
In connection with our product development activities
and manufacturing of our biological, pharmaceutical and diagnostic and
detection products, we are subject to federal, state and local laws, rules,
10
regulations and policies
governing the use, generation, manufacture, storage, handling and disposal of
certain materials, biological specimens and wastes. Although we believe that we have complied
with these laws, regulations and policies in all material respects and have not
been required to take any significant action to correct any noncompliance, we
may be required to incur significant costs to comply with environmental and
health and safety regulations in the future.
Although we believe that our safety procedures for handling and
disposing of such materials comply with the standards prescribed by state and
federal regulations, the risk of accidental contamination or injury from these
materials cannot be eliminated. In the
event of such an accident, we could be held liable for any damages that result
and any such liability could exceed our resources.
Employees
As of December 31, 2006, we and our subsidiaries employed
299 people, of whom 123 were in sales, marketing, distribution and customer
support, 99 were in production and veterinary diagnostic laboratories, 54 were in
management and administration and 23 were in research, development and
regulatory affairs. We believe that our
ability to attract and retain skilled personnel is critical to our
success. None of our employees is
covered by a collective bargaining agreement, and we believe our employee
relations are good.
Executive Officers
Our
executive officers and their ages as of March 30, 2007 are as follows:
|
Name
|
|
Age
|
|
Position
|
|
Robert B. Grieve, Ph.D.
|
|
55
|
|
Chairman of the Board and Chief Executive Officer
|
|
Jason A. Napolitano
|
|
38
|
|
Executive Vice President and Chief Financial Officer
|
|
Joseph H. Ritter, D.V.M.
|
|
58
|
|
Executive Vice President, Global Business Operations
|
|
Michael A. Bent
|
|
52
|
|
Vice President, Principal Accounting Officer and
Controller
|
|
John R. Flanders
|
|
51
|
|
Vice President, General Counsel and Secretary
|
|
Todd M. Gilson
|
|
36
|
|
Vice President, Marketing
|
|
Michael J. McGinley, Ph.D.
|
|
46
|
|
Vice President, Operations and Technical Affairs and
General Manager, Heska Des Moines
|
|
G. Lynn Snodgrass
|
|
37
|
|
Vice President, Sales
|
|
Nancy Wisnewski, Ph.D.
|
|
44
|
|
Vice President, Product Development and Technical
Customer Service
|
Robert B.
Grieve, Ph.D.
, one of our founders, currently serves as Chief
Executive Officer and Chairman of the Board.
Dr. Grieve was named Chief Executive Officer effective January 1, 1999,
Vice Chairman effective March 1992 and Chairman of the Board effective May
2000. Dr. Grieve also served as Chief
Scientific Officer from December 1994 to January 1999 and Vice President,
Research and Development, from March 1992 to December 1994. He has been a member of our Board of
Directors since 1990. He holds a Ph.D.
degree from the University of Florida and M.S. and B.S. degrees from the
University of Wyoming.
Jason A.
Napolitano
was appointed Executive Vice President and Chief
Financial Officer in May 2002. He also
served as our Secretary from May 2002 to December 2006. Prior to joining us formally, he was a
financial consultant. From 1990 to 2001,
Mr. Napolitano held various positions at Credit Suisse First Boston, an
investment bank, including Vice President in health care investment banking and
Director in mergers and acquisitions. He
holds a B.S. degree from Yale University.
11
Joseph H.
Ritter, D.V.M.
was
appointed Executive Vice President, Global Business Operations in March
2006. From February 2004 to February
2006, he was Vice President, Marketing and International Business. Also during part of 2004 Dr. Ritter was
responsible for our sales force. From
October 2002 until February 2004, he was Heska’s Vice President of
International Business. From 1995 until
2002 he was President and owner of Veterinary Specialties, Inc., a veterinary
products distribution company. From 1984
to 1995, Dr. Ritter held various senior positions at Mallinckrodt Veterinary,
Inc. including Group Vice President, America and Asia. He holds a Doctorate of Veterinary Medicine
from the University of Illinois and a M.B.A. with an emphasis on international
finance from the American Graduate School of International Management.
Michael
A. Bent
was appointed Vice President, Principal Accounting
Officer and Controller in May 2002. From
September 1999 until April 2002, he was Corporate Controller. From November 1993 until September 1999, Mr. Bent
was Director, Accounting Operations at Coors Brewing Company. Mr. Bent holds a B.S. in accounting from the
University of Wyoming. Mr. Bent is a CPA
in Colorado and Wyoming.
John R. Flanders
was appointed Vice President, General Counsel and Secretary in December
2006. Prior to joining Heska, Mr.
Flanders held the same title at Orange Glo International, Inc., a privately
held consumer products company, from 2002 to 2006. Mr. Flanders held various positions at Coors
Brewing Company from 1988 to 2002, including Vice President, Deputy General
Counsel. Mr. Flanders holds a Juris
Doctor from the University of Denver, College of Law and a B.A. from Colorado
State University. Mr. Flanders is
admitted to practice law in the State and Federal courts of Colorado.
Todd M. Gilson
was appointed Vice President, Marketing in January 2007. From July 2005 to December 2006, Mr. Gilson
was Director, Marketing for Heska Corporation. From August 2003 to July
2005 he served as Marketing Manager for Heska. Mr. Gilson served as
Product Manager at the Hain-Celestial Group from March 2003 to August
2003. He held various positions
including Senior Marketing Manager for Waterpik Technologies, Inc. from January
2001 to March 2003. He held various
marketing positions within Procter & Gamble from 1996 through 2001.
Mr. Gilson holds a B.S. in Business Administration from Bowling Green State
University.
Michael J. McGinley, Ph.D.
was appointed Vice
President, Operations and Technical Affairs and General Manager, Heska Des
Moines in January 2002. He was Vice President, Scientific Affairs for
our Diamond Animal Health, Inc. subsidiary from January 1999 to January 2002
and also served as Director, Research and Development from June 1997 to January
1999. Prior to joining Heska, Dr. McGinley held positions with Bayer
Animal Health and Fort Dodge Laboratories. He holds both a Doctorate and
M.S. degree in Immunobiology from Iowa State University.
G. Lynn Snodgrass
was appointed Vice President, Sales in January 2007. From January 2005 to December 2006, he was
Senior Director, Sales for Heska Corporation. He held various sales
positions at Heska from August 1999 through December 2004. Prior to
joining Heska, he held various sales positions with Luitpold Pharmaceuticals,
GPC Incorporated, Merck and Company and TV Fanfare, Inc. Mr. Snodgrass
holds a B.S. in Biomedical Science from Texas A&M University.
Nancy Wisnewski, Ph.D.,
was appointed Vice President, Product Development and Technical
Customer Service in December 2006. From January 2006 to November 2006, Dr.
Wisnewski was Vice President, Research and Development. She served as
Senior Director, Research and Development from April 2001 until December
2005. Dr. Wisnewski held various positions in Heska’s Research and Development
organization between 1993 and 2001. She received a Doctorate in
Parasitology/Biochemistry from the University of Notre Dame and a B.S. in
Biology from Lafayette College.
12
Item 1A. Risk
Factors
Our future operating results may vary substantially
from period to period due to a number of factors, many of which are beyond our
control. The following discussion
highlights these factors and the possible impact of these factors on future
results of operations. If any of the
following factors actually occur, our business, financial condition or results
of operations could be harmed. In that
case, the price of our common stock could decline and you could experience
losses on your investment.
We
may be unable to successfully market, sell and distribute our products.
We
may not successfully develop and maintain marketing, sales or distribution
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.
The market for companion animal healthcare products is
highly fragmented. Because our Core
Companion Animal Health proprietary products are generally available only to
veterinarians or by prescription and our medical instruments require technical
training to operate, we ultimately sell our Core Companion Animal Health
products only to or through veterinarians.
The acceptance of our products by veterinarians is critical to our
success. Changes in our ability to
obtain or maintain such acceptance or changes in veterinary medical practice
could significantly decrease our anticipated sales.
We
currently sell most of our Core Companion Animal Health products in the United
States to veterinarians through an outside sales force of approximately 29
individuals, an inside sales force of approximately 23 individuals, approximately
11 independent third-party distributors who carry our full distribution line
and approximately 7 independent third-party distributors who carry portions of
our distribution line. To be successful
in these endeavors, we will have to effectively market our products and
continue to develop and train our direct sales force as well as sales personnel
of our independent third-party distributors.
Independent third party distributors may be effective
in increasing sales of our products to veterinarians, although we would expect
a corresponding lower gross margin as such distributors typically buy products
from us at a discount to end user prices.
It is possible new or existing independent third party distributors could
cannibalize our direct sales efforts and lower our total gross margin. To be effective when working with an
independent third party distributor, the distributor must agree to market
and/or sell our products and we must provide proper economic incentives to the
distributor as well as contend effectively for the distributor’s time and focus
given other products the distributor may be carrying, potentially including
those of our competitors. If we fail to
be effective with new or existing independent third party distributors, our
financial performance may suffer. In
addition, most of our independent third party distributor agreements can be
terminated on 60 days notice and we believe that IDEXX, one of our largest
competitors, in effect prohibits its distributors from selling competitive products,
including our diagnostic instruments and heartworm diagnostic tests. We believe this restriction limits our
ability to engage national independent third party distributors to sell our
full distribution line of products. In
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 in effect prohibits this
distributor from carrying our diagnostic instruments and heartworm diagnostic
tests as a condition for having access to buy the IDEXX product line. In the second quarter of 2005, one of our distributors
purchased an IDEXX distributor and subsequently informed us that they no longer
would carry our instruments and heartworm diagnostic tests. We believe IDEXX in effect prohibits this
distributor from carrying our diagnostic instruments and heartworm diagnostic
tests as a condition for having access to buy the IDEXX product line.
13
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
rely on third party suppliers to manufacture those products we do not
manufacture ourselves. Proprietary
products provided by these suppliers represent a majority of our product
revenue. We currently rely on these
suppliers for our veterinary instruments and consumable supplies for these
instruments, for our point-of-care diagnostic and other tests, for the
manufacture of our allergy immunotherapy treatment products as well as for the
manufacture of other products. Major suppliers
who sell us proprietary products which are responsible for more than 5% or more
of our revenue are Arkray, Boule, i-STAT Corporation (currently a unit of
Abbott Laboratories which is to be sold to General Electric Company based on a
January 17, 2007 announcement) and Quidel.
None of these suppliers sell us proprietary products which are
responsible for more than 20% of our revenue, although the proprietary products
of one is responsible for more than 15% of our revenue and two others are each
responsible for more than 10% of our revenue.
We often purchase products from our suppliers under agreements that are
of limited duration or potentially can be terminated on an annual basis. In the case of our veterinary diagnostic
instruments, we are typically entitled to non-exclusive access to consumable
supplies for a defined period upon expiration of exclusive rights, which could
subject us to competitive pressures in the period of non-exclusive access. Although we believe we have agreements in
place to ensure supply of our major product offerings in the marketplace
through at least the end of 2007 and we believe we are in compliance with such
agreements, there can be no assurance that our suppliers will 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 would be significant in cases
where we have built a significant installed base, further harming our sales
prospects and opportunities. Even if we
were able to find an alternate supply, we would likely face increased competition
from the product whose rights we lost being marketed by a third party or the
former supplier and it may take us additional time and expense to gain the
necessary approvals and launch an alternative product.
·
High switching costs.
In certain of our diagnostic instrument
products we would lose the consumable revenues from the installed base of those
instruments if we were to switch to a competitive instrument. If we need to change to other commercial
manufacturing contractors for certain of our regulated products, additional
regulatory licenses or approvals must be obtained for these contractors prior
to our use. This would require new
testing and compliance inspections prior to sale thus resulting in potential
delays. Any new manufacturer would have
to be educated in, or develop substantially equivalent processes necessary for
the production of our products. We
likely would have to train our sales force, distribution network employees and
customer support organization on the new product and spend significant funds
marketing the new product to our customer base.
·
Loss of exclusivity.
Current agreements, or agreements we may negotiate in the future, with
suppliers may require us to meet minimum annual sales levels to maintain our
position as the exclusive distributor of these products. We may not meet these minimum sales levels in
the
14
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
significantly, reducing our revenues and/or decreasing our margins.
·
Inability to meet minimum obligations.
Current agreements, or agreements we may
negotiate in the future, may commit us to certain minimum purchase or other
spending obligations. It is possible we
will not be able to create the market demand to meet such obligations, which
could create a drain on our financial resources and liquidity. Some such agreements may require minimum
purchases and/or sales to maintain product rights and we may be significantly
harmed if we are unable to meet such requirements and lose product rights.
·
The involuntary or voluntary discontinuation of a product line.
Unless we are able to find an alternate
supply of a similar product in this or similar circumstances with any product,
we would not be able to continue to offer our customers the same breadth of
products and our sales would likely suffer.
Even if we are able to identify an alternate supply, it may take us
additional time and expense to gain the necessary approvals and launch an
alternative product, especially if the product is discontinued
unexpectedly. An example of such a
situation arose in 2006 when Dolphin Medical Inc. (a majority-owned subsidiary
of OSI Systems, Inc.) discontinued production of our VET/OX G2 DIGITAL Monitor
as part of an agreement with Masimo Corporation to settle a patent dispute.
·
Limited capacity or ability to scale capacity.
If market demand for our products increases
suddenly, our current suppliers might not be able to fulfill our commercial
needs, which would require us to seek new manufacturing arrangements and may
result in substantial delays in meeting market demand. If we consistently generate more demand for a
product than a given supplier is capable of handling, it could lead to large
backorders and potentially lost sales to competitive products that are readily
available. This could require us to seek
or fund new sources of supply, which may be difficult to find unless it is
under terms that are less advantageous.
·
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 opportunities.
·
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
15
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. and Synbiotics Corporation.
The products manufactured by our OVP segment for sale by third parties
compete with similar products offered by a number of other companies, some of
which have substantially greater financial, technical, research and other
resources than us and may have more established marketing, sales, distribution
and service organization’s than our OVP segment’s customers. Competitors may have facilities with similar
capabilities to our OVP segment, which they may operate at a lower unit price
to their customers, which could cause us to lose customers. Companies with a significant presence in the
companion animal health market, such as Bayer AG, Intervet International bv (a
unit of Akzo Nobel N.V.), Merial Limited, Novartis AG, Pfizer Inc.,
Schering-Plough Corporation, Virbac S.A. and Wyeth, may be marketing or
developing products that compete with our products or would compete with them
if developed. These and other
competitors and potential competitors may have substantially greater financial,
technical, research and other resources and larger, more established marketing,
sales, 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. We
believe that one of our largest competitors, IDEXX, in effect prohibits its
distributors from selling competitive products, including our diagnostic
instruments and heartworm diagnostic tests.
If we fail to compete successfully, our ability to achieve sustained
profitability will be limited and sustained profitability, or profitability at
all, may not be possible.
If the third parties to whom we granted substantial marketing rights
for certain of our existing products or future products under development are
not successful in marketing those products, then our sales and financial
position may suffer.
Our
agreements with our corporate marketing partners generally contain no or small
minimum purchase requirements in order for them to maintain their exclusive or
co-exclusive marketing rights. We are
party to an agreement with SPAH which grants distribution and marketing rights
in the U.S. for our canine heartworm preventive product, TRI-HEART Plus
Chewable Tablets. AgriLabs has the
exclusive right to sell certain of our bovine vaccines in the United States,
Africa, China, Mexico and Taiwan.
Novartis Japan markets and distributes our SOLO STEP CH heartworm test
in Japan under an exclusive arrangement and has exclusive rights to our
TRI-HEART Plus Chewable Tablets in Japan.
One or more of these marketing partners may not devote sufficient
resources to marketing our products.
Furthermore, there may be nothing to prevent these partners from
pursuing alternative technologies or products that may compete with our
products in current or future agreements.
In the future, third-party marketing assistance may not be available on
reasonable terms, if at all. If any of
these events occur, we may not be able to commercialize our products and our
sales will decline. In addition, both
our agreements with SPAH and AgriLabs require us to potentially pay penalties
if we are unable to supply product over an extended period of time.
16
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. 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 $1.01 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 company’s
securities, securities class action litigation has often been instituted. If a securities class action suit is filed
against us, it is likely
17
we would incur substantial legal fees and our
management’s attention and resources would be diverted from operating our
business in order to respond to the litigation.
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 potential products is extensive and may take
substantially longer than we anticipate.
Research projects may fail. New
products that we are developing for the veterinary marketplace may not perform
up to our expectations. Because we have
limited resources to devote to product development and commercialization, any
delay in the 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,
veterinarians may be slow to adopt a product or there may be delays in
producing large volumes of a product.
The former is particularly likely where there is no comparable product
available or historical use of such a product.
For example, while we believe our E.R.D.-HEALTHSCREEN urine tests for
dogs and cats represent a significant scientific breakthrough in companion
animal annual health examinations, these products have achieved significantly
lower market acceptance than we anticipated.
The ultimate adoption of a new product by veterinarians, the rate of
such adoption and the extent veterinarians choose to integrate such a product
into their practice are all important factors in the economic success of one of
our new products and are factors that we do not control to a large extent. If our products do not achieve a significant
level of market acceptance, demand for our products will not develop as
expected and our revenues will be lower than we anticipate.
Obtaining and maintaining regulatory approvals in
order to market our regulated products may be costly and delay the marketing
and sales of our products.
Many
of the products we develop, market or manufacture are subject to extensive
regulation by one or more of the USDA, the FDA, the EPA and foreign regulatory
authorities. These regulations govern,
among other things, the development, testing, manufacturing, labeling, storage,
pre-market approval, advertising, promotion, sale and distribution of some of
our products. Satisfaction of these
requirements can take several years and time needed to satisfy them may vary
substantially, based on the type, complexity and novelty of the product.
The
effect of government regulation may be to delay or to prevent marketing of our
products for a considerable period of time and to impose costly procedures upon
our activities. We have experienced in
the past, and may experience in the future, difficulties that could delay or
prevent us from obtaining the regulatory approval or license necessary to
introduce or market our products. Such
delays in approval may cause us to forego a significant portion of a new
product’s sales in its first year due to seasonality and advanced booking
periods associated with certain products.
Regulatory approval of our products may also impose limitations on the
indicated or intended uses for which our products may be marketed.
Among
the conditions for certain regulatory approvals is the requirement that our facilities
and/or the facilities of our third party manufacturers conform to current Good
Manufacturing Practices. 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
18
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.
The loss of significant customers could harm our operating results.
SPAH
accounted for approximately 13% of our consolidated accounts receivable at
December 31, 2006. No single customer
accounted for more than 10% of our consolidated accounts receivable at
December 31, 2005. While sales to
no single customer accounted for more than 10% of consolidated revenue for the twelve month periods ended on
December 31, 2006, December 31, 2005 and December 31, 2004, respectively, 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. For
example, Henry Schein, Inc. (“Henry Schein”) acquired NLS Animal Health (“NLS”)
in the second quarter of 2006. Henry
Schein was our largest independent third-party distributor at the time and NLS
was a distributor of IDEXX products. We
believe IDEXX in effect prohibits its distributors from selling competitive
products, including our diagnostic instruments and heartworm diagnostic
tests. Henry Schein subsequently
informed us that they would no longer carry our diagnostic instruments and
heartworm diagnostic tests. Henry Schein
and we have agreed that Henry Schein will carry our products that do not
compete directly with IDEXX under an amended distribution agreement. Henry Schein customers’ purchases of our
products will likely decline as it is unlikely we will completely recover
purchases by these customers through direct sales and sales to other
distributors. We believe IDEXX in effect
prohibits Henry Schein from carrying our diagnostic instruments and heartworm
diagnostic tests as a condition for having access to buy the IDEXX product
line.
We may not be able to achieve sustained profitability.
Prior
to 2005, we have incurred net losses on an annual basis since our inception in
1988 and, as of December 31, 2006, we had an accumulated deficit of $208.0
million. 2005 and 2006 are the only
years we have achieved positive net income, and we were not profitable in every
quarter of these years. 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 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,
including the repayment of debt as it comes due, or continue our operations.
Our
common stock is listed on the Nasdaq Capital Market and we may not be able to
maintain that listing, which may make it more difficult for you to sell your
shares.
Our
common stock is listed on the Nasdaq Capital Market. The Nasdaq has several quantitative and
qualitative requirements companies must comply with to maintain this listing,
including a $1.00 minimum bid price.
While we believe we are currently in compliance with all Nasdaq
requirements, we have not always been able to maintain compliance in the past
and there can be no assurance we will maintain compliance in the future. For example, in 2005 we received two
communications from Nasdaq advising us we had failed to comply with the minimum
$1.00 per share bid price requirement and the $35 million minimum value of
listed securities requirement, respectively.
While we subsequently received communications from Nasdaq advising
19
us we have regained compliance in both matters and
that both matters are now closed, there can be no assurance we will continue to
meet these requirements or other requirements in the future. If we are delisted from the Nasdaq Capital
Market, our common stock may be considered a penny stock under the regulations
of the SEC and would therefore be subject to rules that impose additional sales
practice requirements on broker-dealers who sell our securities. The additional burdens imposed upon
broker-dealers may discourage broker-dealers from effecting transactions in our
common stock, which could severely limit market liquidity of the common stock
and your ability to sell our securities in the secondary market. This lack of liquidity would also make it
more difficult for us to raise capital in the future.
We may face costly legal
disputes, including related to our intellectual property or technology or that
of our suppliers or collaborators.
We
may face legal disputes related to our business. Even if meritless, these disputes may require
significant expenditures on our part and could entail a significant distraction
to members of our management team or other key employees. A legal dispute leading to an unfavorable
ruling or settlement could have significant material adverse consequences on
our business.
We
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.
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 and suppliers have
received, and may in the future receive, notices from third parties claiming
infringement and invitations to take licenses under third party patents. While we currently do not have any unresolved
notices of infringement, there is no assurance that there will be none in the
future. Any legal action against us or
our collaborators and suppliers may require us or our collaborators and
suppliers to obtain one or more licenses in order to market or manufacture
affected products or services. However,
we or our collaborators and suppliers may not be able to obtain licenses for
technology patented by others on commercially reasonable terms, or at all, may
not be able to develop alternative approaches if unable to obtain licenses, or
current and future licenses may not be adequate
20
for the operation of our
businesses
. An example of such a situation arose in 2006
when Dolphin Medical Inc. (a majority-owned subsidiary of OSI Systems, Inc.)
discontinued production of our VET/OX G2 DIGITAL Monitor as part of an
agreement with Masimo Corporation to settle a patent dispute. Failure to obtain necessary licenses or to
identify and implement alternative approaches could prevent us and our
collaborators and suppliers from commercializing our products under development
and could substantially harm our business.
Interpretation of existing legislation, regulations
and rules or implementation of future legislation, regulations and rules could
cause our costs to increase or could harm us in other ways.
The Sarbanes-Oxley
Act of 2002 (“Sarbanes-Oxley”) has increased our required administrative
actions as a public company. The
increase in general and administrative costs of complying with Sarbanes-Oxley
will depend on how it is interpreted over time.
Of particular concern are the level and timing of standards for internal
control evaluation and reporting adopted under Section 404 of Sarbanes-Oxley. If our regulators and/or auditors adopt or
interpret more stringent standards than we are anticipating, we and/or our
auditors may be unable to conclude that our internal controls over financial
reporting are designed and operating effectively, which could adversely affect
investor confidence in our financial statements. Even if we and our auditors are able to
conclude that our internal controls over financial reporting are designed and
operating effectively in such a circumstance, our general and administrative
costs are likely to increase. We may be
required to obtain an audit of our internal controls as of December 31, 2007
and are currently required to obtain an audit of our internal controls as of
December 31, 2008. Thus, our general and
administrative costs are likely to increase in the future. In addition, actions by other entities, such
as enhanced rules to maintain our listing on the Nasdaq Capital Market, could
also increase our general and administrative costs or have other adverse
effects on us, as could further legislative, regulatory or rule-making action
or more stringent interpretations of existing legislation, regulations and
rules.
Many
of our expenses are fixed and if factors beyond our control cause our revenue
to fluctuate, this fluctuation could cause greater than expected losses, cash
flow and liquidity shortfalls.
We believe that our future operating results will
fluctuate on a quarterly basis due to a variety of factors which are generally
beyond our control, including:
·
supply of
products from third party suppliers or termination of such relationships;
·
the introduction
of new products by our competitors or by us;
·
competition and
pricing pressures from competitive products;
·
our ability to
maintain relationships with independent third party distributors;
·
large customers
failing to purchase at historical levels, including changes in independent
third party distributor purchasing patterns and inventory levels;
·
fundamental
shifts in market demand;
·
manufacturing
delays;
·
shipment
problems;
·
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.
21
We
have high operating expenses for personnel and marketing. Many of these expenses are fixed in the short
term. If any of the factors listed above
cause our revenues to decline, our operating results could be substantially
harmed.
If
we are unable to maintain various financial and other covenants under our
credit facility agreement we will be unable to borrow any funds under the
agreement and fund our operations.
Under
our credit and security agreement with Wells Fargo Bank, National Association (“Wells
Fargo”), as amended and restated in December 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
availability of borrowings under this agreement is essential to continue to
fund our operations. Among the financial
covenants is a requirement to maintain minimum liquidity (cash plus excess
borrowing base) of $1.5 million. Additional
requirements include covenants for minimum capital monthly and minimum net
income quarterly. Although we believe we
will be able to maintain compliance with all these covenants and any covenants
we may negotiate in the future, there can be no assurance thereof. We have not always been able to maintain
compliance with all covenants in the past.
Although Wells Fargo granted us a waiver of non-compliance in each case,
there can be no assurance we will be able to obtain similar waivers or other
modifications if needed in the future on economic terms, if at all.
Failure to comply with any of the covenants, representations or
warranties, or failure to modify them to allow future compliance, could result
in our being in default 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.
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 fiscal 2007, we may be required to raise additional
capital in the future. If necessary, we
expect to raise these additional funds by the sale of equity or debt securities
or refinancing loans currently outstanding on assets with historical
appraised values in excess of related debt.
There is no guarantee that additional capital will be available from
these sources on 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.
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.
22
We
depend on key personnel for our future success.
If we lose our key personnel or are unable to attract and retain
additional personnel, we may be unable to achieve our goals.
Our
future success is substantially dependent on the efforts of our senior management
and other key personnel. The loss of the
services of members of our senior management or other key personnel may
significantly delay or prevent the achievement of our business objectives. Although we have an employment agreement with
many of these individuals, all are at-will employees, which means that either
the employee or Heska may terminate employment at any time without prior
notice. If we lose the services of, or
fail to recruit, key personnel, the growth of our business could be substantially
impaired. We do not maintain key person
life insurance for any of our senior management or key personnel.
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 SEC 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 in excess of or not
covered by our insurance coverage. If we
become subject to product liability claims resulting from defects in our
products, we may fail to achieve market acceptance of our products and our
sales could substantially decline.
The testing, manufacturing and marketing of our
current products as well as those currently under development entail an
inherent risk of product liability claims and associated adverse
publicity. Following the introduction of
a product, adverse side effects may be discovered. Adverse publicity regarding such effects
could affect sales of our other products for an indeterminate time period. To date, we have not experienced any material
product liability claims, but any claim arising in the future could
substantially harm our business.
Potential product liability claims may exceed the amount of our
insurance coverage or may be excluded from coverage under the terms of the
policy. We may not be able to continue
to obtain adequate insurance at a reasonable cost, if at all. In the event that we are held liable for a
claim against which we are not indemnified or for damages exceeding the
$10 million limit of our insurance coverage or which results in
significant adverse publicity against us, we may lose revenue, be required to
make substantial payments which could exceed our financial capacity and/or lose
or fail to achieve market acceptance.
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.
Certain of our products and development programs produced at our Des
Moines, Iowa facility involve the controlled use of hazardous and biohazardous
materials, including chemicals, 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
23
that
result. Our liability for the release of
hazardous materials could exceed our resources, which could lead to a shutdown
of our operations, significant remediation costs and potential legal liability. In addition, we may incur substantial costs
to comply with environmental regulations if we choose to expand our
manufacturing capacity.
Item 1B.
Unresolved Staff Comments
Not applicable.
Item 2.
Properties.
Our principal administrative and research and
development activities are located in Loveland, Colorado. We currently lease approximately 60,000
square feet at a facility in Loveland, Colorado under an 18-year lease
agreement which expires in 2023. Our principal
production facility located in Des Moines, Iowa, consists of 168,000 square
feet of buildings on 34 acres of land, which we own. We also own a 175-acre farm used principally
for testing products, located in Carlisle, Iowa. Our European facility in Fribourg,
Switzerland is leased under an agreement which expires in 2012.
Item 3. Legal
Proceedings.
From time to time, we may be involved in litigation
relating to claims arising out of our operations. On September 9, 2005, United Vaccines, Inc. (“United”),
a customer of our OVP segment, filed a lawsuit in Madison, Wisconsin against
our Diamond Animal Health, Inc. subsidiary (“Diamond”) and Heska Corporation
alleging various claims, including breach of contract and breach of warranty,
and demanding compensatory and punitive damages. On October 20, 2005, we filed counterclaims on
behalf of Diamond as well as a motion to dismiss all claims against Heska
Corporation. United filed an amended
complaint on November 16, 2005 and Diamond filed an amended counterclaim on
January 25, 2006. The matter proceeded
to a jury trial. On October 18, 2006,
all remaining claims against Diamond and Heska Corporation were dismissed and
United was found in breach of contract with corresponding damages owed to
Diamond. In the course of the
litigation, we discovered that United had dissolved as of December 29,
2005. We also came to believe that
United had transferred substantially all its assets to an Indiana Domestic
Limited Liability Company (“LLC”). On December 28, 2006, United filed a
Notice of Appeal with the Seventh Circuit Court of Appeals. Under a settlement
and release agreement effective March 23, 2007, United agreed to have
approximately $1.6 million paid to Diamond for product Diamond had previously
shipped to United and other contractual obligations and all other remaining
claims involving this matter were waived.
Item
4. Submission of Matters to a Vote of
Security Holders.
No matters were submitted to a vote of stockholders
during the fourth quarter ended December 31, 2006.
24
PART II
Item 5. Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
Our common stock is quoted on the Nasdaq Capital
Market under the symbol “HSKA.” The
following table sets forth the high and low closing prices for our common stock
as reported by the Nasdaq Capital Market for the periods indicated below.
|
|
|
High
|
|
Low
|
|
|
2005
|
|
|
|
|
|
|
First Quarter
|
|
$
|
1.28
|
|
$
|
0.75
|
|
|
Second Quarter
|
|
0.84
|
|
0.56
|
|
|
Third Quarter
|
|
0.93
|
|
0.61
|
|
|
Fourth Quarter
|
|
1.35
|
|
0.85
|
|
|
2006
|
|
|
|
|
|
|
First Quarter
|
|
1.71
|
|
1.13
|
|
|
Second Quarter
|
|
1.18
|
|
1.02
|
|
|
Third Quarter
|
|
1.86
|
|
1.01
|
|
|
Fourth Quarter
|
|
1.78
|
|
1.50
|
|
|
2007
|
|
|
|
|
|
|
First Quarter (through
March 26)
|
|
1.73
|
|
1.56
|
|
|
|
|
|
|
|
|
|
|
As of March 26, 2007, there were approximately 328
holders of record of our common stock and approximately 2,981 beneficial
stockholders. We have never declared or
paid cash dividends on our capital stock and do not anticipate paying any cash
dividends in the near future. In
addition, we are restricted from paying dividends, other than dividends payable
solely in stock, under the terms of our credit facility. We currently intend to retain future
earnings, if any, for the development of our business.
Equity Compensation Plan
Information
The following table sets forth information about our
common stock that may be issued upon exercise of options and rights under all
of our equity compensation plans as of December 31, 2006, including the 1988
Stock Option Plan, the 1997 Stock Incentive Plan, the 2003 Stock Incentive Plan
and the 1997 Employee Stock Purchase Plan.
Our stockholders have approved all of these plans.
|
Plan Category
|
|
Number of Securities to
be Issued Upon Exercise
of Outstanding Options
and Rights
|
|
Weighted-Average
Exercise Price of
Outstanding Options
and Rights
|
|
Number of Securities Remaining
Available for Future Issuance
Under Equity Compensation
Plans (excluding securities
reflected in column (a))
|
|
|
Equity
Compensation Plans Approved by Stockholders
|
|
11,818,823
|
|
$
|
1.36
|
|
3,963,440
|
(1)
|
|
Equity
Compensation Plans Not Approved by Stockholders
|
|
None
|
|
None
|
|
None
|
|
|
Total
|
|
11,818,823
|
|
$
|
1.36
|
|
3,963,440
|
|
(1)
Excludes shares authorized
for issuance in connection with our 1997 Stock Incentive Plan which are subject
to an automatic annual increase of 1,500,000 shares on January 1, 2007.
25
STOCK PRICE PERFORMANCE GRAPH
The following
graph provides a comparison over the five-year period ended December 31, 2006
of the cumulative total stockholder return from a $100 investment in the
Company’s common stock with the Center for Research in Securities Prices Total
Return Index for Nasdaq Medical Devices, Instruments and Supplies, Manufacturers
and Distributors Stocks (the “Nasdaq Medical Devices Index”), the CRSP Total
Return Index for Nasdaq Pharmaceutical Stocks (the “Nasdaq Pharmaceutical Index”)
and the CRSP Total Return Index for the Nasdaq Stock Market (U.S. and Foreign)
(the “Nasdaq U.S. & Foreign Index”).
Comparison of Cumulative
Total Return Among Heska Corporation,
the
Nasdaq Medical Devices Index, the Nasdaq Pharmaceutical Index and the Nasdaq
U.S. and Foreign Index
26
Item 6.
Selected Consolidated Financial Data.
The following consolidated statement of operations and
consolidated balance sheet data have been derived from our consolidated
financial statements. The information
set forth below is not necessarily indicative of the results of future
operations and should be read in conjunction with “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” and the Consolidated
Financial Statements and related Notes included as Items 7 and 8 in this Form
10-K.
|
|
|
Year Ended December 31,
|
|
|
|
|
2002
|
|
2003
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
|
(in thousands, except per share amounts)
|
|
|
Consolidated
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Products, net of sales returns and allowances
|
|
$
|
50,151
|
|
$
|
64,033
|
|
$
|
65,687
|
|
$
|
67,549
|
|
$
|
71,815
|
|
|
Research, development and other
|
|
1,175
|
|
1,292
|
|
2,004
|
|
1,888
|
|
3,245
|
|
|
Total revenue
|
|
51,326
|
|
65,325
|
|
67,691
|
|
69,437
|
|
75,060
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
30,201
|
|
38,399
|
|
42,253
|
|
42,515
|
|
43,000
|
|
|
Cost of research, development and other
|
|
734
|
|
626
|
|
729
|
|
1,095
|
|
1,414
|
|
|
Total cost of revenue
|
|
30,935
|
|
39,025
|
|
42,982
|
|
43,610
|
|
44,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
20,391
|
|
26,300
|
|
24,709
|
|
25,827
|
|
30,646
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
13,128
|
|
15,750
|
|
15,616
|
|
14,020
|
|
14,356
|
|
|
Research and development
|
|
7,836
|
|
6,146
|
|
5,891
|
|
3,749
|
|
3,483
|
|
|
General and administrative
|
|
6,755
|
|
7,083
|
|
7,442
|
|
7,187
|
|
9,887
|
|
|
Restructuring expenses, (gain) on sale of assets and
other
|
|
1,007
|
|
515
|
|
—
|
|
—
|
|
(155
|
)
|
|
Total operating expenses
|
|
28,726
|
|
29,494
|
|
28,949
|
|
24,956
|
|
27,571
|
|
|
Income (loss)
from operations
|
|
(8,335
|
)
|
(3,194
|
)
|
(4,240
|
)
|
871
|
|
3,075
|
|
|
Interest and
other expense, net
|
|
334
|
|
214
|
|
575
|
|
774
|
|
1,041
|
|
|
Income (loss)
before income taxes
|
|
(8,669
|
)
|
(3,408
|
)
|
(4,815
|
)
|
97
|
|
2,034
|
|
|
Income tax
expense (benefit)
|
|
—
|
|
51
|
|
—
|
|
(185
|
)
|
206
|
|
|
Net income
(loss)
|
|
$
|
(8,669
|
)
|
$
|
(3,459
|
)
|
$
|
(4,815
|
)
|
$
|
282
|
|
$
|
1,828
|
|
|
Basic net income
(loss) per share
|
|
$
|
(0.18
|
)
|
$
|
(0.07
|
)
|
$
|
(0.10
|
)
|
$
|
0.01
|
|
$
|
0.04
|
|
|
Diluted net
income (loss) per share
|
|
$
|
(0.18
|
)
|
$
|
(0.07
|
)
|
$
|
(0.10
|
)
|
$
|
0.01
|
|
$
|
0.03
|
|
|
Shares used for
basic net income (loss) per share
|
|
47,720
|
|
48,115
|
|
49,029
|
|
49,650
|
|
50,347
|
|
|
Shares used for
diluted net income (loss) per share
|
|
47,720
|
|
48,115
|
|
49,029
|
|
50,438
|
|
52,932
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
6,026
|
|
$
|
4,877
|
|
$
|
4,982
|
|
$
|
5,231
|
|
$
|
5,275
|
|
|
Total current
assets
|
|
24,700
|
|
28,717
|
|
28,442
|
|
26,845
|
|
30,652
|
|
|
Total assets
|
|
35,585
|
|
38,896
|
|
38,724
|
|
36,784
|
|
38,495
|
|
|
Line of credit
|
|
7,596
|
|
7,528
|
|
10,375
|
|
9,453
|
|
8,022
|
|
|
Current portion
of long-term debt and capital leases
|
|
2,338
|
|
783
|
|
302
|
|
1,263
|
|
1,275
|
|
|
Total current
liabilities
|
|
19,274
|
|
18,516
|
|
23,269
|
|
20,722
|
|
21,980
|
|
|
Long-term debt
and capital leases
|
|
770
|
|
1,746
|
|
1,466
|
|
2,703
|
|
1,927
|
|
|
Long-term
deferred revenue and other
|
|
6,331
|
|
11,978
|
|
11,410
|
|
10,126
|
|
7,840
|
|
|
Total stockholders’
equity
|
|
9,210
|
|
6,656
|
|
2,579
|
|
3,233
|
|
6,748
|
|
27
Item 7
. Management’s Discussion and Analysis of
Financial Condition and Results of Operations.
The following discussion and analysis of our financial
condition and results of operations should be read in conjunction with “Selected
Consolidated Financial Data” and the Consolidated Financial Statements and
related Notes included in Items 6 and 8 of this Form 10-K.
This discussion contains forward-looking statements
that involve risks and uncertainties.
Such statements, which include statements concerning future revenue
sources and concentration, gross profit margins, selling and marketing
expenses, research and development expenses, general and administrative
expenses, capital resources, additional financings or borrowings and additional
losses, are subject to risks and uncertainties, including, but not limited to,
those discussed below and elsewhere in this Form 10-K, particularly in Item 1A.
“Risk Factors,” that could cause actual results to differ materially from those
projected. The forward-looking statements
set forth in this Form 10-K are as of March 30, 2007, and we undertake no duty
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 83% of 2006 product revenue, and Other
Vaccines, Pharmaceuticals and Products, previously reported as Diamond Animal
Health, which represented 17% of 2006 product revenue.
The Core Companion Animal Health segment (“CCA”)
includes diagnostic and other instruments and supplies as well as single use
diagnostic and other tests, vaccines and pharmaceuticals, primarily for canine
and feline use.
Diagnostic and other instruments and supplies represented
approximately 45% of our 2006 product revenue.
Many products in this area involve placing an instrument in the field
and generating future revenue from consumables, including items such as
supplies and service, as that instrument is used. Approximately 32% of our 2006 product revenue
resulted from the sale of such consumables to an installed base of instruments
and approximately 13% of our product revenue was from new hardware sales. A loss of or disruption in supply of
consumables we are selling to an installed base of instruments could
substantially harm our business. All
products in this area are supplied by third parties, who typically own the
product rights and supply the product to us under marketing and/or distribution
agreements. In many cases, we have
collaborated with a third party to adapt a human instrument for veterinary
use. Major products in this area include
our handheld electrolyte instrument, our chemistry instrument and our
hematology instrument and their affiliated operating consumables. Revenue from products in these three areas,
including revenue from consumables, represented approximately 40% of our 2006
product revenue.
Single use diagnostic and other tests, vaccines and
pharmaceuticals represented approximately 38% of our 2006 product revenue. Since items in this area are single use by
their nature, our aim is to build customer satisfaction and loyalty for each
product, generate repeat annual sales from existing customers and expand our
customer base in the future. Products in
this area are both supplied by third parties and provided by us. Major products in this area include our
heartworm diagnostic tests, our heartworm preventive, our allergy
immunotherapy, our allergy diagnostic tests and our allergy diagnostic
kits. Combined revenue from
heartworm-related products and allergy-related products represented
approximately 35% of 2006 product revenue.
We consider the Core Companion Animal Health segment
to be our core business and devote most of our management time and other
resources to improving the prospects for this segment. Maintaining a
28
continuing, reliable and
economic supply of products we currently obtain from third parties is critical
to our success in this area. Virtually
all of our sales and marketing expenses are in the Core Companion Animal Health
segment. The majority of our research
and development spending is dedicated to this segment, as well. We strive to provide high value products and
advance the state of veterinary medicine.
All our Core Companion Animal Health products are
ultimately sold to or through veterinarians.
In many cases, veterinarians will mark up their costs to the end
user. The acceptance of our products by veterinarians
is critical to our success. Core
Companion Animal Health products are sold directly by us as well as through
independent third party distributors and other distribution relationships, such
as corporate agreements. Revenue from
direct sales, independent third-party distributors and other distribution
relationships represented approximately 51%, 26% and 23% of Core Companion
Animal Health 2006 product revenue, respectively.
Independent third-party distributors may be effective
in increasing sales of our products to veterinarians, although we would expect
a corresponding lower gross margin as such distributors typically buy products
from us at a discount to end user prices.
To be effective when working with an independent third-party
distributor, the distributor must agree to market and/or sell our products and
we must provide proper economic incentives to the distributors as well as
contend effectively for the distributor’s time and focus given other products
the distributor may be carrying, potentially including those of our
competitors. We believe that one of our
largest competitors, IDEXX, in effect prohibits its distributors from selling
competitive products, including our diagnostic instruments and heartworm
diagnostic tests. We believe the IDEXX
restrictions limit our ability to engage national distributors to sell our full
distribution line of products.
We intend to sustain profitability through a
combination of revenue growth, gross margin improvement and expense
control. Accordingly, we closely monitor
product revenue growth trends in our Core Companion Animal Health segment. Product revenue in this segment grew 10% in
2006 as compared to 2005 and has grown at a compounded annual growth rate of
19% since 1998, our first full year as a public company.
The Other Vaccines, Pharmaceuticals and Products
segment (“OVP”) includes our 168,000 square foot USDA- and FDA-licensed
production facility in Des Moines, Iowa.
We view this facility as a strategic asset which will allow us to
control our cost of goods on any vaccines and pharmaceuticals that we may
commercialize in the future. We are
increasingly integrating this facility with our operations elsewhere. For example, virtually all our U.S. inventory
is now stored at this facility and fulfillment logistics are managed
there. CCA segment products manufactured
at this facility are transferred at cost and are not recorded as revenue for
our OVP segment. We view OVP reported
revenue as revenue primarily to cover the overhead costs of the facility and to
generate incremental cash flow to fund our Core Companion Animal Health
segment.
Our OVP segment includes private label vaccine and
pharmaceutical production, primarily for cattle but also for other animals
including small mammals and fish. All
OVP products are sold by third parties under third party labels.
We have developed our own line of bovine vaccines that
are licensed by the USDA. We have a
long-term agreement with a distributor, Agri Laboratories, Ltd., (“AgriLabs”),
for the marketing and sale of certain of these vaccines which are sold
primarily under the Titanium
Ò
and MasterGuard
Ò
brands which are registered trademarks of AgriLabs. This agreement generates a significant
portion of our OVP segment’s revenue.
Subject to certain purchase minimums, under our long term agreement,
AgriLabs has the exclusive right to sell the aforementioned bovine vaccines in
the United States, Africa, China, Mexico and Taiwan until
29
at least December
2009. This exclusivity may be extended
under certain conditions. Our OVP
segment 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 the sale of products, licensing of
technology product rights, royalties and sponsored research and
development. Our policy is to recognize
revenue when the applicable revenue recognition criteria have been met, which
generally include the following:
·
Persuasive evidence of an arrangement
exists;
·
Delivery has occurred or services rendered;
·
Price is fixed or determinable; and
·
Collectibility
is reasonably assured.
Revenue from the sale of products is recognized after both the goods
are shipped to the customer and acceptance has been received, if required, with
an appropriate provision for estimated returns and allowances
. We
do not permit general returns of products sold.
Certain of our products have expiration dates. Our policy is to exchange certain outdated,
expired product with the same product.
We record an accrual for the estimated cost of replacing the expired
product expected to be returned in the future, based on our historical
experience, adjusted for any known factors that reasonably could be expected to
change historical patterns, such as regulatory actions which allow us to extend
the shelf life of our products. Revenue
from both direct sales to veterinarians and sales to independent third-party
distributors are generally recognized when goods are shipped. Our products are shipped complete and ready
to use by the customer. The terms of the
customer arrangements generally pass title and risk of ownership to the
customer at the time of shipment.
Certain customer arrangements provide for acceptance provisions. Revenue for these arrangements is not
recognized until the acceptance has been received or the acceptance period has
lapsed. We reduce our product revenue by
the estimated cost of any rebates, allowances or similar programs, which are
used as promotional programs.
Recording revenue from the sale of products involves the use of
estimates and management judgment. We
must make a determination at the time of sale whether the customer has the
ability to make payments in accordance with arrangements. While we do utilize past payment history,
and, to the extent available for new customers, public credit information in
making our
30
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.
License revenue under arrangements to sell or license product rights or
technology rights is recognized as obligations under the agreement are
satisfied, which generally occurs over a period of time. Generally, licensing revenue is deferred and
recognized over the estimated life of the related agreements, products, patents
or technology. Nonrefundable licensing
fees, marketing rights and milestone payments received under contractual
arrangements are deferred and recognized over the remaining contractual term
using the straight-line method. Revenue
from licensing technology and product rights is reported in our Research,
development and other revenue line item.
An example of the former, i.e. licensing technology, is a patent we own
under which we have granted a third-party exclusive rights to the human
healthcare market for the life of the patent in exchange for an upfront payment
and royalty payments on sales of any product based on the patent. The upfront payment will be amortized over
the life of the patent and reported along with any affiliated royalty payments
in our Research, development and other revenue line item. An example of the latter, i.e. product
rights, is our July 2002 agreement to license Intervet Inc. certain rights to
patents, trademarks and know-how for our Flu AVERT I.N. equine influenza
vaccine, the world’s first intranasal influenza vaccine for horses. As we have no further rights to manufacture,
market or sell this vaccine without Intervet Inc.’s permission, we are
reporting the amortization of the upfront payment we received in this agreement
along with any affiliated royalty payments in our Research, development and
other revenue line item. The upfront payment
is being amortized over the estimated life of the product.
Recording revenue from license arrangements involves the use of
estimates. The primary estimate made by
management is determining the useful life of the related agreement, product,
patent or technology. We evaluate all of
our licensing arrangements by estimating the useful life of either the product
or the technology, the length of the agreement or the legal patent life and
defer the revenue for recognition over the appropriate period.
Occasionally we enter into arrangements that include multiple
elements. Such arrangements may include
the licensing of technology and manufacturing of product. In these situations we must determine whether
the various elements meet the criteria to be accounted for as separate
elements. If the elements cannot be
separated, revenue is recognized once revenue recognition criteria for the
entire arrangement have been met or over the period that the Company’s
obligations to the customer are fulfilled, as appropriate. If the elements are determined to be
separable, the revenue is allocated to the separate elements based on relative
fair value and recognized separately for each element when the applicable
revenue recognition criteria have been met.
In accounting for these multiple element arrangements, we must make
determinations about whether elements can be accounted for separately and make
estimates regarding their relative fair values.
Allowance
for Doubtful Accounts
We maintain an allowance for doubtful accounts receivable based on
client-specific allowances, as well as a general allowance. Specific allowances are maintained for
clients which are determined to have a high degree of collectibility risk based
on such factors, among others, as: (i) the aging of the accounts receivable
balance; (ii) the client’s past payment experience; (iii) a deterioration in
the client’s financial condition, evidenced by weak financial condition and/or
continued poor operating results, reduced credit ratings, and/or a bankruptcy
filing. In addition to the specific allowance,
the Company maintains a general allowance for credit risk in its accounts
31
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
In the years ended December 31, 2004, 2005
and 2006, we deferred and capitalized certain costs, including payments to
third-party law firms for patent prosecution to expand the scope of our
patents, related to the technology or patents underlying a variety of long-term
licensing agreements. We owned a
portfolio of patents not then utilized in our product development or
manufacture. Several entities paid upfront
licensing fees to utilize the technology supported by these patents in their
own product development and commercialization efforts. Because we believed that we had an obligation
to protect the underlying patents, we deferred the revenue associated with
these long-term agreements and the direct and incremental costs of prosecuting
the patents that supported the agreements.
We use the term “patent prosecution” in this context in the narrow sense
often used by intellectual property professionals — to describe activities
where we seek to expand the scope of existing patents such as geographically,
where we may look to expand patent protection into new countries, or for
broader applications, such as for newly contemplated uses or expanded claim
breadth coverage of the technology defined by those licensing our technology
within existing geographies. A situation
where a third party has violated our intellectual property rights by using our
patented technology without permission and we have filed a corresponding
lawsuit would not meet this definition of “patent prosecution” and we would
therefore expense the corresponding legal expenses as incurred. In accordance with SFAS No. 95, paragraph
17(c), we classified patent prosecution expenditures which were capitalized as
cash used for investing activities since, like a capital expenditure to improve
a building or add a piece of equipment, the cost is a necessary investment into
a productive asset to maintain our future revenue process. No internal costs were capitalized.
These capitalized costs were amortized over the same period as the licensing
revenue related to those patents was recognized. Costs in excess of the
amount of remaining related deferred licensing revenue were not capitalized,
but expensed as incurred. We capitalized
approximately $292 thousand,
$187 thousand and $541 thousand for the years ended December 31,
2006, 2005 and 2004, respectively, and amortized approximately
$334 thousand, $157 thousand and $393 thousand for the same periods,
respectively. In December 2006, we sold
all patents for which we had capitalized patent costs and, accordingly, we have
no capitalized patent costs on our balance sheet as of December 31, 2006. We do not expect to capitalize any patent
costs in the future.
Deferred
Tax Assets – Valuation Allowance
Our deferred tax assets, such as a net
operating loss carryforward (“NOL”), are reduced by an offsetting valuation
allowance based on judgmental assessment of available evidence if we are unable
to conclude that it is more likely than not that some or all of the related
deferred tax assets will be realized. If
we are able to conclude it is more likely than not that we will realize a
future benefit from an NOL, we will reduce the related valuation allowance by
an amount equal to the estimated quantity of income taxes we would pay in cash
if we were not to utilize our NOL in the future. The first time this occurs in a given
jurisdiction, it will result in a net deferred tax asset on our balance sheet
and an income tax benefit of equal magnitude in our statement of operations in
the period we make the determination. In
future periods, we will then recognize as income tax expense the estimated quantity
of income taxes we would have paid in cash had we not utilized our NOL. The corresponding journal entry will be a
reduction of our deferred tax asset. If
there is a change regarding our tax position in the future, we will make a
corresponding adjustment to the related valuation allowance. As an example, in 2005 we reduced our
valuation allowance related to the NOL for our Swiss operating subsidiary which
resulted in a net deferred tax asset on our balance sheet and we increased this
valuation allowance based on agreements subsequently obtained from tax
authorities in Switzerland in 2006. Our
domestic NOL represents a deferred tax asset, which has been completely offset
by a valuation allowance. Based on our
domestic cumulative operating losses in recent years, as well as other factors
including uncertainties regarding our future operations, we have been unable to
conclude that it was more likely than not that we will realize a future benefit
from our domestic NOL. Accordingly, a
valuation allowance has been established for the entire domestic deferred tax
asset at December 31, 2006. We expect to
consider this situation throughout 2007.
Should we conclude it is more likely than not that we will realize a
future benefit from our domestic NOL, we likely would recognize a very large
income tax benefit and a corresponding deferred tax asset on our balance sheet
at that time.
32
Results
of Operations
The following table summarizes our results of
operations for the three most recent fiscal years.
|
|
|
Year Ended December 31,
|
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
|
(in thousands except per share amounts)
|
|
|
Consolidated Statement of
Operations Data:
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Product revenue,
net:
|
|
|
|
|
|
|
|
|
Core companion
animal health
|
|
$
|
52,719
|
|
$
|
54,716
|
|
$
|
59,936
|
|
|
Other vaccines,
pharmaceuticals and products
|
|
12,968
|
|
12,833
|
|
11,879
|
|
|
Total product
revenue
|
|
65,687
|
|
67,549
|
|
71,815
|
|
|
Research,
development and other
|
|
2,004
|
|
1,888
|
|
3,245
|
|
|
Total revenue,
net
|
|
67,691
|
|
69,437
|
|
75,060
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
Cost of products
sold
|
|
42,253
|
|
42,515
|
|
43,000
|
|
|
Cost of
research, development and other
|
|
729
|
|
1,095
|
|
1,414
|
|
|
Total cost of
revenue:
|
|
42,982
|
|
43,610
|
|
44,414
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
24,709
|
|
25,827
|
|
30,646
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Selling and
marketing
|
|
15,616
|
|
14,020
|
|
14,356
|
|
|
Research and
development
|
|
5,891
|
|
3,749
|
|
3,483
|
|
|
General and
administrative
|
|
7,442
|
|
7,187
|
|
9,887
|
|
|
(Gain) on sale
of assets
|
|
—
|
|
—
|
|
(155
|
)
|
|
Total operating
expenses
|
|
28,949
|
|
24,956
|
|
27,571
|
|
|
Income (loss) from
operations
|
|
(4,240
|
)
|
871
|
|
3,075
|
|
|
Interest and other
expense, net
|
|
575
|
|
774
|
|
1,041
|
|
|
Income (loss) before
income taxes
|
|
(4,815
|
)
|
97
|
|
2,034
|
|
|
Income tax expense
(benefit)
|
|
—
|
|
(185
|
)
|
206
|
|
|
Net income (loss)
|
|
$
|
(4,815
|
)
|
$
|
282
|
|
$
|
1,828
|
|
|
Basic net income (loss)
per share
|
|
$
|
(0.10
|
)
|
$
|
0.01
|
|
$
|
0.04
|
|
|
Diluted net income (loss) per share
|
|
$
|
(0.10
|
)
|
$
|
0.01
|
|
$
|
0.03
|
|
Revenue
Total
revenue, which includes product revenue, research and development and other
revenue, increased 8% to $75.1 million in 2006 compared to $69.4 million in
2005. Total revenue for 2005 increased
3% to $69.4 million from $67.7 million in 2004.
Product revenue increased 6% to $71.8 million in 2006 compared to $67.5
million in 2005. Product revenue
increased 3% to $67.5 million in 2005 compared to $65.7 million in 2004.
Core
Companion Animal Health segment product revenue increased 10% to
$59.9 million in 2006 compared to $54.7 million in 2005. Key factors in the increase were higher sales
of our instrument consumables, our heartworm preventive, our heartworm
diagnostic tests and our IV pumps, somewhat offset by lower sales of our
hematology instruments.
2005
product revenue from our Core Companion Animal Health segment increased 4% to
$54.7 million compared to $52.7 million in 2004. Key factors in the increase were higher 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 due to an offer
33
to certain customers who had previously purchased a
hematology analyzer to upgrade to our new hematology analyzer during 2004 which
was not repeated in 2005, and of our heartworm diagnostic tests.
Other
Vaccines, Pharmaceuticals and Products segment (“OVP”) product revenue
decreased 7% to $11.9 million in 2006 compared to $12.8 million in
2005. A key factor in the decline was
lower sales of our bovine vaccines under our contract with AgriLabs, including
purchases under this contract by Intervet Inc. which occurred in the first
quarter of 2005 but not 2006, somewhat offset by increased sales of our bulk
bovine biologicals. Intervet Inc.
launched a line of bovine vaccines competitive with ours in 2005.
2005
product revenue from OVP decreased 1% to $12.8 million compared to $13.0
million in 2004. The decrease in 2005
was due to lower sales of small mammal vaccines, somewhat offset by increased
sales of our bovine vaccines under our contract with AgriLabs and our fish
vaccines.
Revenue
from research and development and other items increased by 72% to $3.2 million
in 2006 from $1.9 million in 2005. This
increase was primarily due to the acceleration of approximately
$1.5 million in previously deferred licensing fees recognized upon
completion of the sale of a worldwide patent portfolio covering a number of
major allergens and the genes that encode them (the “Allergopharma Portfolio”)
in December 2006. We recognized
approximately $2.1 million in licensing revenue related to the Allergopharma
Portfolio in 2006, including revenue from the amortization of previous upfront
payments and other payments from third parties.
While we have an exclusive veterinary license to the Allergopharma
Portfolio and have a service agreement related to the Allergopharma Portfolio
under which we expect to generate 2007 revenue, we expect a significant decline
in revenue related to the Allergopharma Portfolio in 2007 as compared to 2006.
The
2005 decrease of 6% to $1.9 million from $2.0 million in 2004 was
primarily due to the reduced level of activity for research and development
efforts for third parties. We recognized
approximately $269 thousand and $175 thousand in 2005 and 2006, respectively,
for the acceleration of deferred revenue related to terminated licensing
agreements.
In
2007, we expect continued growth in our Core Companion Animal Health
segment. We anticipate 2007 OVP revenue
of around $13.5 million, a slight increase as compared to 2006. We expect research, development and other
revenue to be approximately $1.25 million in 2007, a significant decline when
compared to 2006.
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 $44.4 million
for the twelve months ended December 31, 2006, a 2% increase as compared to
$43.6 million for the corresponding period in 2005. Gross profit
increased 19% to $30.6 million for 2006 as compared to $25.8 million in
2005. Gross Margin, i.e. gross profit divided by total revenue, increased
to 40.8% for 2006 as compared to 37.2% in 2005. Cost of revenue totaled
$43.6 million for 2005, a 2% increase as compared to $43.0 million for
2004. Gross profit increased 5% to $25.8 million for 2005 as compared to
$24.7 million in 2004. Gross Margin increased to 37.2% for 2005 as
compared to 36.5% in 2004.
Cost
of products sold increased 1% to $43.0 million in the twelve months ended
December 31, 2006 from $42.5 million in 2005. Gross profit on
product revenue increased 15% to $28.8 million for 2006 from $25.0 million in
the prior year. Product Gross Margin, i.e. gross profit on product
revenue divided by product revenue, increased to 40.1% in 2006 as compared to
37.1% in 2005. Key factors in the improvement were higher sales and
margins in our heartworm preventive product, where we now have taken in house
certain manufacturing operations we previously outsourced; higher sales and
margins in our heartworm diagnostic
34
tests, where agreements under which we paid certain
royalties expired in 2005 and 2006; and a greater proportion of product sales
from instrument consumables, which typically have a higher than average gross
margin. Cost of products sold increased
1% to $42.5 million in 2005 as compared to $42.3 million in 2004. Gross
profit on product revenue increased 7% to $25.0 million for 2005 from
$23.4 million in 2004. Product Gross Margin increased to 37.1% in 2005 as
compared to 35.7% in 2004. Key factors in the improvement were higher
sales and margins in our heartworm preventive product, where we now have taken
in house certain manufacturing operations we previously outsourced and
increased instrument consumable sales, which typically carry a higher than
average gross margin, somewhat offset by certain supplier price increases
resulting from a contract renegotiation in the second half of 2004.
Cost
of research, development and other revenue increased 29% to $1.4 million in the
twelve months ended December 31, 2006 as compared to $1.1 million in
2005. Gross profit on research, development and other revenue increased
131% to $1.8 million for 2006 from $793 thousand in 2005. Other Gross
Margin, i.e. gross profit on research, development and other revenue divided by
research, development and other revenue, increased to 56.4% for 2006 as
compared to 42.0% in 2005. The primary reason for the increase in gross
margin was the acceleration of certain previously deferred upfront licensing
fees which were recognized in 2006 due to the sale of the Allergopharma
Portfolio in December 2006. Cost of
research, development and other revenue increased 50% to $1.1 million in 2005
as compared to $729 thousand in 2004. Gross profit on research,
development and other revenue decreased 38% to $793 thousand for the twelve
months ended December 31, 2005 from $1.3 million in 2004. Other Gross
Margin decreased to 42.0% for 2005 as compared to 63.6% in 2004. The
primary reason for the decrease is a greater proportion of patent-related costs
being expensed as incurred in 2005 rather than capitalized when compared to the
prior year.
We
expect our gross margin on product sales will increase in 2007 as compared to
2006 as we expect to sell a greater proportion of total sales in relatively
higher margin products.
Operating Expenses
Selling
and marketing expenses increased by 2% to $14.4 million in 2006 compared to
$14.0 million in 2005 primarily due to increased expenditures on marketing
programs. Selling and marketing expenses
decreased by 10% to $14.0 million in 2005 as compared to $15.6 million in 2004
primarily due to marketing spending related to the initial rollout of our new
hematology instrument and greater outside consulting fees related to corporate
branding in 2004.
Research
and development expenses decreased by 7% to $3.5 million in 2006 from $3.7
million in 2005. A key factor in the
decline was lower personnel costs.
Research and development expenses decreased by 36% to $3.7 million
in 2005 from $5.9 million in 2004. Key
factors in the decrease were lower personnel costs and spending on clinical
trials.
General
and administrative expenses increased by 38% to $9.9 million in 2006 from $7.2
million in 2005. Key factors in the
increase include increased compensation expense, primarily related to the
accrual of our 2006 Management Incentive Plan (“MIP”) payouts and options
granted to management which were expensed for accounting purposes in 2006 but
not 2005, increased legal fees, primarily related to litigation with United
Vaccines, Inc. (a former customer of our OVP segment), and increased rent
expense. General and administrative
expenses decreased by 3% to $7.2 million in 2005 from $7.4 million in
2004. Key factors in the decrease were
lower consulting fees and legal fees, somewhat offset by an increase in rent
expense.
In
2006, we recognized a gain of approximately $155 thousand on the sale of the
Allergopharma Portfolio. The gain is
equal to the sales price less the net book value of the Allergopharma
Portfolio, which included all of our unamortized capitalized patent
costs. We had no similar transactions in 2005 or 2004.
35
In
2007, we expect total operating expenses to increase as compared to 2006. We expect operating expenses generally will
increase more slowly than increases in revenue from existing operations.
Interest and Other
Expense, Net
Interest
expense increased to $1.2 million in 2006 from $1.1 million in 2005 and
$690 thousand in 2004. The increase in
2006 as compared to 2005 primarily reflects increased interest on borrowings
under our credit and security agreement with Wells Fargo Bank, National
Association (“Wells Fargo”) due to increases in Wells Fargo’s prime rate. The increase in 2005 as compared to 2004
reflects the greater usage of borrowings under our credit and security
agreement with Wells Fargo, negotiated spread rate increases with Wells Fargo
and increases in Wells Fargo’s prime rate.
The 2005 increase in interest expense was partially offset by a $249
thousand gain in Other, net, primarily due to gains on foreign currency
translation of approximately $224 thousand.
This foreign currency gain resulted primarily from a transaction under
which funds were transferred from Heska AG, our operating subsidiary in
Switzerland, to the United States-based parent company via an intercompany
receivable/payable and certain inventory transactions involving non-U.S. dollar
currencies. Because this intercompany
loan was to be repaid in the foreseeable future, changes in the amount of U.S.
dollars receivable by Heska AG resulting from changes in foreign currency
exchange rates are required to be recorded through earnings or loss. The impact of the foreign currency exchange
rate changes resulted in a gain on the loan due to a strengthening U.S. dollar
relative to the Swiss franc.
We
expect net interest expense to decrease in 2007 due to anticipated lower use of
our revolving credit facility and lower interest rate spreads under our
agreement with Wells Fargo.
Income Tax Expense
(Benefit)
Historically, we have not been consistently profitable
and, accordingly, have not recognized a tax benefit on our pre-tax losses. Based on the profitable operating performance
of our operating subsidiary in Switzerland, Heska AG, in the fourth quarter of
2005 we concluded that our NOL in Switzerland was realizable on a
more-likely-than-not basis. We reduced
the related valuation allowance in the fourth quarter of 2005, resulting in an
income tax benefit of approximately $185 thousand. This resulted in a net deferred tax asset of
$185 thousand — equal to the estimated quantity of income taxes we would have
recognized in our future statements of operations as income tax expense that we
would not have to actually pay in cash as we utilized our NOL in Switzerland.
We subsequently obtained agreements from the
tax authorities in the canton of Fribourg regarding the determination of our
taxable income which reduced our taxable income in Switzerland in 2005 and 2006
from previous estimates for financial reporting purposes and we expect to
reduce our taxable income, and thus our tax obligation, in future years as
compared to prior expectations. Given
our corresponding lower income expectations in Switzerland, we no longer
believe we will utilize all of our NOL in Switzerland before it fully expires
at the end of 2008. Accordingly, we
reduced our net deferred tax asset related to this NOL and recognized a
corresponding income tax expense in the fourth quarter of 2006. In addition, we recognized approximately $58
thousand of income tax expense in the fourth quarter of 2006 related to
alternative minimum tax obligations in the United States.
We
expect income tax expense to be less in 2007 than it was in 2006, primarily due
to lower estimated taxable income in Switzerland as a result of the
aforetomentioned agreements from the tax authorities in the canton of Fribourg.
36
Net Income (Loss)
In
2006, we recorded the second consecutive year of profitability in our
history. Our 2006 net income was $1.8 million as compared to $282
thousand in 2005 and an annual loss of $4.8 million in 2004. The 2006
improvement over 2005 was due to higher revenue and higher Gross Margin,
somewhat offset by increased operating expenses. The improvement from 2004 to 2005 was due to
increased product revenue, higher gross profit percentage on product sales,
lower operating expenses and reversal of valuation allowances against our Swiss
net operating loss deferred income tax assets for Heska AG.
In
2007, we expect to increase our net income primarily due to increased revenue
and increased gross margins somewhat offset by increased operating expenses.
Liquidity, Capital Resources and Financial
Condition
We
have incurred net cumulative negative cash flow from operations since inception
in 1988. For the year ended December 31,
2006, we had total revenue of $75.1 million and net income of $1.8 million. In 2006, net cash provided by operations was
$1.1 million. At December 31, 2006, we
had $5.3 million of cash and cash equivalents, working capital of $8.7 million,
$8.0 million of outstanding borrowings under our revolving line of credit,
discussed below, and $3.2 million of other debt and capital leases.
Net
cash flows from operating activities provided cash of $1.1 million in 2006 as
compared to $148 thousand in 2005 and using $1.1 million in 2004. The major factors in the improvement in our
cash provided from operations in 2006 as compared to 2005 was a $3.7 million increase in cash from accrued
liabilities, the largest component of which was approximately $1.5 million in
anticipated payouts under our MIP which were accrued at year end 2006 as
compared to no such anticipated payouts in 2005, a $1.5 million improvement in
our net income, a $1.1 million improvement in cash used for accounts payable
and an approximately $700 thousand increase in stock-based compensation
recognized for accounting purposes but not paid in cash. The latter primarily relates to the adoption
of a new accounting standard related to the expensing of stock options. These factors were somewhat offset by a
$3.8 million greater usage of cash from accounts receivable, primarily
related to our revenue growth, an approximately $1.5 million greater usage of
cash for inventory purchases and an approximately $1.0 million greater usage of
cash related to deferred revenue and other long-term liabilities, primarily
related to our recognition of approximately $1.5 million in previously deferred
licensing fees upon completion of the sale of the Allergopharma Portfolio in
December 2006. Major factors in the
improvement in our cash provided from operations in 2005 as compared to the net
used in 2004 were a $5.1 million improvement in our net income and an
approximately $1.4 million improvement in cash provided by inventory; these items
were somewhat offset by a $2.1 million decrease in cash provided by
deferred revenue and other long term liabilities, primarily related to an
upfront payment received for marketing rights in 2004 not repeated in 2005, a
$2.0 million decrease in cash provided by accounts payable and a $1.1 million
dollar decrease in accrued liabilities.
Net
cash flows from investing activities provided cash of $159 thousand in 2006 as
compared to using $1.5 million in 2005 and $1.4 million in 2004. Expenditures for property and equipment
totaled approximately $1.2 million, $1.4 million and $1.3 million in
2006, 2005 and 2004, respectively. In
2006, the sale of certain intellectual property generated cash, after related
costs, of approximately $1.6 million which was slightly larger than
approximately $1.5 million in capital expenditures and capitalized patent
costs. In 2004, approximately $1.8
million in capital expenditures and capitalized patent costs were somewhat
offset by approximately $400 thousand of proceeds from the licensing of
certain rights related to one of our products and $100 thousand of
proceeds from the repayment of a loan.
Net
cash flows from financing activities used cash of $1.4 million in 2006 as
compared to providing $1.8 million in 2005 and $2.5 million in 2004. In 2006, the Company reduced its line of
credit borrowings by
37
$1.4 million and repaid principal on term debt of $763
thousand which was somewhat offset by $766 thousand in proceeds from the
issuance of common stock upon option exercises and in our Employee Stock
Purchase Plan. In 2005, the primary
source of cash was $2.5 million from the Equipment Notes, somewhat offset
by $922 thousand repayment of borrowings under our revolving line of credit
with Wells Fargo. In 2004, the primary
source of funds was $2.8 million in borrowings under our revolving credit
facility.
At
December 31, 2006, we had a $12.0 million asset-based revolving line of credit
with Wells Fargo which has a maturity date of June 30, 2009 as part of our
credit and security agreement with Wells Fargo.
At December 31, 2006, $8.0 million was outstanding under this line of
credit. Our ability to borrow under this
line of credit varies based upon available cash, eligible accounts receivable
and eligible inventory. On December 31,
2006, interest on the term note was charged at a stated rate of prime plus 2.5%
and was payable monthly. We are required
to comply with various financial and non-financial covenants, and we have made
various representations and warranties.
Among the financial covenants is a requirement to maintain a minimum
liquidity (cash plus excess borrowing base) of $1.5 million. Additional requirements include covenants for
minimum capital monthly and minimum net income quarterly. Failure to comply with any of the covenants,
representations or warranties could result in our being in default on the loan
and could cause all outstanding amounts payable to Wells Fargo, including those
discussed above, as well as our other borrowings, to become immediately due and
payable or impact our ability to borrow under the agreement. Any default under the Wells Fargo agreement
could also accelerate the repayment of our other borrowings. We were in compliance with all financial
covenants as of December 31, 2006. At
December 31, 2006, our remaining available borrowing capacity based upon
eligible accounts receivable and eligible inventory under our revolving line of
credit was approximately $4.0 million.
At
December 31, 2006, we also had outstanding obligations for long-term debt and
capital leases totaling approximately $3.2 million primarily related to
three term loans with Wells Fargo and a subordinated promissory note with a significant
customer with the proceeds used for facilities enhancements. One term loan is secured by real estate in
Iowa and had an outstanding balance at December 31, 2006 of approximately
$693 thousand due in monthly installments of $17,658 plus interest, with a
balloon payment of approximately $163 thousand due on June 30, 2009. The term loan had a stated interest rate of
prime plus 2.5% on December 31, 2006.
The other two term loans are secured by machinery and equipment at our
Des Moines, Iowa and Loveland, Colorado locations (the “Equipment Notes”). The Equipment Notes had a stated interest
rate of prime plus 2.5% on December 31, 2006.
Principal payments on the Equipment Notes of $46,296 plus interest are
due monthly with a balloon payment of approximately $602 thousand due upon
maturity of the credit facility agreement on June 30, 2009. 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 on May 31, 2007 and the lender has
subordinated its first security interest to Wells Fargo. Our capital lease obligations totaled
approximately $19 thousand at December 31, 2006.
Based
on certain provisions in our agreement with Wells Fargo, we expect the interest
rate on all borrowings will be prime plus 1.0% in the first quarter of 2007 and
prime for the remainder of 2007.
At
December 31, 2006, we had deferred revenue and other long term liabilities, net
of current portion, of approximately $7.8 million. Included in this total is approximately $7.2
million of deferred revenue related to up-front fees that have been received
for certain product rights and technology rights out-licensed. These deferred amounts are being recognized
on a straight-line basis over the remaining lives of the agreements, products,
patents or technology.
Our
primary short-term need for capital, which is subject to change, is to fund our
operations, which consist of continued sales and marketing, general and
administrative and research and development efforts, working capital associated
with increased product sales and capital expenditures relating to maintaining
and
38
developing our manufacturing operations. Our future liquidity and capital requirements
will depend on numerous factors, including the extent to which our marketing,
selling and distribution efforts, as well as those of third parties who market,
sell and distribute our products, are successful in increasing revenue, the
extent of the market acceptance of any new products, the extent to which
currently planned products and/or technologies under research and development
are successfully developed, changes required by us by regulatory bodies to
maintain our operations and other factors.
Our
financial plan for 2007 indicates that our available cash and cash equivalents,
together with cash from operations and borrowings expected to be available
under our revolving line of credit, will be sufficient to fund our operations
through 2007 and into 2008. Our
financial plan for 2007 expects that we will have positive cash flow from
operations, primarily through increased revenue, improved gross margins and
limiting any increase in operating expenses to a modest degree. However, our actual results may differ from
this plan, and we may be required to consider alternative strategies. We may be required to raise additional
capital in the future. If necessary, we
expect to raise these additional funds through the sale of equity or debt
securities or refinancing loans currently outstanding on assets with historical
appraised values significantly in excess of related debt. There is no guarantee that additional capital
will be available from these sources on acceptable terms, if at all, and certain
of these sources may require approval by existing lenders. If we cannot raise the additional funds
through these options on acceptable terms or with the necessary timing,
management could also reduce discretionary spending to decrease our cash burn
rate through actions such as delaying or canceling budgeted research activities
or marketing plans. These actions would
likely extend the then available cash and cash equivalents, and then available
borrowings. See “Risk Factors” In Item
1A.
A
summary of our contractual obligations at December 31, 2006 is shown below.
|
|
|
Payments Due by Period
|
|
|
|
|
Total
|
|
Less Than
1 Year
|
|
1-3
Years
|
|
4-5
Years
|
|
After
5 Years
|
|
|
Contractual
Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term Debt
|
|
$
|
3,183
|
|
$
|
1,267
|
|
$
|
1,916
|
|
$
|
—
|
|
$
|
—
|
|
|
Capital Lease
Obligations
|
|
19
|
|
8
|
|
11
|
|
—
|
|
—
|
|
|
Interest
Payments on Debt
|
|
437
|
|
238
|
|
199
|
|
—
|
|
—
|
|
|
Line of Credit
|
|
8,022
|
|
8,022
|
|
—
|
|
—
|
|
—
|
|
|
Operating Leases
|
|
30,203
|
|
1,533
|
|
4,867
|
|
3,445
|
|
20,358
|
|
|
Unconditional
Purchase Obligations
|
|
5,832
|
|
3,453
|
|
2,379
|
|
—
|
|
—
|
|
|
Total Contractual Cash
Obligations
|
|
$
|
47,696
|
|
$
|
14,521
|
|
$
|
9,372
|
|
$
|
3,445
|
|
$
|
20,358
|
|
In
addition to those agreements considered above where our contractual obligation
is fixed, we are party to commercial agreements which may require us to make
milestone payments under certain circumstances.
All milestone obligations which we believe are likely to be triggered
but are not yet paid are included in “Unconditional Purchase Obligations” in
the table above. We do not believe other
potential milestone obligations, some of which we consider to be of remote
likelihood of ever being triggered, will have a material impact on our
liquidity, capital resources or financial condition in the foreseeable future.
Net
Operating Loss Carryforwards
As
of December 31, 2006, we had a net domestic operating loss carryforward, or
NOL, of approximately
$167.8
million,
a domestic alternative minimum tax credit of approximately $81 thousand and a
domestic research and development tax credit carryforward of approximately $307
thousand. The NOL and tax credit
carryforwards are subject to alternative minimum tax limitations and to
examination by the tax authorities. In
addition, we had a “change of ownership” as defined under the provisions of
Section 382 of the Internal Revenue Code of 1986, as amended (an “Ownership
Change”). We believe the latest, and
most restrictive, Ownership Change occurred at the time of our initial public
offering in July 1997. We do not
39
believe this Ownership Change will place a significant
restriction on our ability to utilize our NOLs in the future. We also have net operating loss carryforwards
in Switzerland of approximately $1.9 million related to losses previously
recorded by Heska AG. Heska AG also has
a “tax holiday” from canton, municipal and church income taxes in the canton of
Fribourg through August 31, 2007.
Recent
Accounting Pronouncements
In
February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid
Financial Instruments -an amendment of FASB Statements No. 133 and 140,” which
simplifies accounting for certain hybrid financial instruments by permitting
fair value remeasurement for any hybrid instrument that contains an embedded
derivative that otherwise would require bifurcation and eliminates a
restriction on the passive derivative instruments that a qualifying
special-purpose entity may hold. SFAS No. 155 is effective for all financial
instruments acquired, issued or subject to a remeasurement (new basis) event
occurring after the beginning of an entity’s first fiscal year that begins
after September 15, 2006. The adoption of SFAS No. 155 will have no impact on
our results of operations or our financial position.
In
March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of
Financial Assets - an amendment of FASB Statement No. 140,” which establishes,
among other things, the accounting for all separately recognized servicing
assets and servicing liabilities by requiring that all separately recognized
servicing assets and servicing liabilities be initially measured at fair value,
if practicable. SFAS No. 156 is effective as of the beginning of an entity’s
first fiscal year that begins after September 15, 2006. The adoption of SFAS
No. 156 will have no impact on our results of operations or our financial
position.
In
June 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting
for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109,”
which establishes that the financial statement effects of a tax position taken
or expected to be taken in a tax return are to be recognized in the financial
statements when it is more likely than not, based on the technical merits, that
the position will be sustained upon examination. FIN 48 is effective for fiscal
years beginning after December 15, 2006. The adoption of FIN 48 is not expected
to have a material impact on our results of operations or our financial
position.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which
establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements.
SFAS No. 157 defines fair value as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. SFAS No. 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. The adoption of SFAS No. 157 is not
expected to have a material impact on our results of operations or our financial
position.
In
September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB
Statements No. 87, 88, 106, and 132(R),” which requires a business entity to
recognize the overfunded or underfunded status of a single-employer defined
benefit postretirement plan as an asset or liability in its statement of
financial position and to recognize changes in that funded status in
comprehensive income in the year in which the changes occur. SFAS No. 158 also
requires a business entity to measure the funded status of a plan as of the
date of its year-end statement of financial position, with limited exceptions.
An employer with publicly traded equity securities is required to initially
recognize the funded status of a defined benefit postretirement plan and to
provide the required disclosures as of the end of the fiscal year ending after
December 15, 2006. As our defined benefit pension plans are currently
overfunded and benefits are frozen, we recognized a corresponding asset on our
balance sheet on December 31, 2006. As
we do not consider this asset to be
40
material, the adoption of SFAS No. 158 did not have a
material impact on our results of operations or our financial position.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Liabilities — including an amendment of FASB Statement
No. 115”. SFAS No. 159 permits
entities to choose to measure many financial instruments and certain other
items at fair value. This statement will
be effective for us January 1, 2008.
We have not yet determined the impact, if any, that adopting this
standard may have on our financial statements.
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 adopted this standard when required on
January 1, 2006. On April 14, 2005,
the SEC issued a release amending the compliance dates for SFAS No. 123R. Under the SEC’s new rule, companies in our
position could implement SFAS No. 123R at the beginning of their next fiscal
year, instead of the next reporting period as originally required under SFAS
No. 123R, that begins after June 15, 2005.
We originally intended to adopt SFAS No. 123R beginning on July 1, 2005
but based on the SEC’s action on April 14, 2005, we decided to adopt this
standard effective on January 1, 2006.
We adopted SFAS No. 123R under the modified prospective method of
adoption. Statement of Financial
Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS
No. 123”), which became effective in 1996, allowed for the continued
measurement of compensation cost for stock-based compensation using the
intrinsic value based method under Accounting Principles Board Opinion No. 25 “Accounting
for Stock Issued to Employees” (“APB No. 25”), provided that pro forma
disclosures were made of net income or loss, assuming the fair value based
method of SFAS No. 123 had been applied.
We have elected to account for our stock-based compensation plans under
APB No. 25 in 2004 and 2005. Upon
adoption of SFAS No. 123R, we were required to recognize compensation expense
using the fair value-based model for options that vest after the effective date
of SFAS No. 123R adoption, including those that were granted prior to the
effective date of SFAS No. 123R adoption.
This resulted in us recording compensation expense for periods after the
effective date of SFAS No. 123R adoption.
Historically, under APB No. 25, we have recorded minimal amounts of
stock-based compensation. On December 2,
2004, the Compensation Committee of our Board of Directors considered the
significant impact that the use of fair values, rather than intrinsic values,
would have on our future results of operations, as well as factors including
that the management team had requested that their salaries be frozen for 2005,
many non-management employees’ 2005 raises were to be below market levels, no management
bonus payments were made for 2004 and the 2005 management incentive plan called
for a performance in excess of our internal budget before any bonus payments
were to be made, and approved the acceleration of vesting of outstanding but
unvested stock options with an exercise price greater than $1.08. 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, calculated under SFAS No. 123 of approximately
$2.1 million, was recorded in 2004.
This action effected options to purchase approximately 2.2 million
shares, approximately 1.1 million of which were held by our Directors and
Executive Officers. Had this 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 compensation expense related to these options of approximately
$870 thousand on a pro forma basis for the year ending December 31,
2005. On February 24, 2005, our Board of
Directors considered the significant impact that the use of fair values, rather
than intrinsic values, would have on our future results of operations, as well
as factors including that the management team had requested that their salaries
be frozen for 2005, many non-management employees’ 2005 raises were to be below
market levels, no management bonus payouts were made for 2004 and the 2005
management incentive plan calls for a performance in excess of our internal
budget before any bonus payments are made, and authorized our Stock Option
Committee, which consisted solely of our Chief
41
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, calculated under SFAS No. 123 of
approximately $540 thousand, was recorded in 2005. 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. We also have
an employee stock purchase plan under which we expect to recognize compensation
expense under SFAS No. 123R beginning on January 1, 2006.
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 in 2006 and 2005 based on our historical experience for time from
option grant to option exercise for all employees and in 2004 based on a
software program to which an input was our historical exercise experience for current
employees; we treated all employees in one grouping in all three years. Our expected volatility input was estimated
based on our historical stock price volatility in 2006 and 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 2006, 2005 and 2004. Our
expected dividends input was zero in 2006, 2005 and 2004. Different assumptions could materially impact
the resulting option value calculated.
In the twelve months ended December 31, 2006, we had stock option
compensation of approximately $745 thousand related to recognition of the
vesting of options to purchase approximately 1.1 million shares. The underlying assumptions made in valuing
these stock options, weighted by number of options and stock fair value at the
time of grant, were as follows: expected term of 2.89 years, expected
volatility of 67%, risk-free interest rate of 4.65% 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 $1.43 per share (the “Benchmark
Tranche”) to yield the same value as above (the “Benchmark Value”). The following table represents the
approximate decrease, in thousands of 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 “at-the-money” options to purchase
approximately 1.1 million shares with a fair market stock value of $1.43 per
share, and if the Benchmark Tranche is valued using an expected term of 2.89
years, expected volatility of 67%, a risk-free interest rate of 4.65% and
expected dividends of zero, we obtain a fair value of approximately $745
thousand — 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 2.89 years and an expected volatility of
60% instead of 67%, we obtain a value of approximately $882 thousand, or
an increase of approximately $137 thousand as compared to the Benchmark Value.
42
|
|
|
Volatility
|
|
|
|
|
|
|
15%
|
|
30%
|
|
45%
|
|
60%
|
|
75%
|
|
90%
|
|
105%
|
|
120%
|
|
135%
|
|
150%
|
|
|
|
|
1
|
|
612
|
|
523
|
|
431
|
|
342
|
|
255
|
|
169
|
|
87
|
|
8
|
|
(67
|
)
|
(139
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
535
|
|
415
|
|
292
|
|
174
|
|
60
|
|
(48
|
)
|
(149
|
)
|
(243
|
)
|
(328
|
)
|
(404
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
467
|
|
328
|
|
185
|
|
48
|
|
(80
|
)
|
(198
|
)
|
(305
|
)
|
(401
|
)
|
(484
|
)
|
(555
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
406
|
|
252
|
|
96
|
|
(52
|
)
|
(188
|
)
|
(311
|
)
|
(418
|
)
|
(510
|
)
|
(586
|
)
|
(650
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time to
|
|
5
|
|
348
|
|
186
|
|
19
|
|
(137
|
)
|
(277
|
)
|
(400
|
)
|
(504
|
)
|
(589
|
)
|
(657
|
)
|
(711
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expiration
|
|
6
|
|
294
|
|
125
|
|
(48
|
)
|
(208
|
)
|
(350
|
)
|
(470
|
)
|
(569
|
)
|
(647
|
)
|
(707
|
)
|
(751
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in years)
|
|
7
|
|
243
|
|
70
|
|
(108
|
)
|
(271
|
)
|
(412
|
)
|
(528
|
)
|
(621
|
)
|
(691
|
)
|
(743
|
)
|
(779
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
|
|
194
|
|
19
|
|
(163
|
)
|
(326
|
)
|
(465
|
)
|
(576
|
)
|
(662
|
)
|
(724
|
)
|
(769
|
)
|
(798
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
148
|
|
(28
|
)
|
(211
|
)
|
(374
|
)
|
(510
|
)
|
(616
|
)
|
(695
|
)
|
(750
|
)
|
(788
|
)
|
(811
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
105
|
|
(71
|
)
|
(255
|
)
|
(418
|
)
|
(549
|
)
|
(650
|
)
|
(721
|
)
|
(770
|
)
|
(801
|
)
|
(820
|
)
|
Stock
option compensation related to recognition of the vesting of options of
approximately $745 thousand for the year ended on December 31, 2006 may
not be indicative of the future impact of SFAS No. 123R. Assuming all options vest according to the
vesting schedules in place at December 31, 2006, we have approximately $62
thousand of compensation cost to be recognized after December 31, 2006,
approximately $60 thousand of which is to be recognized in the year ending
December 31, 2007. 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.
Item 7A
. Quantitative
and Qualitative Disclosures about Market Risk.
Market
risk represents the risk of loss that may impact the financial position,
results of operations or cash flows due to adverse changes in financial and
commodity market prices and rates. We
are exposed to market risk in the areas of changes in United States and foreign
interest rates and changes in foreign currency exchange rates as measured
against the United States dollar. These
exposures are directly related to our normal operating and funding activities.
Interest
Rate Risk
The
interest payable on certain of our lines of credit and other borrowings is
variable based on the United States prime rate and, therefore, is effected by
changes in market interest rates. At
December 31, 2006, approximately $11.2 million was outstanding on these lines
of credit and other borrowings with a weighted average interest rate of
10.68%. We also had approximately $5.3
million of cash and cash equivalents at December 31, 2006, the majority of
which was invested in liquid interest bearing accounts. We had no interest rate hedge transactions in
place on December 31, 2006. 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 $59 thousand based on our outstanding balances as of
December 31, 2006.
43
Foreign
Currency Risk
Our investment in foreign assets consists primarily of
our investment in our European subsidiary.
Foreign currency risk may impact our results of operations. In cases where we purchase inventory in one
currency and sell corresponding products in another, our gross margin
percentage is typically at risk based on foreign currency exchange rates. In addition, in cases where we may be
generating operating income in foreign currencies, the magnitude of such
operating income when translated into U.S. dollars will be at risk based on
foreign currency exchange rates. Our
agreements with suppliers and customers vary significantly in regard to the
existence and extent of currency adjustment and other currency risk sharing
provisions. We had no foreign currency
hedge transactions in place on December 31, 2006.
We have a wholly-owned subsidiary in Switzerland which
uses the Swiss Franc as its functional currency. We purchase inventory in foreign currencies,
primarily Japanese Yen and Euros, and sell corresponding products in U.S.
dollars. We also sell products in
foreign currencies, primarily Japanese Yen and Euros, where our inventory costs
are in U.S. dollars. Based on our 2006
results of operations, if foreign currency exchange rates were to
strengthen/weaken by 25% against the dollar, we would expect a resulting
pre-tax loss/gain of approximately $878 thousand.
44
Item 8.
Financial Statements and Supplementary Data.
HESKA CORPORATION
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
45
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Heska Corporation:
We have audited the accompanying consolidated balance sheet of Heska
Corporation and its subsidiaries as of December 31, 2006, and the related
consolidated statements of operations, stockholders’ equity and cash flows for
the year then ended. In connection with
our audit of these consolidated financial statements, we also have audited the
financial statement schedule of valuation and qualifying accounts. These consolidated financial statements and
financial statement schedule are the responsibility of the Company’s
management. Our responsibility is to
express an opinion on these consolidated financial statements and schedule
based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our
audit included consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the circumstances
but not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Heska
Corporation and its subsidiaries as of December 31, 2006, and the results of
their operations and their cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States of
America. Also, in our opinion, the
related consolidated financial statement schedule of valuation and qualifying
accounts, for the year ended December 31, 2006, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, as of
January 1, 2006, the Company changed its method of accounting for Share-Based
Payments in accordance with FASB Statement No. 123 (revised),
Share-Based Payment
.
As discussed in Note 2 to the consolidated financial statements, as of
January 1, 2006 the Company changed its method of accounting for defined
benefit pension and other postretirement plans in accordance with FASB
Statement No. 158,
Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans - an amendment of FASB Statements No.
87, 88, 106, and 132(R).
|
|
/S/ Ehrhardt
Keefe Steiner & Hottman PC
|
Denver, Colorado
March 23, 2007
46
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
The Board of Directors and Stockholders
Heska Corporation:
We have audited the accompanying consolidated balance sheet of Heska
Corporation (a Delaware corporation) and subsidiaries as of December 31, 2005,
and the related consolidated statements of operations, stockholders’ equity,
and cash flows for the years ended December 31, 2004 and 2005. In
connection with our audits of these consolidated financial statements, we also
have audited the financial statement schedule of valuation and qualifying
accounts as of December 31, 2005, and for the years ended December 31, 2004 and
2005. These consolidated financial statements and financial statement
schedule are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Heska
Corporation and subsidiaries as of December 31, 2005, and the results of
their operations and their cash flows for the years ended December 31, 2004 and
2005, in conformity with U.S. generally accepted accounting principles.
Also in our opinion, the related financial statement schedule of valuation and
qualifying accounts, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
Denver, Colorado
March 29, 2006
47
HESKA CORPORATION AND
SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(dollars in thousands, except per
share amounts)
|
|
|
December 31,
|
|
|
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash
equivalents
|
|
$
|
5,231
|
|
$
|
5,275
|
|
|
Accounts
receivable, net of allowance for doubtful accounts of $88 and $98,
respectively
|
|
9,008
|
|
11,372
|
|
|
Inventories, net
|
|
11,654
|
|
13,090
|
|
|
Other current
assets
|
|
952
|
|
915
|
|
|
Total current
assets
|
|
26,845
|
|
30,652
|
|
|
Property and equipment,
net
|
|
7,428
|
|
6,948
|
|
|
Intangible assets, net
|
|
1,529
|
|
—
|
|
|
Goodwill
|
|
714
|
|
771
|
|
|
Deferred tax asset, net
of current portion
|
|
110
|
|
32
|
|
|
Other assets
|
|
158
|
|
92
|
|
|
Total assets
|
|
$
|
36,784
|
|
$
|
38,495
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
5,186
|
|
$
|
4,849
|
|
|
Accrued
liabilities
|
|
1,481
|
|
2,489
|
|
|
Accrued
compensation
|
|
427
|
|
2,006
|
|
|
Income taxes
payable
|
|
—
|
|
58
|
|
|
Current portion
of deferred revenue
|
|
2,912
|
|
3,281
|
|
|
Line of credit
|
|
9,453
|
|
8,022
|
|
|
Current portion
of capital lease obligations
|
|
7
|
|
8
|
|
|
Current portion
of long-term debt
|
|
1,256
|
|
1,267
|
|
|
Total current
liabilities
|
|
20,722
|
|
21,980
|
|
|
Capital lease
obligations, net of current portion
|
|
20
|
|
11
|
|
|
Long-term debt, net of
current portion
|
|
2,683
|
|
1,916
|
|
|
Deferred revenue, net
of current portion, and other
|
|
10,126
|
|
7,840
|
|
|
Total
liabilities
|
|
33,551
|
|
31,747
|
|
|
Commitments and
contingencies
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
Preferred stock, $.001
par value, 25,000,000 shares authorized; none issued or outstanding
|
|
—
|
|
—
|
|
|
Common stock, $.001 par
value, 75,000,000 shares authorized; 50,042,355 and 50,764,273 shares issued
and outstanding, respectively
|
|
50
|
|
51
|
|
|
Additional paid-in
capital
|
|
213,054
|
|
214,601
|
|
|
Accumulated other
comprehensive income (loss)
|
|
(47
|
)
|
92
|
|
|
Accumulated deficit
|
|
(209,824
|
)
|
(207,996
|
)
|
|
Total stockholders’
equity
|
|
3,233
|
|
6,748
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
36,784
|
|
$
|
38,495
|
|
See accompanying notes to consolidated financial
statements.
48
HESKA CORPORATION AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(in thousands, except per share
amounts)
|
|
|
Year Ended December 31,
|
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
Product revenue, net:
|
|
|
|
|
|
|
|
|
Core companion animal health
|
|
$
|
52,719
|
|
$
|
54,716
|
|
$
|
59,936
|
|
|
Other vaccines, pharmaceuticals and products
|
|
12,968
|
|
12,833
|
|
11,879
|
|
|
Total product revenue, net
|
|
65,687
|
|
67,549
|
|
71,815
|
|
|
Research, development and other
|
|
2,004
|
|
1,888
|
|
3,245
|
|
|
Total revenue, net
|
|
67,691
|
|
69,437
|
|
75,060
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
Cost of products sold
|
|
42,253
|
|
42,515
|
|
43,000
|
|
|
Cost of research, development and other
|
|
729
|
|
1,095
|
|
1,414
|
|
|
Total cost of revenue
|
|
42,982
|
|
43,610
|
|
44,414
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
24,709
|
|
25,827
|
|
30,646
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
15,616
|
|
14,020
|
|
14,356
|
|
|
Research and development
|
|
5,891
|
|
3,749
|
|
3,483
|
|
|
General and administrative
|
|
7,442
|
|
7,187
|
|
9,887
|
|
|
(Gain) on sale of assets
|
|
—
|
|
—
|
|
(155
|
)
|
|
Total operating expenses
|
|
28,949
|
|
24,956
|
|
27,571
|
|
|
Income (loss)
from operations
|
|
(4,240
|
)
|
871
|
|
3,075
|
|
|
Interest and
other expense (income):
|
|
|
|
|
|
|
|
|
Interest income
|
|
(25
|
)
|
(63
|
)
|
(69
|
)
|
|
Interest expense
|
|
690
|
|
1,086
|
|
1,244
|
|
|
Other, net
|
|
(90
|
)
|
(249
|
)
|
(134
|
)
|
|
Income (loss)
before income taxes
|
|
(4,815
|
)
|
97
|
|
2,034
|
|
|
Income tax
expense (benefit)
|
|
—
|
|
(185
|
)
|
206
|
|
|
Net income
(loss)
|
|
$
|
(4,815
|
)
|
$
|
282
|
|
$
|
1,828
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income
(loss) per share
|
|
$
|
(0.10
|
)
|
$
|
0.01
|
|
$
|
0.04
|
|
|
Diluted net
income (loss) per share
|
|
$
|
(0.10
|
)
|
$
|
0.01
|
|
$
|
0.03
|
|
|
Weighted average
outstanding shares used to compute basic net income (loss) per share
|
|
49,029
|
|
49,650
|
|
50,347
|
|
|
Weighted average
outstanding shares used to compute diluted net income (loss) per share
|
|
49,029
|
|
50,438
|
|
52,932
|
|
See accompanying notes to consolidated financial
statements.
49
HESKA CORPORATION AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Com-
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
Additional
|
|
Deferred
|
|
prehensive
|
|
|
|
Stock-
|
|
|
|
|
Common Stock
|
|
Paid-in
|
|
Com-
|
|
Income
|
|
Accumulated
|
|
holders’
|
|
|
|
|
Shares
|
|
Amount
|
|
Capital
|
|
pensation
|
|
(Loss)
|
|
Deficit
|
|
Equity
|
|
|
Balances, January
1, 2004
|
|
48,827
|
|
$
|
49
|
|
$
|
212,131
|
|
$
|
(165
|
)
|
$
|
(68
|
)
|
$
|
(205,291
|
)
|
$
|
6,656
|
|
|
Issuance
of common stock related to options, ESPP and other
|
|
519
|
|
—
|
|
409
|
|
—
|
|
—
|
|
—
|
|
409
|
|
|
Cancellation
of restricted stock
|
|
(7
|
)
|
—
|
|
(7
|
)
|
7
|
|
—
|
|
—
|
|
—
|
|
|
Recognition
of stock based compensation
|
|
—
|
|
—
|
|
—
|
|
91
|
|
—
|
|
—
|
|
91
|
|
|
Comprehensive
net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(4,815
|
)
|
(4,815
|
)
|
|
Minimum
pension liability adjustments
|
|
—
|
|
—
|
|
—
|
|
—
|
|
31
|
|
—
|
|
31
|
|
|
Foreign
currency translation adjustments
|
|
—
|
|
—
|
|
—
|
|
—
|
|
207
|
|
—
|
|
207
|
|
|
Comprehensive
net income (loss)
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(4,577
|
)
|
|
Balances, December 31,
2004
|
|
49,339
|
|
49
|
|
212,533
|
|
(67
|
)
|
170
|
|
(210,106
|
)
|
2,579
|
|
|
Issuance
of common stock related to options, ESPP and other
|
|
769
|
|
1
|
|
579
|
|
—
|
|
—
|
|
—
|
|
580
|
|
|
Repurchase
of stock
|
|
(66
|
)
|
—
|
|
(58
|
)
|
—
|
|
—
|
|
—
|
|
(58
|
)
|
|
Recognition
of stock based compensation
|
|
—
|
|
—
|
|
—
|
|
67
|
|
—
|
|
—
|
|
67
|
|
|
Comprehensive
net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
282
|
|
282
|
|
|
Minimum
pension liability adjustments
|
|
—
|
|
—
|
|
—
|
|
—
|
|
96
|
|
—
|
|
96
|
|
|
Unrealized
gain on available for sale investments
|
|
—
|
|
—
|
|
—
|
|
—
|
|
27
|
|
—
|
|
27
|
|
|
Foreign
currency translation adjustments
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(340
|
)
|
—
|
|
(340
|
)
|
|
Comprehensive
net income (loss)
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
65
|
|
|
Balances, December 31,
2005
|
|
50,042
|
|
50
|
|
213,054
|
|
—
|
|
(47
|
)
|
(209,824
|
)
|
3,233
|
|
|
Issuance
of common stock related to options, ESPP and other
|
|
722
|
|
1
|
|
765
|
|
—
|
|
—
|
|
—
|
|
766
|
|
|
Recognition
of stock based compensation
|
|
—
|
|
—
|
|
782
|
|
—
|
|
—
|
|
—
|
|
782
|
|
|
Comprehensive
net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
1,828
|
|
1,828
|
|
|
Minimum
pension liability adjustments
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(89
|
)
|
—
|
|
(89
|
)
|
|
Unrealized
gain on available for sale investments
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(5
|
)
|
—
|
|
(5
|
)
|
|
Foreign
currency translation adjustments
|
|
—
|
|
—
|
|
—
|
|
—
|
|
233
|
|
—
|
|
233
|
|
|
Comprehensive
net income (loss)
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
1,967
|
|
|
Balances, December 31, 2006
|
|
50,764
|
|
$
|
51
|
|
$
|
214,601
|
|
$
|
—
|
|
$
|
92
|
|
$
|
(207,996
|
)
|
$
|
6,748
|
|
See accompanying notes to
consolidated financial statements.
50
HESKA CORPORATION AND
SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
Year Ended December 31,
|
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
CASH FLOWS
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(4,815
|
)
|
$
|
282
|
|
$
|
1,828
|
|
|
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
1,337
|
|
1,850
|
|
1,671
|
|
|
Amortization of intangible assets
|
|
393
|
|
157
|
|
334
|
|
|
Deferred tax (benefit) expense
|
|
—
|
|
(185
|
)
|
148
|
|
|
Stock based compensation
|
|
91
|
|
90
|
|
782
|
|
|
Loss (gain) on disposition of assets
|
|
—
|
|
17
|
|
(155
|
)
|
|
Unrealized gain on foreign currency translation
|
|
—
|
|
(149
|
)
|
(161
|
)
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
2,067
|
|
1,585
|
|
(2,200
|
)
|
|
Inventories
|
|
(1,398
|
)
|
38
|
|
(1,419
|
)
|
|
Other current assets
|
|
(261
|
)
|
86
|
|
84
|
|
|
Other long-term assets
|
|
(2
|
)
|
84
|
|
—
|
|
|
Accounts payable
|
|
511
|
|
(1,494
|
)
|
(349
|
)
|
|
Accrued liabilities and other
|
|
(199
|
)
|
(1,265
|
)
|
2,421
|
|
|
Income taxes payable
|
|
—
|
|
—
|
|
58
|
|
|
Deferred revenue and other long-term liabilities
|
|
1,138
|
|
(948
|
)
|
(1,917
|
)
|
|
Net cash provided by (used in) operating activities
|
|
(1,138
|
)
|
148
|
|
1,125
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from licensing of technology and product rights
|
|
400
|
|
—
|
|
—
|
|
|
Proceeds from sale of assets, net of related costs
|
|
—
|
|
—
|
|
1,640
|
|
|
Proceeds from repayment of loan
|
|
—
|
|
100
|
|
—
|
|
|
Purchases of property and equipment
|
|
(1,290
|
)
|
(1,376
|
)
|
(1,189
|
)
|
|
Capitalized patent costs
|
|
(541
|
)
|
(187
|
)
|
(292
|
)
|
|
Net cash provided by (used in) investing activities
|
|
(1,431
|
)
|
(1,463
|
)
|
159
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
409
|
|
557
|
|
766
|
|
|
Repurchase of stock
|
|
—
|
|
(58
|
)
|
—
|
|
|
Proceeds from (repayments of) line of credit
borrowings, net
|
|
2,847
|
|
(922
|
)
|
(1,431
|
)
|
|
Proceeds from long-term debt
|
|
—
|
|
2,500
|
|
—
|
|
|
Repayments of debt and capital lease obligations
|
|
(761
|
)
|
(302
|
)
|
(763
|
)
|
|
Net cash provided by (used in) financing activities
|
|
2,495
|
|
1,775
|
|
(1,428
|
)
|
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH
|
|
179
|
|
(211
|
)
|
188
|
|
|
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
105
|
|
249
|
|
44
|
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
4,877
|
|
4,982
|
|
5,231
|
|
|
CASH AND CASH
EQUIVALENTS, END OF YEAR
|
|
$
|
4,982
|
|
$
|
5,231
|
|
$
|
5,275
|
|
See accompanying
notes to consolidated financial statements.
51
HESKA
CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
ORGANIZATION
AND BUSINESS
Heska Corporation (“Heska” or the “Company”)
discovers, develops, manufactures, markets, sells, distributes and supports
veterinary products. Heska’s 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 and advance the state of
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 other instruments and supplies as well as single use
diagnostic and other tests, vaccines and pharmaceuticals, primarily for canine
and feline use. These products are sold
directly by the Company as well as through independent third party distributors
and other distribution relationships.
The Other Vaccines, Pharmaceuticals and Products segment (“OVP”),
previously reported as the Diamond Animal Health segment, includes private
label vaccine and pharmaceutical production, primarily for cattle but also for
other animals including small mammals and fish.
All OVP products are sold by third parties under third party labels.
Cumulative
net losses from inception of the Company in 1988 through December 31, 2006,
have totaled $208.0 million. During the
year ended December 31, 2006, the Company recorded a net income of
approximately $1.8 million and operations provided cash of approximately $1.1
million. The Company’s ability to
achieve sustained profitable operations will depend primarily upon its ability
to successfully market its products and commercialize new products. There can be no guarantee that the Company
will be successful in these endeavors or attain quarterly, annual, or sustained
profitability in the future.
2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements
include the accounts of the Company and of its wholly-owned subsidiaries since
their respective dates of acquisitions.
All material intercompany transactions and balances have been eliminated
in consolidation.
Use of Estimates
The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ from those
estimates. Significant estimates are
required when establishing the allowance for doubtful accounts and the
provision for excess/obsolete inventory, in determining the period over which
the Company’s obligations are fulfilled under agreements to license product
rights and/or technology rights, evaluating long-lived assets for impairment
and in determining the need for, and the amount of, a valuation allowance on
deferred tax assets.
52
Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced
amount and do not bear interest. The
allowance for doubtful accounts is the Company’s best estimate of the amount of
probable credit losses in the Company’s existing accounts receivable. The Company determines the allowance based on
historical write-off experience. The
Company reviews its allowance for doubtful accounts monthly. Past due balances over 90 days and over a
specified amount are reviewed individually for collectibility. Account balances are charged against the
allowance after all means of collection have been exhausted and the potential
for recovery is considered remote. The
Company does not have any off-balance-sheet credit exposure related to its
customers.
Concentration of Credit Risk
Financial instruments that potentially subject the
Company to a concentration of credit risk consist of cash and cash equivalents
and accounts receivable. The Company
maintains the majority of its cash and cash equivalents with financial
institutions that management believes are creditworthy in the form of demand
deposits, U.S. government agency obligations and U.S. corporate commercial
paper. The Company has no significant
off-balance sheet concentrations of credit risk such as foreign exchange
contracts, options contracts or other currency foreign hedging arrangements. Its accounts receivable balances are due
primarily from domestic veterinary clinics and individual veterinarians, and
both domestic and international corporations.
Cash and Cash Equivalents
Cash and cash equivalents are stated at cost, which
approximates market, and include short-term, highly liquid investments with
original maturities of less than three months.
The Company valued its European Euro and Japanese Yen cash accounts at
the spot market foreign exchange rate as of each balance sheet date, with changes
due to foreign exchange fluctuations recorded in current earnings. The Company held 1,001,317 and 1,607,633
Euros at December 31, 2005 and 2006, respectively. The Company held 30,178,209 and 50,954,278
Yen at December 31, 2005 and 2006, respectively. The Company held 1,034,905 and 1,347,692
Swiss Francs at December 31, 2005 and 2006, respectively. The Company held 1,970 and 1,202 British
Pounds at December 31, 2005 and 2006, respectively.
Fair Value of Financial Instruments
The Company’s financial instruments consist of cash
and cash equivalents, short-term trade receivables and payables and notes
payable, including the revolving line of credit. The carrying values of cash and cash
equivalents and short-term trade receivables and payables approximate fair
value. The fair value of notes payable
is estimated based on current rates available for similar debt with similar
maturities and collateral, and at December 31, 2005 and 2006, approximates the
carrying value due primarily to the floating rate of interest on such debt
instruments.
Inventories
Inventories are
stated at the lower of cost or market using the first-in, first-out
method. Inventory manufactured by the
Company includes the cost of material, labor and overhead. If the cost of inventories exceeds estimated
fair value, provisions are made to reduce the carrying value to estimated fair
value.
53
Inventories, net
consist of the following (in thousands):
|
|
|
December 31,
|
|
|
|
|
2005
|
|
2006
|
|
|
Raw materials
|
|
$
|
3,002
|
|
$
|
5,337
|
|
|
Work in process
|
|
3,090
|
|
3,426
|
|
|
Finished goods
|
|
6,318
|
|
5,851
|
|
|
Allowance for
excess or obsolete inventory
|
|
(756
|
)
|
(1,524
|
)
|
|
|
|
$
|
11,654
|
|
$
|
13,090
|
|
Property and Equipment
Property and
equipment are recorded at cost and depreciated on a straight-line basis over
the estimated useful lives of the related assets. Leasehold improvements are amortized over the
applicable lease period or their estimated useful lives, whichever is
shorter. Maintenance and repairs are
charged to expense when incurred, and major renewals and improvements are
capitalized.
Property and
equipment consist of the following (in thousands):
|
|
|
Estimated
|
|
December 31,
|
|
|
|
|
Useful Life
|
|
2005
|
|
2006
|
|
|
Land
|
|
N/A
|
|
$
|
377
|
|
$
|
377
|
|
|
Building
|
|
10
to 20 years
|
|
2,678
|
|
2,678
|
|
|
Machinery and
equipment
|
|
3
to 15 years
|
|
20,427
|
|
19,503
|
|
|
Leasehold and
building improvements
|
|
7
to 15 years
|
|
4,931
|
|
5,230
|
|
|
|
|
|
|
28,413
|
|
27,788
|
|
|
Less accumulated
depreciation and amortization
|
|
|
|
(20,985
|
)
|
(20,840
|
)
|
|
|
|
|
|
$
|
7,428
|
|
$
|
6,948
|
|
Depreciation and amortization
expense for property and equipment was $1.3 million, $1.9 million and $1.7
million for the years ended December 31, 2004, 2005 and 2006, respectively.
Realizability of
Long-Lived Assets
The Company continually evaluates whether events and
circumstances have occurred that indicate the remaining estimated useful life
of long-lived assets may warrant revision, or that the remaining balance of
these assets may not be recoverable.
When deemed necessary, the Company completes this evaluation by
comparing the carrying amount of the assets against the estimated undiscounted
future cash flows associated with them.
If such evaluations indicate that the future undiscounted cash flows of
amortizable long-lived assets are not sufficient to recover the carrying value
of such assets, the assets are adjusted to their estimated fair values.
Goodwill and Other Intangible Assets
Goodwill is subject to an annual assessment for
impairment. Impairment is indicated when
the carrying amount of the related reporting unit is greater than its estimated
fair value.
The Company’s recorded goodwill relates to the 1997
acquisition of Heska AG, the Company’s Swiss operating subsidiary. This goodwill is reviewed at least annually
for impairment. At December 31, 2005 and
2006, goodwill was approximately $714 thousand and $771 thousand, respectively,
and is included in the assets of the Core Companion Animal Health segment. The Company completed its annual analysis of
the fair value of its goodwill at December 31, 2006 and determined there
was no indicated impairment of its goodwill.
The change in carrying value of the goodwill between years was solely
due to foreign currency rate
54
changes. There can be no assurance that future
goodwill impairments will not occur.
There are no other intangible assets that are not being amortized on a
periodic basis.
The Company incurred costs, paid to third-party law
firms, to prosecute patents on its proprietary technologies. The Company capitalized qualifying costs
related to its patents. At December 31,
2005, the cost basis of the capitalized patent costs was approximately
$2.3 million, the accumulated amortization was approximately $748
thousand, and the net book value was approximately $1.5 million. These costs were amortized over an average
life of 15 years which was the estimated life of the patents. Related amortization expense for the years
ended December 31, 2004, 2005 and 2006, was approximately $393 thousand,
$157 thousand and $334 thousand, respectively. In December 2006, the Company sold the
patents underlying these capitalized patent costs for a gain of approximately
$155 thousand over the then book value affiliated with the sale of these
patents, which included these capitalized patent costs. Accordingly, the Company had no capitalized
patent costs at December 31, 2006.
Derivative Instruments and Hedging Activities
The Company has utilized derivative financial
instruments to reduce financial market risks in the past. If used, these instruments may be used to
hedge foreign currency, interest rate and certain equity market exposures of
underlying assets, liabilities and other obligations. The Company does not use derivative financial
instruments for speculative or trading purposes. The Company had no hedging activities in
2004, 2005 and 2006.
Revenue Recognition
The Company generates its revenues through sale of
products and services, licensing of product and technology rights, and research
and development services. Revenue is
accounted for in accordance with the guidelines provided by SEC Codification of
Staff Accounting Bulletins, Topic 13:
Revenue Recognition. The Company’s
policy is to recognize revenue when the applicable revenue recognition criteria
have been met, which generally include the following:
·
Persuasive
evidence of an arrangement exists;
·
Delivery
has occurred or services rendered;
·
Price
is fixed or determinable; and
·
Collectibility
is reasonably assured.
Revenue from the sale of products is generally
recognized after both the goods are shipped to the customer and acceptance has
been received, if required, with an appropriate provision for estimated returns
and other allowances. The terms of the
customer arrangements generally pass title and risk of ownership to the
customer at the time of shipment.
Certain customer arrangements provide for acceptance provisions. Revenue for these arrangements is not
recognized until the acceptance has been received or the acceptance period has
lapsed. The Company maintains an
allowance for sales returns based upon its customer policies and historical
experience. Shipping and handling costs
charged to customers is included as revenue, and the related costs are recorded
as a component of cost of products sold.
In addition to its direct sales force, the Company
utilizes independent third-party distributors to sell its products. Distributors purchase goods from the Company,
take title to those goods and resell them to their customers in the
distributors’ territory.
Upfront payments received by the Company under
arrangements for product, patent or technology rights in which the Company
retains an interest in the underlying product, patent or technology are
initially deferred, and revenue is subsequently recognized over the estimated
life of the agreement, product, patent or technology. The Company received approximately $3.2
million, $560 thousand and $295 thousand of such
55
payments in 2004, 2005
and 2006, respectively. Revenue from
royalties is recognized based upon historical experience or as the Company is
informed of sales to which it is entitled to royalties.
For multiple-element arrangements that are not subject
to a higher level of authoritative literature, the Company follows the
guidelines of the Financial Accounting Standards Board’s (“FASB”) Emerging
Issues Task Force (“EITF”) Issue No. 00-21, “Accounting for Revenue
Arrangements with Multiple Deliverables” (“EITF 00-21”), in determining the
separate units of accounting. For those
arrangements subject to the separation criteria of EITF 00-21, the Company
accounts for each of the individual units of accounting as a separate and
discrete earnings process considering, among other things, whether a delivered
item has value to the client on a standalone basis. For such multiple-element arrangements, total
revenue is allocated to the separate units of accounting based upon objective
and reliable evidence of the fair value of the undelivered item. The
determination of separate units of accounting, and the determination of
objective and reliable evidence of fair value of the undelivered item, both
require judgments to be made by the Company.
Cost of Products Sold
Royalties
payable in connection with certain licensing agreements (see Note 9) are
reflected in cost of products sold as incurred.
Stock-Based Compensation
During the years ended December 31, 2004 and 2005, the
Company accounted for its stock-based compensation plans using the intrinsic
value method in accordance with Accounting Principles Board Opinion No. 25, “Accounting
for Stock Issued to Employees” (“APB No. 25”), and related interpretations, and
follows the disclosure provisions of Statement of Financial Accounting
Standards No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”)
and Statement of Financial Accounting Standards No. 148, “Accounting for
Stock-Based Compensation — Transition and Disclosure” (“SFAS No. 148”). Effective January 1, 2006, the Company
adopted Statement of Financial Accounting Standards No. 123 (revised 2004) “Share-Based Payment” (“SFAS
No. 123R”).
Any accounting difference
between SFAS No. 123R and SFAS No. 123, as historically applied by the Company,
shall be defined as the “123R Effect”.
During the year ended December 31, 2006, the 123R Effect reduced
the Company’s income from continuing operations, income before income taxes and
net income by $782 thousand, basic and diluted earnings per share by $0.02 and
$0.01 per share, respectively, and did not have a material impact on cash flow
from operations and cash flow from financing.
At December 31,
2006, the Company had two stock-based compensation plans. See Note 6 for a description of these plans
and additional disclosures regarding the plans.
The Company recorded compensation expense of $91 thousand and $67
thousand for the years ended December 31, 2004 and 2005, respectively, related
to grants of restricted common stock.
The Company recognized $23 thousand of compensation expense related to
the exercise of one option in 2005. For
the year ended December 31, 2006, the Company recorded compensation expense of
approximately $782 thousand related to its stock-based compensation plans.
Had compensation expense for the Company’s stock-based
compensation plans been based on the fair value at the grant dates for awards
under those plans, consistent with the methodology of SFAS No. 123, the Company’s
net loss and net loss per share for the years ended December 31, 2004 and 2005
would approximate the pro forma amounts as follows (in thousands, except per
share amounts):
56
|
|
|
Year Ended December 31,
|
|
|
|
|
2004
|
|
2005
|
|
|
|
|
(in thousands except per share data)
|
|
|
Net income
(loss) as reported
|
|
$
|
(4,815
|
)
|
$
|
282
|
|
|
Stock-based employee compensation expense included
in the determination of net loss, as reported
|
|
91
|
|
90
|
|
|
Stock-based employee compensation expense as if the
fair value based method had been applied to all awards
|
|
(4,129
|
)
|
(3,175
|
)
|
|
Net income (loss), pro forma
|
|
$
|
(8,853
|
)
|
$
|
(2,803
|
)
|
|
Net income
(loss) per share:
|
|
|
|
|
|
|
Basic and diluted — as reported
|
|
$
|
(0.10
|
)
|
$
|
0.01
|
|
|
Basic and
diluted — pro forma
|
|
$
|
(0.18
|
)
|
$
|
(0.06
|
)
|
As discussed in more detail in Note 6, in December 2004
and March 2005 the vesting of options to purchase approximately 2.2 million
shares and 750 thousand shares, respectively, was accelerated. These
options were not “in-the-money” at the time of acceleration and, therefore,
there was no compensation expense recorded in accordance with APB No. 25 as a
result of the modifications. However, for pro forma purposes in
accordance with SFAS No. 123, the remaining unamortized compensation related to
these options, calculated under SFAS No. 123 of approximately $2.1 million and
$540 thousand was recorded in 2004 and 2005, respectively, and included in the
table above.
Advertising Costs
The Company expenses advertising costs as
incurred. Advertising expenses were $712
thousand, $353 thousand and $443 thousand for the years ended December 31,
2004, 2005 and 2006, respectively.
Income Taxes
The Company records a current provision for income
taxes based on estimated amounts payable or refundable on tax returns filed or
to be filed each year. Deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax
rates, in each tax jurisdiction, expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in operations in
the period that includes the enactment date.
The overall change in deferred tax assets and liabilities for the period
measures the deferred tax expense or benefit for the period. Deferred tax assets are reduced by a
valuation allowance based on judgmental assessment of available evidence if the
Company is unable to conclude that it is more likely than not that some or all
of the deferred tax assets will be realized.
Basic and Diluted Net Income (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. In 2004, due to the Company’s
net loss, 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 prior to 2005. At
December 31, 2005 and 2006, securities that have been excluded from diluted
net income (loss) per share because they would be anti-dilutive are outstanding
options to purchase 7,918,601 and 3,721,800 shares, respectively, of the
Company’s
57
common stock. Securities included in the diluted net income
per share calculation at December 31, 2005 and 2006, using the treasury stock
method, were outstanding options to purchase approximately 788 thousand and
2.6 million shares of the Company’s common stock, respectively.
Comprehensive Income (Loss)
Comprehensive income (loss), as shown in the
Consolidated Statement of Stockholders’ Equity, includes net income (loss)
adjusted for the results of certain stockholders’ equity changes. Such changes include foreign currency items
and minimum pension liability adjustments.
At December 31, 2006, Accumulated Other Comprehensive Income consists of
$159 thousand gain for cumulative translation adjustments, $89 thousand
for unrealized pension liability and $22 thousand of unrealized gain on
available for sale investments. At
December 31, 2005, Accumulated Other Comprehensive Income consists of
$74 thousand loss for cumulative translation loss adjustments and $27
thousand of unrealized gain on available for sale securities. At December 31, 2004, Accumulated Other
Comprehensive Loss consists of cumulative translation loss adjustments of
$311 thousand and income from minimum pension liability adjustments and
other of $141 thousand.
Foreign Currency Translation
The functional currency of the Company’s Swiss
subsidiary is the Swiss Franc. Assets
and liabilities of the Company’s Swiss subsidiary are translated using the
exchange rate in effect at the balance sheet date. Revenue and expense accounts and cash flows
are translated using an average of exchange rates in effect during the period. Cumulative translation gains and losses are
shown in the consolidated balance sheets as a separate component of
stockholders’ equity. Exchange gains and
losses arising from transactions denominated in foreign currencies (i.e.,
transaction gains and losses) are recognized as a component of other income
(expense) in current operations, as are exchange gains and losses on
intercompany transactions expected to be settled in the near term.
New Accounting Pronouncements
In February 2006, the FASB
issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments -an
amendment of FASB Statements No. 133 and 140,” which simplifies accounting for
certain hybrid financial instruments by permitting fair value remeasurement for
any hybrid instrument that contains an embedded derivative that otherwise would
require bifurcation and
eliminates
a restriction
on the passive derivative instruments that a qualifying special-purpose entity
may hold. SFAS No. 155 is effective for all financial instruments acquired,
issued or subject to a remeasurement (new basis) event occurring after the
beginning of an entity’s first fiscal year that begins after September 15,
2006. The adoption of SFAS No. 155 will have no impact on the Company’s results
of operations or the Company’s financial position.
In March 2006, the FASB
issued SFAS No. 156, “Accounting for Servicing of Financial Assets - an
amendment of FASB Statement No. 140,” which establishes, among other things,
the accounting for all separately recognized servicing assets and servicing
liabilities by requiring that all separately recognized servicing assets and
servicing liabilities be initially measured at fair value, if practicable. SFAS
No. 156 is effective as of the beginning of an entity’s first fiscal year that
begins after September 15, 2006. The adoption of SFAS No. 156 will have no
impact on the Company’s results of operations or financial position.
In June 2006, the FASB
issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement No. 109,” which establishes
that the financial statement effects of a tax position taken or expected to be
taken in a tax return are to be recognized in the financial statements when it
is more likely than not, based on the technical merits, that the position will
be sustained upon examination. FIN 48 is effective for fiscal years beginning
after December 15, 2006. The
58
adoption
of FIN 48 is not expected to have a material impact on the Company’s results of
operations or financial position.
In September 2006, the FASB
issued SFAS No. 157, “Fair Value Measurements,” which establishes a framework
for measuring fair value in generally accepted accounting principles and
expands disclosures about fair value measurements. SFAS No. 157 defines fair
value as the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants at the
measurement date. SFAS No. 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim periods within
those fiscal years. The adoption of SFAS No. 157 is not expected to have a
material impact on the Company’s results of operations or financial position.
In September 2006, the FASB
issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106,
and 132(R),” which requires a business entity to recognize the overfunded or
underfunded status of a single-employer defined benefit postretirement plan as
an asset or liability in its statement of financial position and to recognize
changes in that funded status in comprehensive income in the year in which the
changes occur. SFAS No. 158 also requires a business entity to measure the
funded status of a plan as of the date of its year-end statement of financial
position, with limited exceptions. An employer with publicly traded equity
securities is required to initially recognize the funded status of a defined
benefit postretirement plan and to provide the required disclosures as of the
end of the fiscal year ending after December 15, 2006. The Company’s defined benefit pension plan is
currently overfunded and benefits are frozen.
The adoption of SFAS No. 158 has been reflected in the Company’s results
of operations and financial position.
In February 2007, the FASB issued SFAS No. 159, “The
Fair Value Option for Financial Assets and Liabilities — including an amendment
of FASB Statement No. 115”. SFAS
No. 159 permits entities to choose to measure many financial instruments
and certain other items at fair value.
This statement will be effective for us January 1, 2008. The Company has not yet determined the
impact, if any, that adopting this standard may have on its financial
statements.
The Company adopted SFAS No.
123R effective January 1, 2006 under the modified prospective method of
adoption. This pronouncement
requires
companies to measure the
cost of employee services received in exchange for an award of equity
instruments (including stock options) based on the grant-date fair value of the
award. The fair value is estimated using
option pricing models where applicable.
The resulting cost is recognized over the period during which an employee
is required to provide service in exchange for the award, usually the vesting
period. This represents a change in
accounting for the Company’s stock option plans and employee stock purchase
plan. Prior to the Company’s adoption of
SFAS No. 123R on January 1, 2006, the Company measured stock-based compensation
under the intrinsic value based method of APB No. 25 with pro forma disclosures
of net income or loss assuming the fair value method of SFAS No. 123, which
became effective in 1996, had been applied.
3.
CAPITAL LEASE OBLIGATIONS
The Company has entered into certain capital lease
agreements for laboratory equipment, office equipment, machinery and equipment,
and computer equipment and software. At
December 31, 2005 and 2006, the Company had capitalized machinery and
equipment under capital leases with a gross value of approximately $
38 thousand
and $38 thousand, respectively, and
net book value of approximately $25 thousand and $
17 thousand
, respectively.
The capitalized cost of the equipment under capital leases is included
in the accompanying consolidated balance sheets under the respective asset
classes. Under the terms of the Company’s
lease agreements, the Company is required to make monthly payments of principal
and interest through the year 2009, at interest rates ranging from 11.0% to
14.0% per annum. The equipment under the
capital leases serves as security for the leases.
59
The future annual minimum required payments under
capital lease obligations as of December 31, 2006 were as follows (in
thousands):
|
Year Ending December 31,
|
|
|
|
|
2007
|
|
$
|
10
|
|
|
2008
|
|
10
|
|
|
2009
|
|
2
|
|
|
2010
|
|
—
|
|
|
Total future
minimum lease payments
|
|
22
|
|
|
Less amount
representing interest
|
|
3
|
|
|
Present value of
future minimum lease payments
|
|
19
|
|
|
Less current
portion
|
|
8
|
|
|
Total long-term capital
lease obligations
|
|
$
|
11
|
|
4.
LONG-TERM DEBT
Long-term debt
consists of the following (dollars in thousands):
|
|
|
December 31,
|
|
|
|
|
2005
|
|
2006
|
|
|
Promissory note
to the City of Des Moines was paid in full in June 2006.
|
|
$
|
34
|
|
$
|
—
|
|
|
Real estate
mortgage loan with a commercial bank, due in monthly installments, with the
balance due of $163 thousand in full June 30, 2009, with a stated interest
rate of prime plus 2.75% at December 31, 2005 and prime plus 2.5% at
December 31, 2006 (10.0% and 10.75%, respectively).
|
|
905
|
|
693
|
|
|
Term loan with a
commercial bank, secured by machinery and equipment, due in monthly
installments beginning February 2006 with the balance due of $481 thousand in
full June 30, 2009, with a stated interest rate of prime plus 2.75% at
December 31, 2005 and prime plus 2.5% at December 31, 2006 (10.0% and 10.75%,
respectively).
|
|
2,000
|
|
1,592
|
|
|
Term loan with a
commercial bank, secured by machinery and equipment, due in monthly
installments beginning February 2006 with the balance due of $120 thousand in
full June 30, 2009, with a stated interest rate of prime plus 2.75% at
December 31, 2005 and prime plus 2.5% at December 31, 2006 (10.0% and 10.75%,
respectively).
|
|
500
|
|
398
|
|
|
Subordinated
promissory note with a significant customer for facilities improvements in
Des Moines, secured by the manufacturing facility, due in May 2007, with a
stated interest rate of prime plus 1.0% at December 31, 2005 and December 31,
2006 (8.25% and 9.25%, respectively).
|
|
500
|
|
500
|
|
|
|
|
3,939
|
|
3,183
|
|
|
Less
installments due within one year
|
|
(1,256
|
)
|
(1,267
|
)
|
|
|
|
$
|
2,683
|
|
$
|
1,916
|
|
The
Company has a credit and security agreement with Wells Fargo Bank, National
Association which expires June 30, 2009.
The agreement includes the real estate mortgage loan and term loans
above, and a $12.0 million asset-based revolving line of credit with a stated
interest rate at December 31, 2006 of prime plus 2.5%. Amounts due under the credit facility are
secured by a first security interest in essentially all of the Company’s
assets. Under the agreement, the Company
is required to comply with certain financial and non-financial covenants. Among the financial covenants are
requirements for monthly minimum book net
60
worth, quarterly minimum net income and monthly
minimum liquidity. The amount available
for borrowings under the line of credit varies based upon available cash,
eligible accounts receivable and eligible inventory. As of December 31, 2006, approximately $8.0
million was outstanding on the line of credit and there was $4.0 million
available capacity for additional borrowings under the line of credit
agreement.
Maturities of long-term
debt as of December 31, 2006 were as follows (in thousands):
|
Year Ending December 31,
|
|
|
|
|
2007
|
|
$
|
1,267
|
|
|
2008
|
|
767
|
|
|
2009
|
|
1,149
|
|
|
2010
|
|
—
|
|
|
|
|
$
|
3,183
|
|
5. INCOME TAXES
As of December 31, 2006, the Company had a net
domestic operating loss carryforward ("NOL"), of approximately $167.8
million, a domestic alternative minimum tax credit of approximately $81
thousand and a domestic research and development tax credit carryforward of
approximately $307 thousand. The NOL and
tax credit carryforwards are subject to alternative minimum tax limitations and
to examination by the tax authorities.
In addition, the Company had a "change of ownership" as
defined under the provisions of Section 382 of the Internal Revenue Code of
1986, as amended (an "Ownership Change"). The Company believes the latest, and most
restrictive, Ownership Change occurred at the time of its initial public
offering in July 1997. The Company does
not believe this Ownership Change will place a significant restriction on its
ability to utilize its NOL in the future.
The Company also had an NOL of approximately $1.9 million in Switzerland
at December 31, 2006 related to losses previously recorded by Heska AG, the
Company's operating subsidiary in Switzerland.
Based on the profitable operating performance of Heska
AG, the Company's evaluation determined that its NOL in Switzerland was
realizable on a more-likely-than-not basis and the related valuation allowance
was released in the fourth quarter of 2005, resulting in an income tax benefit
of approximately $185 thousand and a corresponding net deferred tax asset of
approximately $185 thousand on December 31, 2005. The Company subsequently obtained agreements
from the tax authorities in the canton of Fribourg (the "Tax
Agreements") regarding the Company's determination of taxable income. The Company anticipates the Tax Agreements
will reduce the Company's taxable income and therefore tax obligation in
Switzerland in future years as compared to prior expectations. In addition, the Tax Agreements reduced the
Company's taxable income in Switzerland in 2005 and 2006 from previous
estimates for financial reporting purposes.
Accordingly, due to the Company's lower income expectations in
Switzerland related to the Tax Agreements, the Company no longer believes it
will be able to utilize all of its NOL in Switzerland before it fully expires
and has made an associated reduction in its net deferred tax asset via an
increase in the related valuation allowance along with a corresponding income
tax expense journal entry in the fourth quarter of 2006. At December 31, 2006 the Company had total
deferred tax assets of approximately $49 thousand. As a result of the Tax Agreements, the
Company has a smaller net deferred tax asset, lower foreign taxable income and
greater domestic taxable income than the Company estimated when it reported its
results for the year ended December 31, 2005.
Heska AG has a "tax holiday" from canton, municipal and church
income taxes in the canton of Fribourg through August 31, 2007. These tax holidays reduce the amount of
deferred tax asset that would otherwise be recorded by approximately $14
thousand. The Company does not have a
"tax holiday" for federal taxes in Switzerland. The Company also recognized approximately
$58 thousand of income tax expense for the year ended December 31, 2006 related
to alternative minimum income tax obligations in the United States. The Company's domestic NOL represents a
deferred tax asset, which has been completely offset by a valuation
allowance. Based on the Company's
domestic cumulative operating losses in recent years, as well as other factors
including uncertainties regarding the Company's future operations, the Company
has been unable to conclude that it was more likely than not on December 31,
2006 that the Company will realize a future benefit from its domestic NOL. Accordingly, a valuation allowance has been
established for the entire domestic deferred tax asset and no benefit for
domestic income taxes has been recognized in the accompanying consolidated
statements of operations.
61
The components of
income (loss) before income taxes were as follows (in thousands):
|
|
|
Year Ended December 31,
|
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
(5,718
|
)
|
$
|
(1,080
|
)
|
$
|
1,976
|
|
|
Foreign
|
|
903
|
|
1,177
|
|
58
|
|
|
|
|
$
|
(4,815
|
)
|
$
|
97
|
|
$
|
2,034
|
|
Temporary differences that give rise to the components
of deferred tax assets are as follows (in thousands):
|
|
|
December 31,
|
|
|
|
|
2005
|
|
2006
|
|
|
Current deferred tax
assets (liabilities):
|
|
|
|
|
|
|
Inventory
|
|
$
|
309
|
|
$
|
555
|
|
|
Accrued
compensation
|
|
17
|
|
52
|
|
|
Net operating
loss carryforwards—foreign
|
|
75
|
|
17
|
|
|
Other
|
|
317
|
|
347
|
|
|
|
|
718
|
|
971
|
|
|
Valuation
allowance
|
|
(643
|
)
|
(954
|
)
|
|
Total current
deferred tax assets (liabilities)
|
|
$
|
75
|
|
$
|
17
|
|
|
|
|
|
|
|
|
|
Noncurrent deferred tax
assets (liabilities):
|
|
|
|
|
|
|
Research and
development and other credits
|
|
$
|
330
|
|
$
|
388
|
|
|
Deferred revenue
|
|
4,853
|
|
4,217
|
|
|
Amortization of
intangible assets
|
|
(584
|
)
|
—
|
|
|
Property and
equipment
|
|
945
|
|
925
|
|
|
Net operating
loss carryforwards—domestic
|
|
65,635
|
|
64,345
|
|
|
Net operating
loss carryforwards—foreign
|
|
110
|
|
32
|
|
|
|
|
71,289
|
|
69,907
|
|
|
Valuation
allowance
|
|
(71,179
|
)
|
(69,875
|
)
|
|
Total noncurrent
deferred tax assets (liabilities)
|
|
$
|
110
|
|
$
|
32
|
|
The components of
the income tax expense (benefit) are as follows (in thousands):
|
|
|
Year Ended December 31,
|
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Current income
tax expense (benefit):
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
$
|
—
|
|
$
|
58
|
|
|
State
|
|
—
|
|
—
|
|
—
|
|
|
Foreign
|
|
—
|
|
—
|
|
—
|
|
|
Total current expense (benefit)
|
|
—
|
|
—
|
|
58
|
|
|
Deferred income
tax expense (benefit):
|
|
|
|
|
|
|
|
|
Federal
|
|
(1,790
|
)
|
—
|
|
—
|
|
|
State
|
|
(231
|
)
|
—
|
|
—
|
|
|
Foreign
|
|
—
|
|
(185
|
)
|
148
|
|
|
Total deferred benefit
|
|
(2,021
|
)
|
(185
|
)
|
148
|
|
|
Valuation allowance
|
|
2,021
|
|
—
|
|
—
|
|
|
Total income tax
expense (benefit)
|
|
$
|
—
|
|
$
|
(185
|
)
|
$
|
206
|
|
62
The
Company’s income tax benefit relating to losses, respectively, for the periods
presented differ from the amounts that would result from applying the federal
statutory rate to those losses as follows:
|
|
|
Year Ended December 31,
|
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Statutory
federal tax rate
|
|
(34
|
)%
|
34
|
%
|
35
|
%
|
|
State income
taxes, net of federal benefit
|
|
(4
|
)%
|
4
|
%
|
4
|
%
|
|
Other permanent
differences
|
|
1
|
%
|
107
|
%
|
9
|
%
|
|
Foreign NOL
utilization
|
|
—
|
|
(95
|
)%
|
—
|
|
|
Foreign rate
difference
|
|
—
|
|
(199
|
)%
|
2
|
%
|
|
Current year
impact of foreign tax holiday
|
|
—
|
|
(166
|
)%
|
(1
|
)%
|
|
Loss of foreign
NOL benefit under new tax rate agreement
|
|
—
|
|
—
|
|
7
|
%
|
|
Swiss NOL
carryforward
|
|
—
|
|
(190
|
)%
|
(1
|
)%
|
|
Change in
valuation allowance
|
|
37
|
%
|
352
|
%
|
(50
|
)%
|
|
Other
|
|
—
|
|
(38
|
)%
|
5
|
%
|
|
Effective income tax
rate
|
|
0
|
%
|
(191
|
)%
|
10
|
%
|
6.
CAPITAL
STOCK
Stock Option Plans
The Company has two stock option plans which
authorize granting of stock options and stock purchase rights to employees,
officers, directors and consultants of the Company to purchase shares of common
stock. In 1997, the board of directors
adopted the 1997 Stock Incentive Plan and terminated two prior option
plans. However, options granted and
unexercised under the prior plans are still outstanding. All shares that remained available for grant
under the terminated plans were incorporated into the 1997 Plan. In addition, all shares subsequently
cancelled under the prior plans are added back to the 1997 Plan on a quarterly
basis as additional options available to grant.
In May 2003, the stockholders approved a new plan, the 2003 Stock
Incentive Plan, which allows for the granting of options for up to 2,390,500
shares of the Company’s common stock.
The number of shares reserved for issuance under all plans as of January
1, 2007 was 4,910,988.
The stock options granted by the board of
directors may be either incentive stock options (“ISOs”) or non-qualified stock
options (“NQs”). The exercise price for
options under all of the plans may be no less than 100% of the fair value of
the underlying common stock for ISOs or 85% of fair value for NQs. Options granted will expire no later than the
tenth anniversary subsequent to the date of grant or three months following
termination of employment, except in cases of death or disability, in which
case the options will remain exercisable for up to twelve months. Under the terms of the 1997 Plan, in the event
the Company is sold or merged, outstanding options will either be assumed by
the surviving corporation or vest immediately.
There are four key inputs to the
Black-Scholes model which the Company uses to estimate fair value for options
which it issues: expected term, expected volatility, risk-free interest rate
and expected dividends, all of which require the Company to make
estimates. The Company’s estimates for
these inputs may not be indicative of actual future performance and changes to
any of these inputs can have a material impact on the resulting estimated fair
value calculated for the option. The
Company’s expected term input was estimated based on the Company’s historical
experience for time from option grant to option exercise for all employees in
2006 and 2005 and based on a software program to which an input was the Company’s
historical exercise experience for current employees in 2004; the Company
treated all employees in one grouping in all three years. The Company’s expected volatility input was
estimated based on the Company’s historical stock price volatility in 2006 and
2005 and a combination of the Company’s historical stock price volatility and a
peer group volatility in 2004. The
Company’s risk-free interest rate input was determined based on the U.S.
Treasury yield curve at the time of option issuance in 2006, 2005 and
2004. The Company’s expected
63
dividends input was zero
in 2006, 2005 and 2004. Weighted average
assumptions used in 2006, 2005 and 2004 for each of these four key inputs are
listed in the following table.
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
Risk-free
interest rate
|
|
3.62
|
%
|
4.17
|
%
|
4.81
|
%
|
|
Expected lives
|
|
4.5 years
|
|
2.8 years
|
|
2.8 years
|
|
|
Expected
volatility
|
|
76
|
%
|
86
|
%
|
65
|
%
|
|
Expected dividend yield
|
|
0
|
%
|
0
|
%
|
0
|
%
|
A summary of the
Company’s stock option plans is as follows:
|
|
|
Year Ended December 31,
|
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
|
Options
|
|
Weighted
Average
Exercise
Price
|
|
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
|
|
11,989,582
|
|
$
|
1.3251
|
|
|
Granted at Market
|
|
2,575,830
|
|
$
|
1.8890
|
|
3,999,897
|
|
$
|
1.0130
|
|
1,078,891
|
|
$
|
1.5175
|
|
|
Granted above Market
|
|
418
|
|
$
|
2.6300
|
|
—
|
|
$
|
—
|
|
—
|
|
$
|
—
|
|
|
Cancelled
|
|
(792,963
|
)
|
$
|
3.8742
|
|
(821,161
|
)
|
$
|
1.6345
|
|
(681,377
|
)
|
$
|
1.3042
|
|
|
Exercised
|
|
(386,974
|
)
|
$
|
0.7476
|
|
(540,113
|
)
|
$
|
0.7222
|
|
(568,273
|
)
|
$
|
1.0418
|
|
|
Outstanding at
end of period
|
|
9,350,959
|
|
$
|
1.4509
|
|
11,989,582
|
|
$
|
1.3251
|
|
11,818,823
|
|
$
|
1.3575
|
|
|
Exercisable at end of
period
|
|
7,939,567
|
|
$
|
1.5532
|
|
11,765,335
|
|
$
|
1.3373
|
|
11,792,445
|
|
$
|
1.3585
|
|
The total
estimated fair value of stock options granted during the years ended December
31, 2006, 2005 and 2004 were computed to be approximately $718 thousand, $2.2
million and $3.0 million, respectively.
The amounts are amortized ratably over the vesting periods of the
options. The weighted average estimated
fair value of options granted during the years ended December 31, 2006, 2005
and 2004 was computed to be approximately $0.68, $0.56 and $1.16,
respectively. The total intrinsic value
of options exercised during the years ended December 31, 2006, 2005 and 2004
were $251 thousand, $123 thousand and $483 thousand, respectively. The cash proceeds from options exercised
during the years ended December 31, 2006, 2005 and 2004 were $592
thousand, $390 thousand and $289 thousand.
The Company does not consider the tax benefit realized as a result of
the exercise of these options to be material given the Company’s relatively
large NOL in the United States.
The following
table summarizes information about stock options outstanding and exercisable at
December 31, 2006.
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
|
Exercise Prices
|
|
Number of
Options
Outstanding
at
December 31,
2006
|
|
Weighted
Average
Remaining
Contractual
Life in Years
|
|
Weighted
Average
Exercise
Price
|
|
Number of
Options
Exercisable
at
December 31,
2006
|
|
Weighted
Average
Exercise
Price
|
|
|
$0.34 — $0.87
|
|
1,994,613
|
|
6.15
|
|
$
|
0.6457
|
|
1,982,402
|
|
$
|
0.6454
|
|
|
$0.88 — $1.05
|
|
2,364,021
|
|
7.71
|
|
$
|
0.9008
|
|
2,364,021
|
|
$
|
0.9008
|
|
|
$1.06 — $1.24
|
|
1,964,429
|
|
5.71
|
|
$
|
1.1220
|
|
1,950,262
|
|
$
|
1.1222
|
|
|
$1.25 — $1.68
|
|
2,937,738
|
|
7.95
|
|
$
|
1.3822
|
|
2,937,738
|
|
$
|
1.3822
|
|
|
$1.69 — $13.75
|
|
2,558,022
|
|
6.50
|
|
$
|
2.4869
|
|
2,558,022
|
|
$
|
2.4869
|
|
|
$0.34 — $13.75
|
|
11,818,823
|
|
6.91
|
|
$
|
1.3575
|
|
11,792,445
|
|
$
|
1.3585
|
|
As of
December 31, 2006, there was $62 thousand of total unrecognized compensation
expense related to outstanding stock options.
That cost is expected to be recognized over a weighted-average period of
0.4 years with all cost to be recognized by the end of May 2008, assuming all
options vest according to the
64
vesting
schedules in place at December 31, 2006.
As of December 31, 2006, the aggregate intrinsic value of outstanding
options was approximately $5.9 million and the aggregate intrinsic value of
exercisable options was approximately $5.9 million.
Modifications to and Vesting of Certain Stock Option
Grants
On December 2,
2004 the Compensation Committee of the Company’s Board of Directors (the “Compensation
Committee”) considered the significant impact that the use of fair values,
rather than intrinsic values, would have on the Company’s future results of
operations, as well as factors including that the management team had requested
that their salaries be frozen for 2005, many non-management employees’ 2005
raises were to be below market levels, no management bonus payments were made
for 2004 and the 2005 management incentive plan called for a performance in
excess of the Company’s internal budget before any bonus payments were to be
made, and approved the acceleration of vesting of outstanding but unvested
stock options with an exercise price greater than $1.08. 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, calculated under SFAS No. 123 of approximately
$2.1 million, was recorded in 2004.
This action effected options to purchase approximately 2.2 million
shares, approximately 1.1 million of which were held by the Company’s Directors
and Executive Officers. Had this 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,
compensation expense related to these options of $870 thousand would have
been recorded on a pro forma basis during the year ended December 31, 2005,
with the remainder, approximately $1.2 million, recorded as compensation
expense after the adoption of SFAS 123R when required on January 1, 2006. On February 24, 2005, the Company’s Board of
Directors (the “Board of Directors”) considered the significant impact that the
use of fair values, rather than intrinsic values, would have on the Company’s
future results of operations, as well as factors including that the management
team had requested that their salaries be frozen for 2005, many non-management
employees’ 2005 raises were to be below market levels, no management bonus
payments were made for 2004 and the 2005 management incentive plan called for a
performance in excess of the Company’s internal budget before any bonus
payments were to be made, and authorized the Company’s Stock Option Committee
(the “Stock Option Committee”), which consisted solely of the Company’s Chief
Executive Officer, to immediately vest all options granted from that date
through June 30, 2005 and to accelerate the vesting of any outstanding but
unvested stock options with a strike price that is not “in-the-money” at its
discretion (the aggregate authorization to the Stock Option Committee to be
known as the “Vesting Authorization”) through June 30, 2005; for similar
reasons and understanding the SEC had issued a release amending the compliance
date for SFAS No. 123R, on May 9, 2005, the Board of Directors approved the
extension of the Vesting Authorization to the Stock Option Committee from June
30, 2005 to December 31, 2005. On March
30, 2005, the Stock Option Committee exercised its discretion and accelerated
the vesting of outstanding but unvested stock options with a strike price
greater than or equal to $0.82. 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, calculated under SFAS No. 123 of
approximately $540 thousand, was recorded in 2005. This action effected options to purchase
approximately 750 thousand shares, approximately 55 thousand of which were held
by the Company’s 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, compensation expense related to
these options of $275 thousand would have been recorded on a pro forma
basis during the nine months ended December 31, 2005, with the remainder,
approximately $265 thousand, recorded as compensation expense after the
adoption of SFAS 123R when required on January 1, 2006. All options granted in 2005 on or after March
30, 2005, which totaled options to purchase approximately 3.9 million shares,
were granted with immediate vesting.
65
Employee Stock Purchase Plan (the “ESPP”)
Under the 1997 Employee Stock Purchase Plan, the
Company is authorized to issue up to 2,750,000 shares of common stock to its
employees, of which 2,197,548 had been issued as of December 31, 2006. Employees of the Company and its U.S.
subsidiaries who are expected to work at least 20 hours per week and five
months per year are eligible to participate.
Under the terms of the plan, employees can choose to have up to 10% of
their annual base earnings withheld to purchase the Company’s common
stock. Each enrollment period is one
year, with six-month measurement periods ending June 30 and December 31. The purchase price of the stock for June 30
and December 31 was 85% of the end-of-measurement-period market price.
For the years ended December 31, 2004, 2005 and 2006,
the weighted-average fair value of the purchase rights granted was $0.44, $0.27
and $0.36 per share, respectively. Pro
forma stock-based compensation was approximately $58 thousand and $65 thousand
in 2004 and 2005, respectively, for the ESPP.
Beginning in 2006, stock-based compensation was expensed.
Restricted Stock Exchange
On August 9, 2001, the Board of Directors approved a
proposal to give Colorado-based Heska employees an opportunity to exchange all
options outstanding with exercise prices greater than $3.90 per share under the
1997 Stock Incentive Plan for shares of restricted stock. The offer closed on September 28, 2001 with
options to purchase 1,044,900 shares of common stock exchanged for 1,044,900
shares of restricted stock. The fair
value of the restricted stock at the time of the exchange was $0.68 per
share. The restricted stock vested over
48 months beginning November 1, 2001.
This exchange resulted in deferred compensation of approximately $710 thousand
that was recognized over the vesting period of the restricted stock. The Company recognized $91 thousand and $67
thousand of non-cash compensation expense from this exchange in 2004 and 2005,
respectively. A total of approximately
728 thousand shares vested under the exchange offer. The final vesting date was October 1, 2005
and employees may sell previously vested shares.
7.
MAJOR
CUSTOMERS
The Company had no customers in 2004, 2005 and 2006
who represented 10% or more of total revenue.
At December 31, 2006, the Company had one customer, Schering-Plough
Animal Health Corporation (“SPAH”), who represented 13% of total accounts receivable. No customer represented 10% or more of total
accounts receivable at December 31, 2005.
8.
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
Year Ended December 31,
|
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
|
(in thousands)
|
|
|
Cash paid for
interest
|
|
$
|
690
|
|
$
|
1,004
|
|
$
|
1,178
|
|
|
Purchase of assets
under capital lease financing
|
|
$
|
24
|
|
$
|
—
|
|
$
|
—
|
|
9.
COMMITMENTS
AND CONTINGENCIES
The Company holds certain rights to market and
manufacture all products developed or created under certain research,
development and licensing agreements with various entities. In connection with such agreements, the
Company has agreed to pay the entities royalties on net product sales. In the years ended December 31, 2004, 2005
and 2006, royalties of $1.0 million, $895 thousand and $722 thousand became
payable under these agreements, respectively.
The Company has contracts with two suppliers for
unconditional annual minimum inventory purchases totaling approximately $3.5
million in fiscal 2007 and $2.4 million through 2010.
66
The Company has entered into operating leases for its
office and research facilities and certain equipment with future minimum
payments as of December 31, 2006 as follows (in thousands):
|
Year Ending December 31,
|
|
|
|
|
2007
|
|
$
|
1,533
|
|
|
2008
|
|
1,584
|
|
|
2009
|
|
1,622
|
|
|
2010
|
|
1,661
|
|
|
2011
|
|
1,702
|
|
|
Thereafter
|
|
22,101
|
|
|
|
|
$
|
30,203
|
|
The
Company had rent expense of $774
thousand, $1.4 million and $1.8 million in 2004, 2005 and 2006, respectively.
From
time to time, the Company may be
involved in litigation relating to claims arising out of its operations. For example, on September 9, 2005, United
Vaccines, Inc. (“United”), a customer of our OVP segment, filed a lawsuit in
Madison, Wisconsin against our Diamond Animal Health, Inc. subsidiary (“Diamond”)
and Heska Corporation alleging various claims, including breach of contract and
breach of warranty, and demanding compensatory and punitive damages. On October 20, 2005, we filed counterclaims
on behalf of Diamond as well as a motion to dismiss all claims against Heska
Corporation. United filed an amended
complaint on November 16, 2005 and Diamond filed an amended counterclaim on
January 25, 2006. The matter proceeded
to a jury trial. On October 18, 2006,
all remaining claims against Diamond and Heska Corporation were dismissed and
United was found in breach of contract with corresponding damages owed to
Diamond. In the course of the
litigation, we discovered that United had dissolved as of December 29,
2005. We also came to believe that
United had transferred substantially all its assets to an Indiana Domestic
Limited Liability Company (“LLC”). On
December 28, 2006, United filed a Notice of Appeal with the Seventh Circuit
Court of Appeals. The parties to this
matter ultimately signed a settlement and release agreement, as outlined in
Note 12. As of December 31, 2006, the Company was not party to any legal
proceedings other than the above that are expected, individually or in the
aggregate, to have a material effect on its business, financial condition or
operating results.
The Company generally
warrants that its products and services will conform to published
specifications. The typical warranty
period is one year from delivery of the product or service. The typical remedy for breach of warranty is
to correct or replace any defective product, and if not possible or practical,
the Company will accept the return of the defective product and refund the
amount paid. Historically, the Company
has incurred minimal warranty costs, and as a result, does not maintain a
warranty reserve.
The Company’s licensing
arrangements generally include a product indemnification provision that will
indemnify and defend a licensee in actions brought against the licensee that
claim the Company’s patents infringe upon a copyright, trade secret or valid
patent. Historically, the Company has
not incurred any significant costs related to product indemnification claims,
and as a result, does not maintain a reserve for such exposure.
10.
SEGMENT
REPORTING
The Company is
comprised of two reportable segments, Core Companion Animal Health (“CCA”) and
Other Vaccines, Pharmaceuticals and Products (“OVP”). The Core Companion Animal Health segment
includes diagnostic and monitoring instruments and supplies, as well as single
use diagnostic and other tests, vaccines and pharmaceuticals, primarily for
canine and feline use. These products
are sold directly by the Company as well as through independent third-party
distributors and other distribution relationships. CCA segment products manufactured at the Des
Moines, Iowa production facility included in the OVP segment’s
67
assets are transferred at cost and are not recorded as revenue for the
OVP segment. The Other Vaccines,
Pharmaceuticals and Products segment includes private label vaccine and pharmaceutical
production, primarily for cattle but, also for other animals including small
mammals and fish. All OVP products are
sold by third parties under third party labels.
Additionally,
the Company generates non-product revenue from research and development
projects for third parties, licensing of technology and royalties. The Company performs these research and
development projects for both companion animal and livestock purposes.
Summarized
financial information concerning the Company’s reportable segments is shown in
the following table (in thousands).
|
|
|
Core
Companion
Animal
Health
|
|
Other Vaccines,
Pharmaceuticals
and Products
|
|
Total
|
|
|
2004:
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
54,474
|
|
$
|
13,217
|
|
$
|
67,691
|
|
|
Operating income
(loss)
|
|
(5,704
|
)
|
1,464
|
|
(4,240
|
)
|
|
Total assets
|
|
23,357
|
|
15,367
|
|
38,724
|
|
|
Capital
expenditures
|
|
277
|
|
1,013
|
|
1,290
|
|
|
Depreciation and
amortization
|
|
378
|
|
959
|
|
1,337
|
|
|
Amortization of
intangible assets
|
|
393
|
|
—
|
|
393
|
|
|
Interest expense
|
|
372
|
|
318
|
|
690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core
Companion
Animal
Health
|
|
Other Vaccines,
Pharmaceuticals
and Products
|
|
Total
|
|
|
2005:
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
56,604
|
|
$
|
12,833
|
|
$
|
69,437
|
|
|
Operating income
(loss)
|
|
(595
|
)
|
1,466
|
|
871
|
|
|
Total assets
|
|
22,848
|
|
13,936
|
|
36,784
|
|
|
Capital
expenditures
|
|
931
|
|
445
|
|
1,376
|
|
|
Depreciation and
amortization
|
|
846
|
|
1,004
|
|
1,850
|
|
|
Amortization of
intangible assets
|
|
157
|
|
—
|
|
157
|
|
|
Interest expense
|
|
652
|
|
434
|
|
1,086
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core
Companion
Animal
Health
|
|
Other Vaccines,
Pharmaceuticals
and Products
|
|
Total
|
|
|
2006:
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
62,968
|
|
$
|
12,092
|
|
$
|
75,060
|
|
|
Operating income
(loss)
|
|
2,780
|
|
295
|
|
3,075
|
|
|
Total assets
|
|
26,112
|
|
12,383
|
|
38,495
|
|
|
Capital
expenditures
|
|
810
|
|
379
|
|
1,189
|
|
|
Depreciation and
amortization
|
|
765
|
|
906
|
|
1,671
|
|
|
Amortization of
intangible assets
|
|
334
|
|
—
|
|
334
|
|
|
Interest expense
|
|
809
|
|
435
|
|
1,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68
Total
revenue
by principal geographic area was
as follows (in thousands):
|
|
|
For the Years Ended December 31,
|
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
59,452
|
|
$
|
60,849
|
|
$
|
63,828
|
|
|
Europe
|
|
4,484
|
|
4,151
|
|
5,974
|
|
|
Other
International
|
|
3,755
|
|
4,437
|
|
5,258
|
|
|
Total
|
|
$
|
67,691
|
|
$
|
69,437
|
|
$
|
75,060
|
|
Total
assets
by principal geographic areas
were as follows (in thousands):
|
|
|
December 31,
|
|
|
|
|
2004
|
|
2005
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
35,123
|
|
$
|
33,414
|
|
$
|
33,395
|
|
|
Europe
|
|
3,601
|
|
3,370
|
|
5,100
|
|
|
Other International
|
|
—
|
|
—
|
|
—
|
|
|
Total
|
|
$
|
38,724
|
|
$
|
36,784
|
|
$
|
38,495
|
|
11. QUARTERLY FINANCIAL INFORMATION (unaudited)
The following summarizes selected quarterly financial
information for each of the two years in the periods ended December 31, 2005
and 2006 (amounts in thousands, except per share data).
|
|
|
Q1
|
|
Q2
|
|
Q3
|
|
Q4
|
|
Total
|
|
|
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
17,154
|
|
$
|
16,565
|
|
$
|
19,340
|
|
$
|
16,378
|
|
$
|
69,437
|
|
|
Gross profit
|
|
5,918
|
|
5,525
|
|
7,678
|
|
6,706
|
|
25,827
|
|
|
Operating income (loss)
|
|
(1,103
|
)
|
(707
|
)
|
1,472
|
|
1,209
|
|
871
|
|
|
Net income (loss)
|
|
(1,308
|
)
|
(767
|
)
|
1,234
|
|
1,123
|
|
282
|
|
|
Net income (loss) per share — basic and diluted
|
|
(0.03
|
)
|
(0.02
|
)
|
0.02
|
|
0.02
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
17,500
|
|
$
|
18,537
|
|
$
|
18,605
|
|
$
|
20,418
|
|
$
|
75,060
|
|
|
Gross profit
|
|
6,853
|
|
7,629
|
|
7,936
|
|
8,228
|
|
30,646
|
|
|
Operating income (loss)
|
|
42
|
|
622
|
|
1,150
|
|
1,261
|
|
3,075
|
|
|
Net income (loss)
|
|
(239
|
)
|
302
|
|
864
|
|
901
|
|
1,828
|
|
|
Net income (loss) per share — basic
|
|
(0.00
|
)
|
0.01
|
|
0.02
|
|
0.02
|
|
0.04
|
|
|
Net income
(loss) per share — diluted
|
|
(0.00
|
)
|
0.01
|
|
0.02
|
|
0.02
|
|
0.03
|
|
12. SUBSEQUENT EVENT
Under a settlement and release agreement effective on
March 23, 2007, United agreed to have approximately $1.6 million paid to
Diamond for product Diamond had previously shipped to United and other
contractual obligations and all other remaining claims involving this matter
were waived. See Note 9 – Commitments
and Contingencies for historical information on this matter.
69
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls
and Procedures.
(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 Annual Report on Form 10-K. 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 SEC’s rules and forms and that such information
is accumulated and communicated to our management, including our chief
executive officer and chief financial officer, as appropriate, to allow timely
decisions regarding 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.
As of June 30, 2006, we did not meet the definition
of “accelerated filer,” as defined by Rule 12b-2 of the Exchange Act and, thus,
are not 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 ended December 31, 2006.
Item 9B. Other Information.
None.
70
PART III
Certain information required by Part III is
incorporated by reference to our definitive Proxy Statement filed with the
Securities and Exchange Commission in connection with the solicitation of proxies
for our 2007 Annual Meeting of Stockholders.
Item 10. Directors and Executive Officers of the
Registrant.
Executive
Officers
The information
required by this item with respect to executive officers is incorporated by
reference to Item 1 of this report and can be found under the caption “Executive
Officers.”
Directors
The information
required by this section with respect to our directors will be incorporated by
reference to the information in the sections entitled “Election of Directors”
and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Proxy
Statement.
Code of
Ethics
Our Board of
Directors has adopted a code of ethics for senior executive and financial
officers (including our principal executive officer, principal financial
officer and principal accounting officer).
The code of ethics is available on our website at www.heska.com. We intend to disclose any amendments to or
waivers from the code of ethics at that location.
Audit
Committee
The information
required by this section with respect to our Audit Committee will be
incorporated by reference to the information in the section entitled “Directors
and Executive Officers” in the Proxy Statement.
Item 11. Executive Compensation.
The information
required by this section will be incorporated by reference to the information
in the sections entitled “Director Compensation” and “Executive Compensation”
in the Proxy Statement.
Item 12. Security Ownership of Certain Beneficial
Owners and Management.
The information
required by this section will be incorporated by reference to the information
in the section entitled “Common Stock Ownership of Certain Beneficial Owners
and Management” in the Proxy Statement.
71
Item 13. Certain Relationships and Related
Transactions.
The
information required by this section will be incorporated by reference to the
information in the sections entitled “Executive Compensation—Employment,
Severance and Change of Control Agreements,” “Certain Transactions and
Relationships” and “Directors and Executive Officers” in the Proxy Statement.
Item 14.
Principal Accountant Fees and Services.
The information
required by this section will be incorporated by reference to the information
in the section entitled “Auditor Fees and Services” in the Proxy Statement.
The information required
by Part III to the extent not set forth herein, will be incorporated herein by
reference to our definitive Proxy Statement for the 2007 Annual Meeting of
Stockholders.
72
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) The following documents are filed as a part
of this Form 10-K.
(1) Financial Statements:
Reference is made to the Index to Consolidated
Financial Statements under Item 8 in Part II of this Form 10-K.
(2) Financial Statement Schedules:
Schedule II — Valuation and Qualifying Accounts.
SCHEDULE
II
HESKA CORPORATION AND
SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(amounts in
thousands)
|
|
|
Balance at
Beginning
of Year
|
|
Additions
Charged to
Costs and
Expenses
|
|
Other
Additions
|
|
Deductions
|
|
Balance at
End of Year
|
|
|
Allowance for doubtful accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
$
|
192
|
|
$
|
(32
|
)
|
—
|
|
$
|
(65) (a)
|
|
$
|
95
|
|
|
December 31, 2005
|
|
$
|
95
|
|
$
|
43
|
|
—
|
|
$
|
(50) (a)
|
|
$
|
88
|
|
|
December 31, 2006
|
|
$
|
88
|
|
$
|
46
|
|
—
|
|
$
|
(36) (a)
|
|
$
|
98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for restructuring charges
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
$
|
121
|
|
$
|
—
|
|
—
|
|
$
|
(106) (b)
|
|
$
|
15
|
|
|
December 31, 2005
|
|
$
|
15
|
|
$
|
—
|
|
—
|
|
$
|
(15) (b)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for tax valuation
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
$
|
69,375
|
|
$
|
2,105
|
|
—
|
|
$
|
—
|
|
$
|
71,480
|
|
|
December 31, 2005
|
|
$
|
71,480
|
|
$
|
342
|
|
—
|
|
$
|
—
|
|
$
|
71,822
|
|
|
December 31,
2006
|
|
$
|
71,822
|
|
$
|
—
|
|
—
|
|
$
|
(999) (c)
|
|
$
|
70,823
|
|
(a)
Write-offs
of uncollectible accounts.
(b)
Payments
for personnel severance costs, contractual obligations and facility closing
costs.
(c)
Utilization of tax
benefits from net operating loss carryforwards.
73
(3) Exhibits:
The exhibits listed below are
required by Item 601 of Regulation S-K.
Each management contract or compensatory plan or arrangement required to
be filed as an exhibit to this Form 10-K has been identified.
|
Exhibit
Number
|
|
Notes
|
|
Description of Document
|
|
3(i)
|
|
(4)
|
|
Restated Certificate of Incorporation of the
Registrant.
|
|
3(ii)
|
|
(5)
|
|
Bylaws of the Registrant.
|
|
10.1+
|
|
(2)
|
|
Supply Agreement between Registrant and Quidel
Corporation, dated July 3, 1997.
|
|
10.2+
|
|
(3)
|
|
Exclusive Distribution Agreement between Registrant
and Novartis Agro K.K., dated August 18, 1998.
|
|
10.3
|
|
(3)
|
|
Right of First Refusal Agreement between Registrant,
Novartis Animal Health, Inc. and Novartis Agro K.K., dated August 18, 1998.
|
|
10.4+
|
|
(6)
|
|
Amended and Restated Distribution Agreement between
Registrant and i-STAT Corporation, dated February 9, 1999.
|
|
10.5+
|
|
(6)
|
|
First Amendment to Product Supply Agreement between
Registrant and Quidel Corporation, dated March 15, 1999.
|
|
10.6+
|
|
(7)
|
|
Amended and Restated Bovine Vaccine Distribution
Agreement between Diamond Animal Health, Inc. and Agri Laboratories, Ltd.,
dated September 30, 2002.
|
|
10.7+
|
|
|
|
Distribution Agreement between Registrant and Arkray
Inc., dated February 16, 2001.
|
|
10.8*
|
|
|
|
1997 Incentive Stock Plan of Registrant, as amended
and restated.
|
|
10.9*
|
|
|
|
1997 Incentive Stock Plan Employees and Consultants
Option Agreement.
|
|
10.10*
|
|
|
|
1997 Incentive Stock Plan Outside Directors Option
Agreement.
|
|
10.11*
|
|
(10)
|
|
1997 Employee Stock Purchase Plan of Registrant, as
amended.
|
|
10.12*
|
|
|
|
2003 Equity Incentive Plan.
|
|
10.13*
|
|
|
|
2003 Equity Incentive Plan Option Agreement.
|
|
10.14*
|
|
(1)
|
|
Form of Indemnification Agreement entered into
between Registrant and its directors and certain officers.
|
|
10.15*
|
|
(11)
|
|
Amended and Restated Employment Agreement with
Robert B. Grieve, dated March 29, 2006.
|
|
10.16*
|
|
(8)
|
|
Employment Agreement between Registrant and Michael
A. Bent, dated May 1, 2000.
|
|
10.17*
|
|
|
|
Employment Agreement between Registrant and Michael
McGinley, dated May 1, 2000.
|
|
10.18*
|
|
|
|
Employment Agreement between Registrant and Nancy
Wisnewski, dated April 15, 2002.
|
|
10.19*
|
|
(8)
|
|
Employment Agreement between Registrant and Jason A.
Napolitano, dated May 6, 2002.
|
|
10.20*
|
|
(9)
|
|
Employment Agreement between Registrant and Joseph
H. Ritter, dated May 1, 2004.
|
|
10.21*
|
|
|
|
Employment Agreement between Registrant and John R.
Flanders, dated December 11, 2006.
|
|
10.22
|
|
|
|
Separation and Release Agreement between Registrant
and Carol Talkington Verser, dated December 31, 2006.
|
|
10.23+
|
|
|
|
Distribution Agreement between Registrant and Arkray
Global Business Inc., dated November 1, 2004.
|
|
10.24+
|
|
|
|
Supply and Distribution Agreement between Registrant
and Boule Medical AB, dated June 17, 2003, Letter Amendment to Supply and
Distribution Agreement between Registrant and Boule Medical AB, dated June 1,
2004 and Letter Amendment to Supply and Distribution Agreement between
Registrant and Boule Medical AB, dated December 31, 2004.
|
|
10.25+
|
|
|
|
Distribution Agreement between Registrant and i-STAT
Corporation, dated October 1, 2004.
|
|
10.26+
|
|
|
|
Second Amendment to Amended and Restated Bovine
Vaccine Distribution Agreement between Diamond Animal Health, Inc. and Agri
Laboratories, Ltd., dated December 10, 2004.
|
|
10.27+
|
|
|
|
Third Amended and Restated Credit and Security
Agreement between Registrant, Diamond Animal Health, Inc. and Wells Fargo
Business Credit, Inc., dated December 30, 2005.
|
|
10.28+
|
|
|
|
First Amendment to Third Amended and Restated Credit
and Security Agreement between Registrant, Diamond Animal Health, Inc. and
Wells Fargo Bank, National Association, dated December 5, 2006.
|
|
10.29+
|
|
|
|
Supply and License Agreement between Registrant and
Schering-Plough Animal Health Corporation, dated August 1, 2003.
|
|
10.30
|
|
(9)
|
|
Net Lease Agreement between Registrant and CCMRED 40
LLC, dated May 24, 2004.
|
|
10.31
|
|
(10)
|
|
First Amendment to Net Lease Agreement and
Development Agreement between Registrant and CCMRED 40, LLC, dated February
11, 2005.
|
|
10.32
|
|
(10)
|
|
Second Amendment to Net Lease Agreement between
Registrant and CCMRED 40 LLC, dated July 14, 2005.
|
|
10.33+
|
|
|
|
Third Amendment to Amended and Restated Bovine
Vaccine Distribution Agreement between Diamond Animal Health, Inc. and Agri
Laboratories, Ltd., dated May 26, 2006.
|
|
10.34*
|
|
(12)
|
|
Management Incentive Plan Master Document.
|
|
10.35*
|
|
|
|
2007 MIP Plan.
|
|
10.36*
|
|
(14)
|
|
Director Compensation Policy, effective January 1,
2007.
|
|
21.1
|
|
|
|
Subsidiaries of the Company.
|
|
23.1
|
|
|
|
Consent of Ehrhardt Keefe Steiner & Hottman, PC,
Independent Registered Public Accounting Firm.
|
|
23.2
|
|
|
|
Consent of KPMG LLP, Independent Registered Public
Accounting Firm.
|
|
24.1
|
|
|
|
Power of Attorney (See page 77 of this Form 10-K).
|
|
31.1
|
|
|
|
Certification of Chief Executive Officer Pursuant to
Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
|
|
31.2
|
|
|
|
Certification of Chief Financial Officer Pursuant to
Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended.
|
|
32.1
|
|
|
|
Certification of Chief Executive Officer and Chief
Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
|
Notes
* Indicates management contract or
compensatory plan or arrangement.
+ Portions of the exhibit have been omitted
pursuant to a request for confidential treatment.
(1) Filed with Registrant's Registration
Statement on Form S-1 (File No. 333-25767).
(2) Filed with the Registrant's Form 10-Q for
the quarter ended September 30, 1997.
(3) Filed with the Registrant's Form 10-K for
the year ended December 31, 1998.
(4) Filed with the Registrant's Form 10-Q for
the quarter ended June 30, 2000.
(5) Filed with the Registrant's Form 10-Q for
the quarter ended June 30, 2001.
(6) Filed with the Registrant's Form 10-K for
the year ended December 31, 2001.
(7) Filed with the Registrant's Form 10-Q for
the quarter ended September 30, 2002.
(8) Filed with the Registrant's Form 10-K for
the year ended December 31, 2002.
(9) Filed with the Registrant's Form 10-K for
the year ended December 31, 2004.
(10) Filed with the Registrant's Form 10-Q for the
quarter ended June 30, 2005.
(11) Filed with the Registrant's Form 10-K for the
year ended December 31, 2005.
(12) Filed with the Registrant's Form 10-Q for the
quarter ended March 31, 2006.
(13) Filed with the Registrant's Form 10-Q for the
quarter ended June 30, 2006.
(14) Filed with the Registrant's Form 8-K dated
March 5, 2007.
74
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized, on
March 30, 2007.
|
|
HESKA CORPORATION
|
|
|
By:
|
/s/ ROBERT B. GRIEVE
|
|
|
|
Robert B. Grieve
|
|
|
|
Chairman of the Board and Chief Executive Officer
|
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person
whose signature appears below constitutes and appoints Robert B. Grieve, Jason
A. Napolitano and Michael A. Bent, and each of them, his or her true and lawful
attorneys-in-fact, each with full power of substitution, for him or her in any
and all capacities, to sign any amendments to this report on Form 10-K and to
file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact or their substitute or
substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities and
Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates
indicated:
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/ ROBERT B. GRIEVE
|
|
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer) and Director
|
|
March 30, 2007
|
|
Robert B. Grieve
|
|
|
|
|
|
|
|
/s/ JASON A. NAPOLITANO
|
|
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
|
|
March 30, 2007
|
|
Jason A.
Napolitano
|
|
|
|
|
|
|
|
/s/ MICHAEL A. BENT
|
|
Vice President, Controller (Principal Accounting
Officer)
|
|
March 30, 2007
|
|
Michael A. Bent
|
|
|
|
|
|
|
|
/s/ WILLIAM A. AYLESWORTH
|
|
Director
|
|
March 30, 2007
|
|
William A.
Aylesworth
|
|
|
|
|
|
|
|
/s/ ELISABETH DEMARSE
|
|
Director
|
|
March 30, 2007
|
|
Elisabeth
DeMarse
|
|
|
|
|
|
|
|
/s/ A. BARR DOLAN
|
|
Director
|
|
March 30, 2007
|
|
A. Barr Dolan
|
|
|
|
|
|
|
|
/s/ PETER EIO
|
|
Director
|
|
March 30, 2007
|
|
Peter Eio
|
|
|
|
|
|
|
|
/s/ G. IRWIN GORDON
|
|
Director
|
|
March 30, 2007
|
|
G. Irwin Gordon
|
|
|
|
|
|
|
|
/s/ JOHN F. SASEN, Sr.
|
|
Director
|
|
March 30, 2007
|
|
John F. Sasen,
Sr.
|
75
Exhibit 10.12
HESKA
CORPORATION
2003
EQUITY INCENTIVE PLAN
HESKA CORPORATION hereby establishes the Heska
Corporation 2003 Equity Incentive Plan, effective as of April 15, 2003.
SECTION 1
BACKGROUND AND PURPOSE
1.1
Background
. The Plan
permits the grant of certain awards, including but not limited to, Nonqualified
Stock Options, Incentive Stock Options, SARs, Restricted Stock, Performance
Units, and Performance Shares.
1.2
Purpose of the
Plan
. The Plan is intended to attract, motivate, and retain
(a) employees of the Company and its Affiliates, (b) consultants who
provide significant services to the Company and its Affiliates, and
(c) directors of the Company who are employees of neither the Company nor
any Affiliate. The Plan also is designed
to encourage stock ownership by Participants, thereby aligning their interests
with those of the Company’s shareholders.
SECTION 2
DEFINITIONS
The
following words and phrases shall have the following meanings unless a
different meaning is plainly required by the context:
2.1 “
1934 Act
” means the
Securities Exchange Act of 1934, as amended.
Reference to a specific section of the 1934 Act or regulation thereunder
shall include such section or regulation, any valid regulation promulgated
under such section, and any comparable provision of any future legislation or
regulation amending, supplementing or superseding such section or regulation.
2.2 “
Affiliate
” means any
corporation or any other entity (including, but not limited to, partnerships
and joint ventures) controlling, controlled by, or under common control with
the Company.
2.3 “
Affiliated SAR
” means a SAR
that is granted in connection with a related Option, and which automatically
will be deemed to be exercised at the same time that the related Option is
exercised.
2.4 “
Annual Revenue
” means the
Company’s or a business unit’s net sales for the Fiscal Year, determined in
accordance with generally accepted accounting principles; provided, however,
that prior to the Fiscal Year, the Committee shall determine whether any
significant item(s) shall be
1
excluded or included from the calculation of Annual
Revenue with respect to one or more Participants.
2.5 “
Award
” means, individually or
collectively, a grant under the Plan of Nonqualified Stock Options, Incentive
Stock Options, SARs, Restricted Stock, Performance Units, or Performance
Shares.
2.6 “
Award Agreement
” means the
written agreement setting forth the terms and provisions applicable to each
Award granted under the Plan.
2.7 “
Board
” or “
Board of
Directors
” means the Board of Directors of the Company.
2.8 “
Cash
Position
” means the Company’s level of cash and cash equivalents.
2.9 “
Change
in Control
” means the occurrence of any of the following events:
(a) Any “person” (as
such term is used in Sections 13(d) and 14(d) of the Exchange Act) becomes
the “beneficial owner” (as defined in Rule 13d-3 of the Exchange Act),
directly or indirectly, of securities of the Company representing fifty percent
(50%) or more of the total voting power represented by the Company’s then outstanding
voting securities;
(b) The consummation of
the sale or disposition by the Company of all or substantially all of the
Company’s assets;
(c) A change in the
composition of the Board occurring within a two-year period, as a result of
which fewer than a majority of the directors are Incumbent Directors. “Incumbent Directors” means directors who
either (A) are Directors as of the effective date of the Plan, or
(B) are elected, or nominated for election, to the Board with the
affirmative votes of at least a majority of the Directors at the time of such
election or nomination (but will not include an individual whose election or
nomination is in connection with an actual or threatened proxy contest relating
to the election of directors to the Company); or
(d) The consummation of
a merger or consolidation of the Company with any other corporation, other than
a merger or consolidation which would result in the voting securities of the
Company outstanding immediately prior thereto continuing to represent (either
by remaining outstanding or by being converted into voting securities of the
surviving entity or its parent) at least fifty percent (50%) of the total
voting power represented by the voting securities of the Company or such
surviving entity or its parent outstanding immediately after such merger or
consolidation.
2.10 “
Code
”
means the Internal Revenue Code of 1986, as amended. Reference to a specific section of the Code
or regulation thereunder shall include such section or regulation, any valid
regulation promulgated under such section, and any comparable provision of any
future legislation or regulation amending, supplementing or superseding such
section or regulation.
2.11 “
Committee
”
means the Board or a committee appointed by the Board (pursuant to
Section 3.1) to administer the Plan.
2
2.12
“
Company
” means Heska
Corporation, a Delaware corporation, or any successor thereto.
2.13 “
Consultant
” means any
consultant, independent contractor, or other person who provides significant
services to the Company or its Affiliates, but who is neither an Employee nor a
Director.
2.14 “
Director
” means any individual
who is a member of the Board of Directors of the Company.
2.15 “
Disability
” means a permanent
and total disability within the meaning of Section 22(e)(3) of the Code,
provided that in the case of Awards other than Incentive Stock Options, the
Committee in its discretion may determine whether a permanent and total
disability exists in accordance with uniform and non-discriminatory standards
adopted by the Committee from time to time.
2.16 “
Earnings Per Share
” means as to
any Fiscal Year, the Company’s or a business unit’s Net Income, divided by a
weighted average number of common shares outstanding and dilutive common
equivalent shares deemed outstanding, determined in accordance with generally
accepted accounting principles.
2.17 “
Employee
” means any employee of
the Company or of an Affiliate, whether such employee is so employed at the
time the Plan is adopted or becomes so employed subsequent to the adoption of
the Plan.
2.18 “
Exercise Price
” means the price
at which a Share may be purchased by a Participant pursuant to the exercise of
an Option.
2.19 “
Fair Market Value
” means the
last quoted per share selling price for Shares on the relevant date, or if there
were no sales on such date, the closing bid on the relevant date. If there are neither bids nor sales on the
relevant date, then the Fair Market Value shall mean the arithmetic mean of the
highest and lowest quoted selling prices on the nearest day before and the
nearest day after the relevant date, as determined by the Committee. Notwithstanding the preceding, for federal,
state, and local income tax reporting purposes, fair market value shall be
determined by the Committee (or its delegate) in accordance with uniform and
nondiscriminatory standards adopted by it from time to time.
2.20 “
Fiscal Year
” means the fiscal
year of the Company.
2.21 “
Freestanding SAR
” means a SAR
that is granted independently of any Option.
2.22 “
Grant Date
” means, with respect
to an Award, the date that the Award was granted.
2.23 “
Incentive Stock Option
” means
an Option to purchase Shares that is designated as an Incentive Stock Option
and is intended to meet the requirements of Section 422 of the Code.
2.24 “
Individual Objectives
” means as
to a Participant, the objective and measurable goals set by a “management by
objectives” process and approved by the Committee (in its discretion).
3
2.25 “
Net Income
” means as to any
Fiscal Year, the income after taxes of the Company for the Fiscal Year
determined in accordance with generally accepted accounting principles,
provided that prior to the Fiscal Year, the Committee shall determine whether
any significant item(s) shall be included or excluded from the calculation of
Net Income with respect to one or more Participants.
2.26 “
Nonqualified Stock Option
”
means an option to purchase Shares that is not intended to be an Incentive
Stock Option.
2.27 “
Operating
Cash Flow
” means the Company’s or a business unit’s sum of Net Income plus depreciation
and amortization less capital expenditures plus changes in working capital
comprised of accounts receivable, inventories, other current assets, trade
accounts payable, accrued expenses, product warranty, advance payments from
customers and long-term accrued expenses, determined in accordance with
generally acceptable accounting principles.
2.28 “
Operating
Income
” means the Company’s or a business unit’s income from operations but
excluding any unusual items, determined in accordance with generally accepted
accounting principles.
2.29 “
Option
” means an Incentive
Stock Option or a Nonqualified Stock Option.
2.30 “
Participant
” means an Employee,
Consultant, or Director who has an outstanding Award.
2.31 “
Performance Goals
” means the
goal(s) (or combined goal(s)) determined by the Committee (in its discretion)
to be applicable to a Participant with respect to an Award. As determined by the Committee, the
Performance Goals applicable to an Award may provide for a targeted level or
levels of achievement using one or more of the following measures:
(a) Annual Revenue, (b) Cash Position, (c) Earnings Per Share,
(d) Individual Objectives, (e) Net Income, (f) Operating Cash
Flow, (g) Operating Income, (h) Return on Assets, (i) Return on
Equity, (j) Return on Sales, and (k) Total Shareholder Return. The Performance Goals may differ from
Participant to Participant and from Award to Award.
2.32 “
Performance Share
” means an
Award granted to a Participant pursuant to Section 8.
2.33 “
Performance Unit
” means an Award
granted to a Participant pursuant to Section 8.
2.34 “
Period of Restriction
” means
the period during which the transfer of Shares of Restricted Stock are subject
to restrictions and therefore, the Shares are subject to a substantial risk of
forfeiture. As provided in
Section 7, such restrictions may be based on the passage of time, the
achievement of target levels of performance, or the occurrence of other events
as determined by the Committee, in its discretion.
2.35 “
Plan
” means the Heska Corporation
2003 Equity Incentive Plan, as set forth in this instrument and as hereafter
amended from time to time.
2.36 “
Restricted Stock
”
means an Award granted to a Participant pursuant to Section 7.
4
2.37 “
Return
on Assets
” means the percentage equal to the Company’s or a business unit’s
Operating Income before incentive compensation, divided by average net Company
or business unit, as applicable, assets, determined in accordance with
generally accepted accounting principles.
2.38 “
Return
on Equity
” means the percentage equal to the Company’s Net Income divided
by average stockholder’s equity, determined in accordance with generally
accepted accounting principles.
2.39 “
Return
on Sales
” means the percentage equal to the Company’s or a business unit’s
Operating Income before incentive compensation, divided by the Company’s or the
business unit’s, as applicable, revenue, determined in accordance with
generally accepted accounting principles.
2.40 “
Rule 16b-3
” means
Rule 16b-3 promulgated under the 1934 Act, and any future regulation
amending, supplementing or superseding such regulation.
2.41 “
Section 16 Person
” means a
person who, with respect to the Shares, is subject to Section 16 of the
1934 Act.
2.42 “
Shares
” means the shares of
common stock of the Company.
2.43 “
Stock Appreciation Right
” or “
SAR
”
means an Award, granted alone or in connection with a related Option, that
pursuant to Section 6 is designated as a SAR.
2.44 “
Subsidiary
” means any
corporation in an unbroken chain of corporations beginning with the Company if
each of the corporations other than the last corporation in the unbroken chain
then owns stock possessing fifty percent (50%) or more of the total combined
voting power of all classes of stock in one of the other corporations in such
chain.
2.45 “
Tandem SAR
” means a SAR that is
granted in connection with a related Option, the exercise of which shall
require forfeiture of the right to purchase an equal number of Shares under the
related Option (and when a Share is purchased under the Option, the SAR shall
be canceled to the same extent).
4.46 “
Termination of Service
” means
(a) in the case of an Employee, a cessation of the employee-employer
relationship between the Employee and the Company or an Affiliate for any
reason, including, but not by way of limitation, a termination by resignation,
discharge, death, Disability or the disaffiliation of an Affiliate, but
excluding any such termination where there is a simultaneous reemployment by
the Company or an Affiliate; and (b) in the case of a Consultant, a
cessation of the service relationship between the Consultant and the Company or
an Affiliate for any reason, including, but not by way of limitation, a
termination by resignation, discharge, death, Disability, or the disaffiliation
of an Affiliate, but excluding any such termination where there is a
simultaneous re-engagement of the consultant by the Company or an Affiliate.
2.47 “
Total
Shareholder Return
” means the total return (change in share price plus
reinvestment of any dividends) of a Share.
5
SECTION 3
ADMINISTRATION
3.1
The Committee
. The Plan
shall be administered by the Committee.
If the Committee is not the Board then the Committee shall consist of
not less than two (2) Directors who shall be appointed from time to time by,
and shall serve at the pleasure of, the Board of Directors. If the Committee is not the Board then the
Committee shall be comprised solely of Directors who both are (a) ”non-employee
directors” under Rule 16b-3, and (b) ”outside directors” under
Section 162(m) of the Code.
3.2
Authority of the Committee
.
It shall be the duty of the Committee to administer the Plan in accordance with
the Plan’s provisions. The Committee
shall have all powers and discretion necessary or appropriate to administer the
Plan and to control its operation, including, but not limited to, the power to
(a) determine which Employees, Consultants and Directors shall be granted
Awards, (b) prescribe the terms and conditions of the Awards,
(c) interpret the Plan and the Awards, (d) adopt such procedures and
subplans as are necessary or appropriate to permit participation in the Plan by
Employees and Directors who are foreign nationals or employed outside of the
United States, (e) adopt rules for the administration, interpretation and
application of the Plan as are consistent therewith, and (f) interpret,
amend or revoke any such rules.
3.3
Delegation by the Committee
.
The Committee, in its sole discretion and on such terms and conditions as it
may provide, may delegate all or any part of its authority and powers under the
Plan to one or more Directors or officers of the Company; provided, however,
that the Committee may not delegate its authority and powers (a) with
respect to Section 16 Persons, or (b) in any way which would
jeopardize the Plan’s qualification under Section 162(m) of the Code or
Rule 16b-3.
3.4
Decisions Binding
. All
determinations and decisions made by the Committee, the Board, and any delegate
of the Committee pursuant to the provisions of the Plan shall be final,
conclusive, and binding on all persons, and shall be given the maximum
deference permitted by law.
SECTION 4
SHARES SUBJECT TO THE PLAN
4.1
Number of Shares
.
Subject to adjustment as provided in Section 4.3, the total number of
Shares available for grant under the Plan shall not exceed 2,390,500. Shares granted under the Plan may be either
authorized but unissued Shares or treasury Shares.
4.2
Lapsed Awards
. If an
Award is settled in cash, or is cancelled, terminates, expires, or lapses for
any reason (with the exception of the termination of a Tandem SAR upon exercise
of the related Option, or the termination of a related Option upon exercise of
the corresponding Tandem SAR), any Shares subject to such Award again shall be
available to be the subject of an Award.
4.3
Adjustments in Awards and
Authorized Shares
. In the event
that any dividend or other distribution (whether in the form of cash, Shares,
other securities, or other property), recapitalization, stock split, reverse
stock split, reorganization, merger, consolidation, split-up, spin-off,
combination, repurchase, or exchange of Shares or other securities of the
Company, or other
6
change in the corporate structure of the Company affecting the Shares
occurs such that an adjustment is determined by the Committee (in its sole
discretion) to be appropriate in order to prevent dilution or enlargement of
the benefits or potential benefits intended to be made available under the
Plan, then the Committee shall, in such manner as it may deem equitable, adjust
the number and class of Shares which may be delivered under the Plan
,
the number, class, and price of Shares subject to outstanding Awards, and the
numerical limits of Sections 5.1, 6.1, 7.1 and 8.1. Notwithstanding the preceding, the number of
Shares subject to any Award always shall be a whole number.
SECTION 5
STOCK OPTIONS
5.1
Grant of Options
.
Subject to the terms and provisions of the Plan, Options may be granted to
Employees, Consultants and Directors at any time and from time to time as
determined by the Committee in its sole discretion. The Committee, in its sole discretion, shall
determine the number of Shares subject to each Option, provided that during any
Fiscal Year, no Participant shall be granted Options covering more than 500,000
Shares. Notwithstanding the foregoing
limitation, in connection with a Participant’s initial service as an Employee,
a Participant may be granted Options to purchase up to an additional 500,000
Shares.
The Committee may grant Incentive Stock Options, Nonqualified Stock
Options, or a combination thereof.
5.2
Award Agreement
. Each
Option shall be evidenced by an Award Agreement that shall specify the Exercise
Price, the expiration date of the Option, the number of Shares to which the
Option pertains, any conditions to exercise the Option, and such other terms
and conditions as the Committee, in its discretion, shall determine. The Award Agreement shall also specify
whether the Option is intended to be an Incentive Stock Option or a
Nonqualified Stock Option.
5.3
Exercise Price
. Subject
to the provisions of this Section 5.3, the Exercise Price for each Option
shall be determined by the Committee in its sole discretion.
5.3.1
Nonqualified
Stock Options
. In the case of a
Nonqualified Stock Option, the Exercise Price shall be not less than one
hundred percent (100%) of the Fair Market Value of a Share on the Grant Date.
5.3.2
Incentive
Stock Options
. In the case of an
Incentive Stock Option, the Exercise Price shall be not less than one hundred
percent (100%) of the Fair Market Value of a Share on the Grant Date; provided,
however, that if on the Grant Date, the Employee (together with persons whose
stock ownership is attributed to the Employee pursuant to Section 424(d)
of the Code) owns stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company or any of its Subsidiaries, the
Exercise Price shall be not less than one hundred and ten percent (110%) of the
Fair Market Value of a Share on the Grant Date.
5.3.3
Substitute
Options
. Notwithstanding the
provisions of Sections 5.3.1 and 5.3.2, in the event that the Company or
an Affiliate consummates a transaction described in Section 424(a) of the
Code (e.g., the acquisition of property or stock from an unrelated
corporation), persons who become Employees, Directors or Consultants on account
of such transaction may be granted Options in substitution for options granted
by their former employer. If such
substitute
7
Options are granted, the Committee, in its sole
discretion and consistent with Section 424(a) of the Code, may determine
that such substitute Options shall have an exercise price less than one hundred
percent (100%) of the Fair Market Value of the Shares on the Grant Date.
5.4
Expiration of Options
.
5.4.1
Expiration
Dates
. Each Option shall terminate
no later than the first to occur of the following events:
(a) The
date for termination of the Option set forth in the written Award Agreement, or
(b) If
no date for the termination of the Option is set forth in the written Award
Agreement (other than reference to Section 5.4.1(c)), the expiration of
three (3) months from the date of the Participant’s Termination of Service for
any reason; or
(c) The
expiration of ten (10) years from the Grant Date.
5.4.2
Committee
Discretion
. Subject to the limits of
Section 5.4.1, the Committee, in its sole discretion, (a) shall
provide in each Award Agreement when each Option expires and becomes
unexercisable, and (b) may, after an Option is granted, extend the maximum
term of the Option (subject to Section 5.8.4 regarding Incentive Stock
Options).
5.5
Exercisability of Options
.
Options granted under the Plan shall be exercisable at such times and be
subject to such restrictions and conditions as the Committee shall determine in
its sole discretion. After an Option is
granted, the Committee, in its sole discretion, may accelerate the
exercisability of the Option.
5.6
Payment
. Options shall
be exercised by the Participant’s delivery of a written notice of exercise to
the Secretary of the Company (or its designee), setting forth the number of
Shares with respect to which the Option is to be exercised, accompanied by full
payment for the Shares.
Upon the exercise of any
Option, the Exercise Price shall be payable to the Company in full in cash or
its equivalent. The Committee, in its
sole discretion, also may permit exercise (a) by tendering previously
acquired Shares having an aggregate Fair Market Value at the time of exercise
equal to the total Exercise Price (such previously acquired Shares must have
been held for the requisite period necessary to avoid a charge to the Company’s
earnings for the financial reporting purposes, unless otherwise determined by
the Committee), or (b) by any other means which the Committee, in its sole
discretion, determines to both provide legal consideration for the Shares, and
to be consistent with the purposes of the Plan.
As soon as practicable
after receipt of a written notification of exercise and full payment for the
Shares purchased, the Company shall deliver to the Participant (or the
Participant’s designated broker), Share certificates (which may be in book
entry form) representing such Shares.
5.7
Restrictions on Share
Transferability
. The Committee may impose such restrictions on any
Shares acquired pursuant to the exercise of an Option as it may deem advisable,
including, but not limited to, restrictions related to applicable federal
securities laws, the requirements of any
8
national securities exchange or system upon which
Shares are then listed or traded, or any blue sky or state securities laws.
5.8
Certain Additional Provisions for
Incentive Stock Options
.
5.8.1
Exercisability
. The aggregate Fair Market Value (determined
on the Grant Date(s)) of the Shares with respect to which Incentive Stock
Options are exercisable for the first time by any Employee during any calendar
year (under all plans of the Company and its Subsidiaries) shall not exceed
$100,000.
5.8.2
Termination
of Service
. No Incentive Stock
Option may be exercised more than three (3) months after the Participant’s
Termination of Service for any reason other than Disability or death, unless
(a) the Participant dies during such three-month period, and/or
(b) the Award Agreement or the Committee permits later exercise. No Incentive Stock Option may be exercised
more than one (1) year after the Participant’s Termination of Service on
account of death or Disability, unless the Award Agreement or the Committee
permit later exercise.
5.8.3
Company
and Subsidiaries Only
. Incentive
Stock Options may be granted only to persons who are employees of the Company
or a Subsidiary on the Grant Date.
5.8.4
Expiration
. No Incentive Stock Option may be exercised
after the expiration of ten (10) years from the Grant Date; provided, however,
that if the Option is granted to an Employee who, together with persons whose
stock ownership is attributed to the Employee pursuant to Section 424(d)
of the Code, owns stock possessing more than 10% of the total combined voting
power of all classes of the stock of the Company or any of its Subsidiaries,
the Option may not be exercised after the expiration of five (5) years from the
Grant Date.
SECTION 6
STOCK APPRECIATION RIGHTS
6.1
Grant of SARs
. Subject
to the terms and conditions of the Plan, a SAR may be granted to Employees,
Directors and Consultants at any time and from time to time as shall be
determined by the Committee, in its sole discretion. The Committee may grant Affiliated SARs,
Freestanding SARs, Tandem SARs, or any combination thereof.
6.1.1
Number
of Shares
. The Committee shall have
complete discretion to determine the number of SARs granted to any Participant,
provided that during any Fiscal Year, no Participant shall be granted SARs
covering more than 500,000 Shares, except that such Participant may receive
SARS covering up to an additional 500,000 Shares in the fiscal year of the
Company in which his or her service as an Employee first commences.
6.1.2
Exercise
Price and Other Terms
. The
Committee, subject to the provisions of the Plan, shall have complete
discretion to determine the terms and conditions of SARs granted under the
Plan. However, the exercise price of a
Freestanding SAR shall be not less than one hundred percent (100%) of the Fair
Market Value of a Share on the Grant Date.
The exercise price of Tandem or Affiliated SARs shall equal the Exercise
Price of the related Option.
9
6.2
Exercise of Tandem SARs
.
Tandem SARs may be exercised for all or part of the Shares subject to the
related Option upon the surrender of the right to exercise the equivalent portion
of the related Option. A Tandem SAR may
be exercised only with respect to the Shares for which its related Option is
then exercisable. With respect to a
Tandem SAR granted in connection with an Incentive Stock Option: (a) the
Tandem SAR shall expire no later than the expiration of the underlying
Incentive Stock Option; (b) the value of the payout with respect to the
Tandem SAR shall be for no more than one hundred percent (100%) of the
difference between the Exercise Price of the underlying Incentive Stock Option
and the Fair Market Value of the Shares subject to the underlying Incentive
Stock Option at the time the Tandem SAR is exercised; and (c) the Tandem
SAR shall be exercisable only when the Fair Market Value of the Shares subject
to the Incentive Stock Option exceeds the Exercise Price of the Incentive Stock
Option.
6.3
Exercise of Affiliated SARs
.
An Affiliated SAR shall be deemed to be exercised upon the exercise of the
related Option. The deemed exercise of
an Affiliated SAR shall not necessitate a reduction in the number of Shares
subject to the related Option.
6.4
Exercise of Freestanding SARs
.
Freestanding SARs shall be exercisable on such terms and conditions as the
Committee, in its sole discretion, shall determine.
6.5
SAR Agreement
. Each SAR
grant shall be evidenced by an Award Agreement that shall specify the exercise
price, the term of the SAR, the conditions of exercise, and such other terms
and conditions as the Committee, in its sole discretion, shall determine.
6.6
Expiration of SARs
. A
SAR granted under the Plan shall expire upon the date determined by the
Committee, in its sole discretion, and set forth in the Award Agreement. Notwithstanding the foregoing, the rules of
Section 5.4 also shall apply to SARs.
6.7
Payment of SAR Amount
.
Upon exercise of a SAR, a Participant shall be entitled to receive payment from
the Company in an amount determined by multiplying:
(a) The difference between the Fair
Market Value of a Share on the date of exercise over the exercise price; times
(b) The number of Shares with respect to
which the SAR is exercised.
At
the discretion of the Committee, the payment upon SAR exercise may be in cash,
in Shares of equivalent value, or in some combination thereof.
SECTION 7
RESTRICTED STOCK
7.1
Grant of Restricted Stock
.
Subject to the terms and provisions of the Plan, the Committee, at any time and
from time to time, may grant Shares of Restricted Stock to Employees, Directors
and Consultants in such amounts as the Committee, in its sole discretion, shall
determine. The Committee, in its sole
discretion, shall determine the number of Shares to be granted to each
Participant, provided that during any Fiscal Year, no Participant shall receive
more than 100,000 Shares of Restricted Stock.
In addition, no more than 500,000 Shares available for grant under the
10
Plan may be issued pursuant to Shares of Restricted
Stock with a purchase price that is less than 100% of Fair Market Value.
7.2
Restricted Stock Agreement
.
Each Award of Restricted Stock shall be evidenced by an Award Agreement that
shall specify the Period of Restriction, the number of Shares granted, and such
other terms and conditions as the Committee, in its sole discretion, shall
determine. Unless the Committee
determines otherwise, Shares of Restricted Stock shall be held by the Company
as escrow agent until the restrictions on such Shares have lapsed.
7.3
Transferability
. Except
as provided in this Section 7, Shares of Restricted Stock may not be sold,
transferred, pledged, assigned, or otherwise alienated or hypothecated until
the end of the applicable Period of Restriction.
7.4
Other Restrictions
. The
Committee, in its sole discretion, may impose such other restrictions on Shares
of Restricted Stock as it may deem advisable or appropriate, in accordance with
this Section 7.4.
7.4.1
General
Restrictions
. The Committee may set
restrictions based upon the achievement of specific performance objectives
(Company-wide, divisional, or individual), applicable federal or state
securities laws, or any other basis determined by the Committee in its
discretion.
7.4.2
Section 162(m)
Performance Restrictions
. For
purposes of qualifying grants of Restricted Stock as “performance-based
compensation” under Section 162(m) of the Code, the Committee, in its discretion,
may set restrictions based upon the achievement of Performance Goals. The Performance Goals shall be set by the
Committee on or before the latest date permissible to enable the Restricted
Stock to qualify as “performance-based compensation” under Section 162(m)
of the Code. In granting Restricted
Stock which is intended to qualify under Section 162(m) of the Code, the
Committee shall follow any procedures determined by it from time to time to be necessary
or appropriate to ensure qualification of the Restricted Stock under
Section 162(m) of the Code (e.g., in determining the Performance Goals).
7.4.3
Legend
on Certificates
. The Committee, in
its discretion, may legend the certificates representing Restricted Stock to
give appropriate notice of such restrictions.
7.5
Removal of
Restrictions
. Except as otherwise provided in this Section 7,
Shares of Restricted Stock covered by each Restricted Stock grant made under
the Plan shall be released from escrow as soon as practicable after the last
day of the Period of Restriction. The
Committee, in its discretion, may accelerate the time at which any restrictions
shall lapse or be removed. After the
restrictions have lapsed, the Participant shall be entitled to have any legend
or legends under Section 7.4.3 removed from his or her Share certificate,
and the Shares shall be freely transferable by the Participant.
7.6
Voting Rights
. During
the Period of Restriction, Participants holding Shares of Restricted Stock
granted hereunder may exercise full voting rights with respect to those Shares,
unless the Committee determines otherwise.
11
7.7
Dividends and Other Distributions
.
During the Period of Restriction, Participants holding Shares of Restricted
Stock shall be entitled to receive all dividends and other distributions paid
with respect to such Shares unless otherwise provided in the Award
Agreement. If any such dividends or
distributions are paid in Shares, the Shares shall be subject to the same
restrictions on transferability and forfeitability as the Shares of Restricted
Stock with respect to which they were paid.
7.8
Return of Restricted Stock to
Company
. On the date set forth in the Award Agreement, the Restricted
Stock for which restrictions have not lapsed shall revert to the Company and
again shall become available for grant under the Plan.
SECTION 8
PERFORMANCE UNITS AND PERFORMANCE SHARES
8.1
Grant of Performance Units/Shares
.
Performance Units and Performance Shares may be granted to Employees, Directors
and Consultants at any time and from time to time, as shall be determined by
the Committee, in its sole discretion.
The Committee shall have complete discretion in determining the number
of Performance Units and Performance Shares granted to each Participant
provided that during any Fiscal Year, (a) no Participant shall receive
Performance Units having an initial value greater than $1,000,000, except that
such Participant may receive Performance Units in the fiscal year of the
Company in which his or her service as an Employee first commences with an
initial value no greater than $2,000,000, and (b) no Participant shall
receive more than 500,000 Performance Shares, except that such Participant may
receive up to an additional 500,000 Performance Shares in the fiscal year of
the Company in which his or her service as an Employee first commences.
8.2
Value of Performance Units/Shares
.
Each Performance Unit shall have an initial value that is established by the
Committee on or before the Grant Date.
Each Performance Share shall have an initial value equal to the Fair
Market Value of a Share on the Grant Date.
8.3
Performance Objectives and Other
Terms
. The Committee shall set performance objectives in its
discretion which, depending on the extent to which they are met, will determine
the number or value of Performance Units/Shares that will be paid out to the
Participants. The time period during
which the performance objectives must be met shall be called the “Performance
Period.” Each Award of Performance
Units/Shares shall be evidenced by an Award Agreement that shall specify the
Performance Period, and such other terms and conditions as the Committee, in
its sole discretion, shall determine.
8.3.1
General
Performance Objectives
. The
Committee may set performance objectives based upon the achievement of
Company-wide, divisional, or individual goals, applicable federal or state
securities laws, or any other basis determined by the Committee in its
discretion.
8.3.2
Section 162(m)
Performance Objectives
. For purposes
of qualifying grants of Performance Units/Shares as “performance-based
compensation” under Section 162(m) of the Code, the Committee, in its
discretion, may determine that the performance objectives applicable to
Performance Units/Shares shall be based on the achievement of Performance
Goals. The Performance Goals shall be set
by the Committee on or before the latest date permissible to enable
12
the Performance Units/Shares to qualify as “performance-based
compensation” under Section 162(m) of the Code. In granting Performance Units/Shares which
are intended to qualify under Section 162(m) of the Code, the Committee
shall follow any procedures determined by it from time to time to be necessary
or appropriate to ensure qualification of the Performance Units/Shares under
Section 162(m) of the Code (e.g., in determining the Performance Goals).
8.4
Earning of Performance
Units/Shares
. After the applicable Performance Period has ended, the
holder of Performance Units/Shares shall be entitled to receive a payout of the
number of Performance Units/Shares earned by the Participant over the
Performance Period, to be determined as a function of the extent to which the
corresponding performance objectives have been achieved. After the grant of a Performance Unit/Share,
the Committee, in its sole discretion, may reduce or waive any performance
objectives for such Performance Unit/Share.
8.5
Form and Timing of Payment of
Performance Units/Shares
. Payment of earned Performance Units/Shares
shall be made as soon as practicable after the expiration of the applicable
Performance Period. The Committee, in
its sole discretion, may pay earned Performance Units/Shares in the form of
cash, in Shares (which have an aggregate Fair Market Value equal to the value
of the earned Performance Units/Shares at the close of the applicable
Performance Period) or in a combination thereof.
8.6
Cancellation of Performance
Units/Shares
. On the date set forth in the Award Agreement, all
unearned or unvested Performance Units/Shares shall be forfeited to the
Company, and again shall be available for grant under the Plan.
SECTION 9
MISCELLANEOUS
9.1
Change
in Control
.
9.1.1
Options
and SARs
.
(a) In
the event of a Change in Control, each outstanding Option and SAR shall be
assumed or an equivalent option or right substituted by the successor
corporation or a parent or Subsidiary of the successor corporation.
(b) In the event that the successor
corporation refuses to assume or substitute for the Option or SAR, then the
Options and SARs held by such Participant shall become one hundred percent
(100%) exercisable. If an Option or SAR
becomes fully vested and exercisable in lieu of assumption or substitution in
the event of a Change in Control, the Company shall notify the Participant in
writing or electronically that the Option or SAR shall be fully vested and
exercisable (subject to the consummation of the Change in Control) for a period
of fifteen (15) days from the date of such notice, and the Option or SAR shall
terminate upon the expiration of such period.
(c) For
the purposes of this Section 9.1.1, the Option or SAR shall be considered
assumed if, following the Change in Control, the option or right confers the
right to purchase or receive, for each Share subject to the Option or SAR
immediately prior to the Change in Control, the consideration (whether stock,
cash, or other securities or property) received in the
13
Change in Control by holders of Shares for each Share
held on the effective date of the transaction (and if holders were offered a
choice of consideration, the type of consideration chosen by the holders of a
majority of the outstanding Shares); provided, however, that if such
consideration received in the Change in Control is not solely common stock of
the successor corporation or its parent, the Committee or the Board may, with
the consent of the successor corporation, provide for the consideration to be
received upon the exercise of the Option or SAR, for each Share subject to the
Option or SAR, to be solely common stock of the successor corporation or its
parent equal in fair market value to the per share consideration received by
holders of Shares in the Change in Control, as determined on the date of the
Change in Control.
9.1.2
Restricted
Stock
. In the event of a Change in
Control, any Company repurchase or reacquisition right with respect to
outstanding Shares of Restricted Stock held by the Participant will be assigned
to the successor corporation. In the
event that the successor corporation refuses to accept the assignment of any
such Company repurchase or reacquisition right, such Company repurchase or
reacquisition right will lapse and the Participant will become one hundred
percent (100%) vested in such Shares of Restricted Stock immediately prior to
the Change in Control.
9.1.3 Performance
Shares and Performance Units. In the
event of a Change in Control, the Committee or the Board, in its discretion,
may provide for any one or more of the following with respect to the
Performance Shares and Units: (a) any outstanding Performance Shares and Units
shall be assumed by the successor corporation or a parent or Subsidiary of the
successor corporation, (b) any outstanding Performance Shares and Units
shall be terminated immediately prior to the Change in Control, or
(c) with respect to a Change in Control that occurs prior to a Participant’s
Termination of Service, one hundred percent (100%) of any outstanding
Performance Shares or Units shall be deemed to be earned and shall be
immediately payable to the Participant, or, in cases where a Participant has
received a target award of Performance Units or Shares, up to one hundred
percent (100%) of the target amount shall vest.
In the event any outstanding Performance Shares and Units are assumed,
the successor corporation shall have the ability to reasonably and equitably
adjust the Performance Goals.
9.2
Deferrals
. The
Committee, in its sole discretion, may permit a Participant to defer receipt of
the payment of cash or the delivery of Shares that would otherwise be due to
such Participant under an Award. Any
such deferral elections shall be subject to such rules and procedures as shall
be determined by the Committee in its sole discretion.
9.3
No Effect on Employment or Service
.
Nothing in the Plan shall interfere with or limit in any way the right of the
Company to terminate any Participant’s employment or service at any time, with
or without cause. For purposes of the
Plan, transfer of employment of a Participant between the Company and any one
of its Affiliates (or between Affiliates) shall not be deemed a Termination of
Service. Employment with the Company and
its Affiliates is on an at-will basis only.
9.4
Participation
. No
Employee or Consultant shall have the right to be selected to receive an Award
under this Plan, or, having been so selected, to be selected to receive a
future Award.
14
9.5
Indemnification
. Each
person who is or shall have been a member of the Committee, or of the Board,
shall be indemnified and held harmless by the Company against and from
(a) any loss, cost, liability, or expense that may be imposed upon or
reasonably incurred by him or her in connection with or resulting from any
claim, action, suit, or proceeding to which he or she may be a party or in
which he or she may be involved by reason of any action taken or failure to act
under the Plan or any Award Agreement, and (b) from any and all amounts paid
by him or her in settlement thereof, with the Company’s approval, or paid by
him or her in satisfaction of any judgment in any such claim, action, suit, or
proceeding against him or her, provided he or she shall give the Company an
opportunity, at its own expense, to handle and defend the same before he or she
undertakes to handle and defend it on his or her own behalf. The foregoing right of indemnification shall
not be exclusive of any other rights of indemnification to which such persons
may be entitled under the Company’s Certificate of Incorporation or Bylaws, by
contract, as a matter of law, or otherwise, or under any power that the Company
may have to indemnify them or hold them harmless.
9.6
Successors
. All
obligations of the Company under the Plan, with respect to Awards granted
hereunder, shall be binding on any successor to the Company, whether the
existence of such successor is the result of a direct or indirect purchase,
merger, consolidation, or otherwise, of all or substantially all of the business
or assets of the Company.
9.7
Beneficiary Designations
.
If permitted by the Committee, a Participant under the Plan may name a
beneficiary or beneficiaries to whom any vested but unpaid Award shall be paid
in the event of the Participant’s death.
Each such designation shall revoke all prior designations by the
Participant and shall be effective only if given in a form and manner
acceptable to the Committee. In the
absence of any such designation, any vested benefits remaining unpaid at the
Participant’s death shall be paid to the Participant’s estate and, subject to
the terms of the Plan and of the applicable Award Agreement, any unexercised
vested Award may be exercised by the administrator or executor of the
Participant’s estate.
9.8
Limited Transferability of Awards
.
No Award granted under the Plan may be sold, transferred, pledged, assigned, or
otherwise alienated or hypothecated, other than by will, by the laws of descent
and distribution, or to the limited extent provided in Section 9.6. All rights with respect to an Award granted
to a Participant shall be available during his or her lifetime only to the
Participant. Notwithstanding the
foregoing, the Participant may, in a manner specified by the Committee,
(a) transfer a Nonqualified Stock Option to a Participant’s spouse, former
spouse or dependent pursuant to a court-approved domestic relations order which
relates to the provision of child support, alimony payments or marital property
rights, and (b) transfer a Nonqualified Stock Option by bona fide gift and
not for any consideration, to (i) a member or members of the Participant’s
immediate family, (ii) a trust established for the exclusive benefit of
the Participant and/or member(s) of the Participant’s immediate family,
(iii) a partnership, limited liability company of other entity whose only
partners or members are the Participant and/or member(s) of the Participant’s
immediate family, or (iv) a foundation in which the Participant and/or
member(s) of the Participant’s immediate family control the management of the
foundation’s assets.
9.9
No Rights as Stockholder
.
Except to the limited extent provided in Sections 7.6 and 7.7, no
Participant (nor any beneficiary) shall have any of the rights or privileges of
a stockholder of the Company with respect to any Shares issuable pursuant to an
Award (or exercise thereof), unless
15
and until certificates representing such Shares shall
have been issued, recorded on the records of the Company or its transfer agents
or registrars, and delivered to the Participant (or beneficiary).
SECTION 10
AMENDMENT, TERMINATION, AND DURATION
10.1
Amendment, Suspension, or
Termination
. The Board, in its sole discretion, may amend, suspend or
terminate the Plan, or any part thereof, at any time and for any reason. The amendment, suspension, or termination of
the Plan shall not, without the consent of the Participant, alter or impair any
rights or obligations under any Award theretofore granted to such
Participant. No Award may be granted
during any period of suspension or after termination of the Plan. Notwithstanding the foregoing, the Board may
not, without stockholder approval, (a) reduce the exercise price of any
outstanding Award, (b) cancel and re-grant Options at a lower exercise
price (including entering into a 6-month-and-1-day cancellation and re-grant
program), (c) replace underwater Options with other Awards in an exchange,
buy-back or other scheme, or (d) replace Awards with an Award of the same
type having a lower exercise price or accelerated vesting schedule in an
exchange, buy-back or other scheme.
10.2
Duration of the Plan
. The
Plan shall be effective as of April 15, 2003, and subject to Section 10.1
(regarding the Board’s right to amend or terminate the Plan), shall remain in
effect thereafter. However, without
further stockholder approval, no Incentive Stock Option may be granted under
the Plan after April 15, 2013.
SECTION 11
TAX WITHHOLDING
11.1
Withholding Requirements
.
Prior to the delivery of any Shares or cash pursuant to an Award (or exercise
thereof), the Company shall have the power and the right to deduct or withhold,
or require a Participant to remit to the Company, an amount sufficient to
satisfy federal, state, and local taxes (including the Participant’s FICA
obligation) required to be withheld with respect to such Award (or exercise
thereof).
11.2
Withholding Arrangements
.
The Committee, in its sole discretion and pursuant to such procedures as it may
specify from time to time, may permit a Participant to satisfy such tax
withholding obligation, in whole or in part by (a) electing to have the
Company withhold otherwise deliverable Shares, or (b) delivering to the
Company already-owned Shares having a Fair Market Value equal to the minimum
amount required to be withheld. The
amount of the withholding requirement shall be deemed to include any amount
which the Committee agrees may be withheld at the time the election is made,
not to exceed the amount determined by using the maximum federal, state or
local marginal income tax rates applicable to the Participant with respect to
the Award on the date that the amount of tax to be withheld is to be
determined. The Fair Market Value of the
Shares to be withheld or delivered shall be determined as of the date that the
taxes are required to be withheld.
16
SECTION 12
LEGAL CONSTRUCTION
12.1
Gender and Number
. Except
where otherwise indicated by the context, any masculine term used herein also
shall include the feminine; the plural shall include the singular and the
singular shall include the plural.
12.2
Severability
. In the event
any provision of the Plan shall be held illegal or invalid for any reason, the
illegality or invalidity shall not affect the remaining parts of the Plan, and
the Plan shall be construed and enforced as if the illegal or invalid provision
had not been included.
12.3
Requirements of Law
. The
granting of Awards and the issuance of Shares under the Plan shall be subject
to all applicable laws, rules, and regulations, and to such approvals by any
governmental agencies or national securities exchanges as may be required.
12.4
Securities Law Compliance
.
With respect to Section 16 Persons, transactions under this Plan are
intended to comply with all applicable conditions of Rule 16b-3. To the extent any provision of the Plan, Award
Agreement or action by the Committee fails to so comply, it shall be deemed
null and void, to the extent permitted by law and deemed advisable by the
Committee.
12.5
Governing Law
. The Plan
and all Award Agreements shall be construed in accordance with and governed by
the laws of the State of California.
12.6
Captions
. Captions are
provided herein for convenience only, and shall not serve as a basis for
interpretation or construction of the Plan.
17
EXECUTION
IN WITNESS WHEREOF, the Company, by its duly
authorized officer, has executed this Plan on the date indicated below.
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HESKA CORPORATION
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Dated: April 15,
2003
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By:
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Title:
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Chief Executive
Officer
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18
Exhibit 10.23
[***] — 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.
DISTRIBUTION
AGREEMENT
THIS AGREEMENT made and
entered into effective as of November 1, 2004 (the “
Effective
Date”),
by and between ARKRAY Global Business, Inc., a Japanese corporation with its
principal office at 57 Nishi Aketa-cho, Higashikujo, Minami-ku, Kyoto 601-8045,
Japan (hereinafter referred to as “AGB”) and HESKA Corporation, a Delaware
corporation with its principal office at 1613 Prospect Parkway, Fort Collins,
Colorado 80525, U.S.A. (hereinafter referred to as “HESKA”),
WITNESSETH
WHEREAS, HESKA and
ARKRAY, Inc., a parent company of AGB, are the parties to the distribution
agreement made and entered into effective as of February 16, 2001;
WHEREAS, effective
November 1, 2001, ARKRAY, Inc. has assigned and transferred to AGB, and AGB has
accepted from ARKRAY, Inc. all of ARKRAY, Inc.’s rights and obligations under
the said distribution agreement with prior written consent of HESKA (the
distribution agreement so assigned and transferred is hereinafter referred to
as the “Current Agreement”); and
WHEREAS, in the absence
of 180 day prior written notice not to renew the Current Agreement, (1) the
Current Agreement has been automatically renewed for an additional period of
one year from February 16, 2004, and (2) the Current Agreement so renewed is to
be further renewed for an additional period of one year from February 16, 2005
but AGB and HESKA desire to terminate the Current Agreement on October 31, 2004
and enter into a new distribution agreement effective as of November 1, 2004.
NOW, THEREFORE, in
consideration of the foregoing premises and of the mutual covenants herein
contained, the parties hereby agree as follows:
ARTICLE I
AGB hereby appoints HESKA
as its exclusive distributor to promote, market, service and sell the Products
(hereinafter defined) in the Field of the Territory (hereinafter respectively
defined) from the Effective Date of this Agreement, and HESKA accepts such
appointment,
subject to and in
accordance with the following terms and conditions. AGB and HESKA acknowledge
and agree that the Current Agreement shall terminate and cease to be valid any
further upon this Agreement becoming effective.
1.1 Products
The Products means those
products manufactured by or for the ARKRAY group of companies, and listed on
Attachment
1
(hereinafter referred to as the “Products”), along with all related spare
parts necessary to support those products. The
Attachment 1
can be
amended as needed in the future by mutual written agreement of both parties.
1.2 Branding
AGB and HESKA agree that
the brand name of the Products and its logotype shall be a combination of “ARKRAY’
and “HESKA” in a format to be mutually agreed upon by the parties hereto.
1.3 Distribution Right
HESKA shall have
an exclusive right to promote, market, sell and distribute the Products, with
the right to appoint sub-distributors, only in the veterinary market
(hereinafter referred to as the “Field”) of North America, i.e. USA and Canada
(hereinafter referred to as the “Territory”). The exclusivity referred to in
this Agreement applies between HESKA and AGB, AGB’s affiliates and
AGB-appointed distributors. Except as expressly provided in this Article 1, no
right, title or interest is granted, whether express or implied, by AGB to
HESKA, and nothing in this Agreement shall be deemed to grant to HESKA any
right to any products other than the Products.
HESKA agrees that,
during the term of this Agreement, (a) HESKA shall not make commercially
available a product(s) with features identical to the Products, (b) HESKA shall
not handle or otherwise provide any “off-brand” and/or “generic” form of
consumables, test strips or reagents for use with any instrument Product,
PROVIDED, HOWEVER, this paragraph shall not apply to common laboratory transfer
pipettes, common QC serum materials and primary blood collection tubes that fit
commercially available external centrifuges.
1.4 Sales Responsibility
HESKA assumes all sales
responsibilities for the Products to be sold under this Agreement.
“Sales
Responsibilities”
as used herein includes all sales force training,
maintenance and support activities, warranty repair service as contemplated at
Section 2.1 below as well as advertising, promotion, and demonstration. AGB
will provide HESKA with all drawings,
specifications,
test procedures, manuals, information and demonstration materials, but only to
the extent that they are reasonably necessary for HESKA to fulfill its Sales
Responsibilities. AGB will also provide HESKA with test data and results,
performance studies, and other materials as needed to obtain regulatory
clearance to market all Products in the Field of the Territory.
1.5 Relationship of
Parties
Each party shall be
considered an independent contractor of the other party. Nothing in this
Agreement shall be construed as establishing a joint venture or partnership or
principal/agent or employer/employee relationship. No party is authorized to
make any statement, claim, representation or warranty or to act on behalf of
the other party with respect to any of the provisions of this Agreement, except
as provided for herein or as specifically authorized in writing by the other
party.
1.6 Term
Unless terminated earlier
as set forth in Section 1.7, this Agreement shall continue to be in full force
and effect for a period of three (3) years from the Effective Date first
hereinabove written.
1.7 Termination
1.7.1 Either party may
terminate this Agreement by a written notice to the other party at any time in
the event that the other party shall have been in breach of any of the
provisions of this Agreement and such breach shall have continued for sixty
(60) days (ten (10) days in the case of breach of payment terms) after receipt
of written notice of the breach from the non-breaching party.
1.7.2 Either party may
terminate this Agreement without any notice to the other party if the other
party (1) is declared insolvent or bankrupt, or proceedings for commencement of
civil rehabilitation, company reorganization or other similar procedure are
made against it in a court of competent jurisdiction or (2) enters into
liquidation whether compulsorily or voluntarily; or compounds or makes any
arrangements with its creditor or has a receiver, manager or administrator
appointed in respect of all or any part of its assets.
1.7.3 Either party may
terminate this Agreement by a written notice to the other party at any time in
the event of any sale to a competitor of the other party’s veterinary blood
chemistry business pertaining to this Agreement occurs, whether by sale of
assets or divisions, merger or otherwise.
1.8 Effect of Termination
[***] — Certain information on
this page have been omitted and filed separately with the Securities and
Exchange Commission. Confidential
treatment has been requested with respect to the omitted portions.
1.8.1 Upon
termination of this Agreement, the terminating party may (but has no obligation
to) cancel any and all outstanding orders pending hereunder.
1.8.2 In the event of
termination by HESKA, HESKA will have the right to return any instrument
Products in-transit from AGB to HESKA as well as in its possession in unused or
unpacked condition to AGB, at AGB’s expense for return freight, for a full
refund of the purchase price paid for such Products by HESKA to AGB.
1.8.3 In the event of
termination by AGB, at the option of AGB, either AGB will have the right to
repurchase any instrument Products in HESKA’s possession in unused or unpacked
condition, at HESKA’s expense for return freight, for a full refund of the
purchase price paid for such Products by HESKA to AGB or HESKA shall pay for
any and all Products in process, in inventory, and/or in-transit to HESKA and,
when applicable, the deficient number of the instrument Products provided for
at Section 3.2 and shall take delivery of those Products as soon as demanded by
AGB; provided, that HESKA is allowed to distribute such purchased Products in
the Field in the Territory for six (6) month after such termination. Unless
otherwise provided herein, each party waives any claims for compensation or
damages in connection with such cancellation of outstanding orders from the
other party.
ARTICLE II
2.1 Warranty and Quality
AGB warrants that the
Products sold hereunder shall be free and clear of any and all liens,
encumbrances or defects in title and shall be conveyed to HESKA with lawful and
marketable title. AGB further warrants that the Products shall satisfy the
performance specifications set forth in
Attachments 1 and 2.
AGB will
not make any changes to the Products without first (i) notifying HESKA in
writing at least ninety (90) days in advance of such changes, (ii) providing HESKA
with satisfactory evidence that such changes do not alter the performance
specifications of any Product or necessitate further regulatory filings for any
Product, and (iii) obtaining HESKA’S consent in writing. AGB shall input normal
reference ranges for animals supplied by HESKA in writing into the instrument
Products without modification by AGB.
The instrument Products
are warranted by AGB to be free from defects in materials and workmanship for a
period of twelve (12) months from the date of shipment from AGB to HESKA, and
the test strip Products are warranted for a period of their remaining shelf
lives, provided, however, AGB shall not ship test strip Products whose
remaining shelf lives are less [***] at the time of shipment. AGB will use good
faith efforts to provide the longest possible shelf life in excess of the
minimum requirement of [***]. During the warranty period, AGB will promptly
provide HESKA with all necessary warranty repair parts to have the
non-conforming Products repaired by HESKA, or replacement of the non-conforming
Products at no cost. AGB’s
warranty obligation under
this Section 2.1 is limited to the timely supply of free repair parts or free
replacement of the non-conforming Products.
In the event that HESKA
determines that any shipment of the Products fails to conform to their
performance specifications set forth in
Attachments 1 and 2,
HESKA shall
promptly notify AGB and reasonably specify the manner in which the Products
fail to conform. AGB shall have the right to make its own inspection and
evaluation of the allegedly non-conforming Products and shall notify HESKA,
within twenty one (21) days after receipt of such information, including
samples of the allegedly non-conforming Products from HESKA, whether it has
confirmed and accepted HESKA’S claim that the Products are non-conforming.
If AGB determines and
confirms that the Products are non-conforming, AGB shall replace, at no cost to
HESKA, the non-conforming Products at the earliest date after confirmation of
the Products non-conformance. AGB shall also bear the freight charges for
return of all non-conforming Products to AGB from HESKA.
If, after evaluating the
allegedly non-conforming Products, AGB believes that the Products in question
are conforming, AGB shall supply HESKA with its written findings and request
HESKA to submit additional samples of the Products to an independent third
party, acceptable to both parties, for testing in accordance with and against
the performance specifications set forth in
Attachments 1 and 2.
The
decision of such third party shall be final with respect to the alleged
non-conforming Products and binding on both parties to this Agreement.
If the decision of the
third party is that the Products are non-conforming, AGB shall pay the return
freight with respect to the Products shipped to HESKA as well as all costs and
expenses relating to the testing of the Products by the independent third
party. In addition, AGB shall supply HESKA with a Certificate of Destruction
certifying that the non-conforming Products returned by HESKA have been
destroyed in an environmentally safe manner.
If the decision of the
third party is that the Products conform to the performance specifications set
forth in
Attachments 1 and 2,
HESKA shall accept the Products and shall
be responsible for the return freight and all costs and expenses relating to
the testing of the Products by the independent third party.
AGB shall, at its cost,
comply and provide HESKA with certifications that the Products are in
compliance with any applicable government regulations relating to the sale of
the Products in
the Territory, and
manufacture in Japan or in China, as the case may be, including compliance with
ISO 9001 or ISO 13485 requirements. HESKA agrees to take responsibility for
timely providing AGB with such regulations in writing. AGB and HESKA shall
cooperate in meeting all regulations or requirements of, and the guidelines
published by, the U.S. Food and Drug Administration and any other applicable
U.S. governmental regulatory agencies. AGB and HESKA, in consultation, shall
use their best efforts to answer specific questions relating to quality
assurance as soon as possible upon receipt of such questions.
AGB warrants that shipping of Products is in compliance with all
applicable laws and government regulations of Japan and/or China regarding
exports.
2.2 Trademark
AGB grants HESKA a
limited non-exclusive and non-transferable license to use ARKRAY, Inc.’s and/or
AGB’S trademarks and brand names set forth in
Attachment 3
for the
specific purpose of performing its obligations hereunder. Except as specified
in this Section 2.2 and Section 1.2, no party hereto will derive any legal
rights to the other party’s trademarks and brand names by use thereof. No party
hereto shall adopt, use or register in any country, without the prior written
consent of the other party, any trademarks and brand names which are likely to
be confused with a trademark(s) and brand names of the other party.
2.3 Recall
If any governmental or
regulatory authority having jurisdiction over the Products requires AGB or
HESKA to recall any Products, such party shall immediately give a notice to the
other party of such requirement and all particulars thereof and review with the
other party the proposed manner in which the recall is to be carried out, it
being the intention of the parties that the cost, expenses and liabilities
associated with any such recall shall be borne by the party that caused the
recall. The party responsible for carrying out the recall shall do so in as
expeditious a manner as possible and in such a way as to cause the least
disruption to the sale of the Products and to preserve the goodwill attached to
the Products and each party.
2.4 Spare Parts, Consumables and Test Strips
Notwithstanding any
provision of this Agreement to the contrary, AGB will continue to furnish for
five (5) years after the termination or expiration of this Agreement the spare
parts, consumables and test strip Products for exclusive use with the
instrument Products at their prices as of the termination date; provided, that
such prices can be adjusted once a year equal to the percentage increase in the
U.S. Consumer Price Index. For purposes of this Agreement, U.S. Consumer Price
Index means the U.S. Consumer Price Index, All Urban Consumers
(CPI-U). U.S. City
Average for all Items, 1982-84=100.
2.5 Patents
AGB warrants and
represents to HESKA that to the best of its actual knowledge, and as of the
Effective Date of this Agreement, neither the Products covered by this
Agreement nor their manufacture, use, rental, importation or sale will infringe
upon any issued patent or other proprietary rights held by a third party.
AGB shall, in
consultation with HESKA, defend, indemnify and hold HESKA and its subsidiary or
affiliated companies, and customers thereof, harmless from any costs, damages,
loss, expense, claims, judgments or settlements including without limitation
reasonable attorney’s fees and investigation costs, with respect to any and all
claims that the manufacture, use, rental, importation or sale of any Products
covered by this Agreement infringes upon any patent or other proprietary rights
of a third party.
ARTICLE III
3.1 Orders and Forecast
HESKA agrees and
acknowledges that each order for the instrument Products shall be in multiples
of five (5) units, and each order for the test strip Products shall be in
multiples of one hundred (100) boxes. On or around the Effective Date of this
Agreement, HESKA shall submit a firm purchase order for the Products covering
its requirement for the first five (5) months. Thereafter, HESKA shall submit
periodically purchase orders by the end of each calendar quarter as needed in
the form agreed to by both parties, the terms and conditions of which shall be
applicable hereto to the extent they are not inconsistent with the provisions
of this Agreement. AGB will immediately confirm the receipt of each purchase
order from HESKA so that HESKA has assurance that each purchase order is duly
received by AGB. Such purchase orders shall not bind AGB unless or until
accepted by AGB. AGB shall notify HESKA of its decision on acceptance within
ten (10) days after receipt of a purchase order.
HESKA shall provide AGB,
on a quarterly basis by the end of each calendar quarter, with a non-binding
rolling one (1) year forecast of its anticipated purchases of the Products. AGB
shall keep HESKA notified immediately of any events that may significantly
impact AGB
’
S
ability to deliver the Products, such as interruptions by suppliers, labor
troubles, discovered defects, and the like.
3.2 Minimum Purchase Requirement for Instrument Product
During the effective term
of this Agreement, HESKA guarantees to purchase from AGB 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.
to take delivery of the instrument Products in the following annual
minimum purchase quantity:
(l) The 1
st
Contract Year
:
[***] units
(2) The annual
minimum purchase quantity for the 2
nd
and 3
rd
Contract Year shall be [***] units each
unless AGB and HESKA mutually agree to a different minimum purchase quantity at
least ninety (90) days prior to the beginning of the 2
nd
and 3
rd
Contract Year. If, during any Contract
Year, HESKA failed to purchase and to take delivery of the instrument Products
in the annual minimum purchase quantity applicable to that Contract Year, it is
the intent of the parties hereto that HESKA shall pay for and take delivery of
the deficient number of the instrument Products upon demand from AGB.
For the purpose of
this Section 3.2,
(a) “Contract
Year” shall mean any one (1) year period commencing on the Effective Date or
any anniversary thereof, and
(b) The
instrument Product is considered purchased when the payment therefore has
actually been received by AGB in full; and
(c) HESKA shall be deemed to have satisfied its
obligation to purchase and take delivery of the annual minimum purchase
quantity of the Products that are accepted by AGB and paid by HESKA during any
applicable Contract Year for which AGB fails to make timely production or
delivery.
3.3 Pricing
AGB will sell the
Products to HESKA in accordance with the prices set forth on
Attachment 1.
The Product pricing is fixed until the first anniversary of the Effective Date
of this Agreement. Thereafter, upon thirty (30) day’s prior written notice from
one party to the other, the parties agree to discuss in good faith any
adjustment to the prices of the Products in an attempt to reach a mutually
satisfactory agreement. If a mutually satisfactory agreement cannot be reached,
the prices of the Products then in effect shall remain applicable.
3.4 Shipping of Products
AGB agrees to ship
to HESKA the instrument Products and the test strip Products within ninety (90)
days of its acceptance of HESKA’S purchase orders. In the event of its
inability to make a complete shipment as accepted by AGB, AGB shall notify
HESKA immediately of the possible shipping date. Both parties shall discuss and
amicably agree to adjust the shipping date if AGB’S shipping date causes HESKA
any inconvenience.
3.5 Payment Terms
HESKA shall pay for all
the Products ordered with AGB by telegraphic transfer (“T/T”) in
advance of the contracted shipment date. Such T/T
shall be made at least two (2) weeks before the contracted shipment date,
PROVIDED, THAT, HESKA receives a timely firm shipment date in writing from AGB.
AGB shall periodically review HESKA’S financial condition and consider in good
faith whether any revision of payment terms is possible or not.
3.6 Labeling and
Packaging
The test strip Products
shall be labeled as illustrated on
Attachment 4
attached hereto. The
Products shall be packaged and shipped to HESKA in accordance with AGB’S
quality standards. If changes need to be made to labels or packaging in order
to comply with legal or regulatory requirements, HESKA shall cooperate fully
with AGB to comply with those requirements as quickly as possible.
3.7 Freight/Insurance
AGB, at its option, will
ship the Products ordered by HESKA under the terms of FCA Osaka, Kobe and/or
Shanghai, China as defined in Incoterms 2000. HESKA shall be responsible for
payment of all air and/or sea freight, insurance, duties and tariffs for
shipments of the Products to HESKA.
ARTICLE IV
4.1 Report
HESKA shall make periodic
reports on a quarterly basis to AGB on its inventory, sales activities and
sales promotion plans for the Products, and the market conditions including
information on the competitive products.
4.2 Approvals
HESKA and AGB shall exercise reasonable efforts to
obtain all government licenses or approvals required for the marketing, sales
or use of the Products in the Field of the Territory. All Products
registrations, if required, are in the name of AGB unless otherwise agreed by
both parties. If registrations in HESKA’s name are required by law, all
registrations are to be assigned or transferred to AGB, to the extent permitted
by law, at AGB’s expense, upon termination of this Agreement.
AGB will pay personnel, consulting,
data collection costs and other expenses incurred in connection with the
preparation and filing of all applications hereunder. AGB shall also have
financial responsibility for government licenses and approvals, which shall
apply to both the initial list of the Products on
Attachment 1,
as well
as to any changes to such Products. Similarly, whenever because of changes in
regulatory agencies or regulations or in the
Products, any additional
or different requirements are imposed regarding the marketing, sales or use of
any Products, AGB and HESKA shall exercise their reasonable best efforts to
comply, at AGB’s expense, with all new requirements regarding the marketing,
sales or use of Products.
4.3 Confidentiality
(a) “
Confidential
Information”
means any technical, manufacturing, business and marketing
information, including, without limitation, patent applications, patent
disclosure, data, inventions, concepts, ideas, structures, formulas,
techniques, processes, apparatus, know-how and customer information, disclosed
after the Effective Date of this Agreement orally or in tangible form such as
documents, memoranda, reports, correspondence, machine readable tapes or disks
drawings, notes or other media.
(b) The party
receiving information
(“Receiving Party”)
agrees that the party
disclosing
(“Disclosing Party”)
is the owner of the Confidential
Information and that the Receiving Party will not use any Confidential
Information for any purpose except for the performance of this Agreement. Each
Receiving Party agrees not to disclose any Confidential Information to any
third party or to employees of the Receiving Party, except to those employees
who are required to have the Confidential Information in order to be engaged in
the execution of this Agreement. Receiving Party’s obligations with regard to
the confidentiality and nonuse of such Confidential Information shall not
extend to any information that:
(1)
was
in the public domain at the time it was disclosed or becomes part of public
domain after disclosure, including, without limitation, disclosure in a U.S. or
foreign patent or disclosure in a printed publication which is generally
available to the public, or through the sale of the Product embodying the same
to the extent that such confidentiality is ascertainable from such Product; or
(2)
was
known to the Receiving Party at the time of its disclosure or becomes known to
the party without breach of this Agreement, provided that the Receiving Party
shall have the burden of proving such knowledge: or
(3)
is independently
developed by the persons of the Receiving Party without use of the Confidential
Information; or
(4)
is disclosed by
a Disclosing Party to a third party without restrictions on such third party’s
rights to disclose or use the same; or
(5)
is disclosed by
the Disclosing Party pursuant to statute, regulation, judicial order, a
requirement of an agency or by operation of law, provided that, in the case of
a judicial order or the order of an agency, the Receiving Party shall (i) give
the Disclosing party prompt notice of any such possible disclosure of
Confidential Information and (ii) permit the Disclosing
Party, at its expense, to take all reasonable measures
to prevent or limit the scope of such disclosure and/or to obtain protective
orders relating to the confidentiality of such Confidential Information; or
(6)
is approved for
release upon the Disclosing Party’s prior written consent; or
(7)
is disclosed by
the Disclosing Party to the Receiving Party after written notification is given
by the Receiving Party to the Disclosing Party that it will not accept any
further Confidential Information.
(c) Each Receiving Party agrees that it shall
take all reasonable measures to protect the secrecy and avoid unauthorized use
of the Confidential Information and that any disclosure of the information
within the Receiving Party will only be such as is reasonably necessary for the
purposes contemplated by this Agreement. Each Receiving Party shall immediately
notify the Disclosing Party in the event of any unauthorized use or disclosure
of the Confidential Information.
(d) Any disclosures made after the Effective
Date of this Agreement shall be governed exclusively by the provisions of this
Section 4.3 and not by the parties’ existing Confidential Disclosure Agreement—Bilateral
signed by ARKRAY on November 17, 2000. This Section 4.3 shall survive for five
(5) years following termination of this Agreement.
4.4 Product Liability
Insurance
Each party shall maintain
product liability insurance in the amount of One Million Dollars ($1,000,000).
Each party agrees that it shall provide the other party with at least thirty
(30) days’ prior written notice of any cancellation or change of limits or
terms of such policy and similarly the certificate and policy shall contain an
endorsement that such insurance may not be cancelled or modified except upon
thirty (30) days’ prior written notice to the other party.
4.5 Product and General
Liability Indemnification
Each party agrees that it
will defend, indemnify and hold harmless the other party from and against all
costs, damages, loss, expense (including reasonable attorney’s fees and
investigation costs), claims by or judgments or settlements in favor of third
parties for bodily injury, property damage, or any other damage or injury
caused or alleged to have been caused by defects of products it supplies.
Furthermore, each party agrees that it shall defend, indemnify and hold the
other party harmless from all costs, damages, loss, expense (including
reasonable attorney’s fees and investigation costs), or any other damage caused
by, arising out of, or resulting from (i) such party’s failure of performance
of any of the terms of this Agreement; (ii) such party’s failure to comply with
any and all laws (statutory and common) and regulations applicable to such
performance; or (iii) any governmental or regulatory investigation of it or its
products.
[***] — Certain information on this page have been omitted and filed
separately with the Securities and Exchange Commission. Confidential treatment has been requested
with respect to the omitted portions.
Each party agrees to give
the other party prompt notice in writing of the institution of any suit or
investigation, or any claims made by a third party, including any claims
asserted or made by any governmental authority having jurisdiction over the
parties or any Product. AGB and HESKA agree to cooperate with each other in the
defense of such suits or claims and to provide all necessary information to
enable the defending party to carry on the defense of such suit or any appeal
from a judgment or decree rendered therein.
4.6 Force Majeure
Except with respect to
the indemnification obligations provided for in Section 4.5, no party shall be
liable to the other party in any manner for failure or delay to fulfill all or
part of this Agreement, directly or indirectly, owing to acts of God,
governmental orders or restrictions, war, threat of war, warlike conditions,
hostilities, sanctions, mobilization, blockade, embargo, detention, revolution,
riot, looting, strike, lockout, shortage of power or raw material, other labor
troubles, fire, typhoon, earthquake, or lightning, epidemic or accident of any
other causes or circumstances beyond its control.
4.7 Notices
Any notice required or
permitted to be given hereunder shall be given in writing and be properly given
if served personally by the party giving notice or if sent by such party by
prepaid registered or recorded delivery letter, by fax (simultaneously
confirmed by prepaid registered or recorded delivery letter) to the address of
the other party specified hereunder. Any notice personally delivered to the
appropriate address shall be deemed to have been given on the date of its
delivery and any notice sent by prepaid registered or recorded delivery post
shall be deemed to have been given on the seventh day following the posting of
the same and any notice given by fax shall be deemed to have been given on the
day which it is transmitted.
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If to AGB
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If to HESKA:
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57 Nishi
Aketa-cho
|
1613 Prospect
Parkway
|
|
Higashi-kujo,
Minami-ku
|
Fort Collins,
Colorado 80525
|
|
Kyoto 601-8045,
Japan
|
USA
|
|
(Fax): [***]
|
(Fax): [***]
|
|
Attention:
Shigeru Doi
President &
CEO
|
Attention:
Robert Grieve
Chief Executive
Officer
|
4.8 Publicity
Neither party shall
announce or disclose the existence of this Agreement or its terms and
conditions, or advertise or release any publicity regarding this Agreement
without the prior
written consent of the
other party, except as required by law, rule, or regulation. AGB understands
and agrees that HESKA may be required to disclose and file this Agreement with
the U.S. Securities and Exchange Commission and that such filings are publicly
available. HESKA will be obligated to disclose the information within the
limits of the range required by law, rule or regulation.
4.9 Assignability
This Agreement and the
rights and obligations hereunder shall not be assigned or transferred to any
third party by either party except (i) with the prior written approval of the
other party or (ii) subject to Section 1.7, in connection with a sale of its
business pertaining to this Agreement, whether by sale of assets or divisions,
merger or otherwise.
4.10 Waivers
No delay or omission in
the exercise of any right or remedy of any party or any default by another
shall impair any right or remedy otherwise available nor shall it be construed
as a waiver of any right or remedy. Any waiver by any party of any default must
be in writing and shall not be a waiver of any other default concerning the
same or any other provision.
4.11 Entire Agreement
This Agreement contains
the entire understanding of the parties with respect to the subject matter
hereof. All express or implied agreements and understandings, either oral or
written, heretofore made including the Current Agreement recited herein above
are expressly superseded by this Agreement. This Agreement may be modified only
by written agreement duly executed by the parties.
4.12 Law of Contract
Jurisdiction
This Agreement shall be
governed by and construed under the laws of Japan. AGB represents and warrants
that the provisions of this Agreement are enforceable under such laws. The
English language employed herein shall be controlling and this Agreement shall
be deemed to have been executed at Osaka, Japan.
4.13 Arbitration
All disputes,
controversies or differences which may arise between the parties, out of or in
relation to or in connection with the present contract shall be finally settled
by arbitration. The arbitration shall be held in Denver in English under the
Rules of Arbitration 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.
International Chamber of
Commerce by one or more arbitrators appointed in accordance with the said Rules
if initiated by AGB, and shall be held in Kyoto or Osaka in English in
accordance with the Commercial Arbitration Rules of The Japan Commercial
Arbitration Association by one or more arbitrators appointed in accordance with
these rules if initiated by HESKA. The award rendered by the arbitrator(s)
shall be final and binding upon the parties hereto.
4.14 Survival
The termination or
expiration of this Agreement for any reason whatsoever shall not release either
party from any liability, obligation or agreement which is provided to be
performed after the termination or expiration of this Agreement, and the
provisions of Sections 1.8, 2.1, 2.3, 2.4, 2.5, 4.3, 4.5, 4.7, 4.13 and 4.14
shall survive termination of this Agreement.
4.15 Effect of Headings
The headings in this Agreement are included for
purposes of convenience only and shall not affect the construction or
interpretation of its provisions.
4.16 Execution in Counterparts
This Agreement may
be executed in two (2) counterparts, each of which shall be deemed an original
but all of which together shall be deemed for all purposes one and the same
instrument.
IN WITNESS WHEREOF, the parties
have caused this Agreement to be executed by their authorized representatives
as of the Effective Date first herein above written.
|
ARKRAY Global Business, Inc.
|
HESKA Corporation
|
|
|
|
|
By:
|
[***]
|
|
By:
|
/s/ JASON NAPOLITANO
|
|
[***]
|
|
Jason Napolitano
|
|
|
|
|
|
Title: Mgr., Int’l Communication
|
Title:
|
Chief Financial Officer
|
|
|
|
|
|
Date:
|
April 19, 2005
|
|
Date:
|
May 5, 2005
|
|
|
|
|
|
|
|
|
Attachment 1
Products
&
Price List
PL2004-11
ARKRAY
(logo)
Date: November 01, 2004
Distributor:
Heska
Corporation
1613 Prospect Parkway, Fort Collins,
Colorado
80525
U.S.A.
Phone 970-493-7272
Territory:
North
America
(i.e. United States of America and Canada)
Payment
Terms:
100% advanced payment by telegraphic
transfer (T/T)
Delivery
Terms:
FCA
Osaka/Kobe, Japan and/or Shanghai, China
Prices may be adjusted as stated
in Section 3.3.
[***] — Certain
information on this page have been omitted and filed separately with the
Securities and Exchange Commission.
Confidential treatment has been requested with respect to the omitted
portions.
Code No. 18303 / 18361
SPOTCHEM
EZ Model : “SP-4430”
(sometimes referred to as “the instrument Products”)
Specification:
|
Sample
|
|
: Serum, Plasma, Whole Blood (only Hb)
|
|
Reagent
|
|
: SPOTCHEM II Reagent Strip
|
|
Measurement
Items
|
|
: Glu, UA, T-Cho, TG, BUN, T-Bil, Ca, TP, Alb, GOT,
GPT, LDH, CPK, Hb, Amy, GGT, ALP, Cre, HDL-C, FRA, IP, Mg,
|
|
|
|
**Total Test Items = 22
|
|
|
|
**Max. 9 items
can be measured simultaneously
|
|
Warm-Up
|
|
: 10 minutes
|
|
Display
|
|
: 20 digits x 2 lines LCD (Character)
|
|
Operation Panel
|
|
: Sheet Key
|
|
Calibration
|
|
: Calibration by Magnetic Card or by Calibration Kit
|
|
Data Storage
|
|
: 100 Measurements
|
|
Dimension &
Weight
|
|
: 338 x 203 x 167 (WDH), Approx. 5.4 kg
|
Including:
Thermal Printer Paper (1), Power Cord (1), AC Adapter
(1), Accessory case (1),
Operating Manual (1), Warranty Card (1), Tip (10),
Cleaning Wire (1), Cleaning Set (1), Nozzle Set (1), Wrench Set (1), Centrifuge
Tube (10), Tip Waste Case (2) and Protective Cover (2)
JP¥[***]-
/
unit
(FCA Kobe/Osaka, Japan and/or Shanghai, China)
***minimum
ordering unit : in multiples of five (5) units per order
[***] — 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.
SPOTCHEM II
Reagent Strips (Single Type):
(sometimes referred to as “the test strip
Products”)
|
CODE NO.
|
|
DESCRIPTION
|
|
@PRICE
|
|
|
|
|
|
|
FCA Japan / China
|
|
|
77341
|
|
Glu
|
|
¥
|
[***]
|
|
|
77342
|
|
UA
|
|
¥
|
[***]
|
|
|
77343
|
|
T-Cho
|
|
¥
|
[***]
|
|
|
77344
|
|
TG
|
|
¥
|
[***]
|
|
|
77345
|
|
BUN
|
|
¥
|
[***]
|
|
|
77346
|
|
T-Bil
|
|
¥
|
[***]
|
|
|
77347
|
|
Ca
|
|
¥
|
[***]
|
|
|
77348
|
|
T-Pro
|
|
¥
|
[***]
|
|
|
77349
|
|
Alb
|
|
¥
|
[***]
|
|
|
77350
|
|
GOT
|
|
¥
|
[***]
|
|
|
77351
|
|
GPT
|
|
¥
|
[***]
|
|
|
77352
|
|
LDH
|
|
¥
|
[***]
|
|
|
77353
|
|
CPK
|
|
¥
|
[***]
|
|
|
77354
|
|
Hb
|
|
¥
|
[***]
|
|
|
77355
|
|
Amy
|
|
¥
|
[***]
|
|
|
77356
|
|
GGT
|
|
¥
|
[***]
|
|
|
77357
|
|
ALP
|
|
¥
|
[***]
|
|
|
77358
|
|
Cre
|
|
¥
|
[***]
|
|
|
77359
|
|
HDL-C
Kit
|
|
¥
|
[***]
|
|
|
77360
|
|
FRA
|
|
¥
|
[***]
|
|
|
77361
|
|
IP
|
|
¥
|
[***]
|
|
|
77362
|
|
Mg
|
|
¥
|
[***]
|
|
* 25 Strips /
Box
SPOTCHEM II
Reagent Strips (Multi Type):
(sometimes referred to as “the test strip Products”)
|
CODE NO.
|
|
DESCRIPTION
|
|
@PRICE
|
|
|
|
|
|
|
FCA Japan / China
|
|
|
77363
|
|
Panel-V
|
|
¥
|
[***]
|
|
|
|
|
|
|
|
|
|
* 25 Strips /
Box
[***] — 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.
Optional
Consumable Accessories:
|
CODE NO.
|
|
DESCRIPTION
|
|
@PRICE
|
|
|
|
|
|
|
FCA Japan /
China
|
|
|
10067
|
|
Thermal
Printer Paper (For Built in Printer, 58 mm width)
|
|
¥
|
[***]
|
|
|
10204
|
|
Serum
Sample Tube (100 pieces, blue cap)
|
|
¥
|
[***]
|
|
|
10191
|
|
Serum
Sample Tube (500 pieces, blue cap)
|
|
¥
|
[***]
|
|
|
10202
|
|
Whole
Blood Sample Tube (100 pieces, orange cap)
|
|
¥
|
[***]
|
|
|
10192
|
|
Whole
Blood Sample Tube
(500 pieces,
orange cap)
|
|
¥
|
[***]
|
|
|
10200
|
|
Diluent
for Hb measurement (20 mL, 50 pieces)
|
|
¥
|
[***]
|
|
|
10206
|
|
Pipette
Tip for Hb Meas. (100L,
960 pieces)
|
|
¥
|
[***]
|
|
|
10207
|
|
Pipette
Tip for Hb Meas. (1,000L, 960 pieces)
|
|
¥
|
[***]
|
|
|
77041
|
|
Calibrator
Kit (Low and High, 2 vials each, 2 vials of dilution)
|
|
¥
|
[***]
|
|
|
77042
|
|
Calibrator
Hb Kit (Calibrator and dilution for Hb meas)
|
|
¥
|
[***]
|
|
|
77043
|
|
Calibration
Check (4 pieces of lyophilized serum 3 mL)
|
|
¥
|
[***]
|
|
|
10711
|
|
Tip Set
(EZ) (100 pieces)
|
|
¥
|
[***]
|
|
|
10712
|
|
Centrifuge
Cup (100 pieces)
|
|
¥
|
[***]
|
|
|
10743
|
|
Tip Set
(EZ)
(500 pieces)
|
|
¥
|
[***]
|
|
|
10692
|
|
AC
Adaptor
|
|
¥
|
[***]
|
|
|
10698
|
|
Cleaning
wire
|
|
¥
|
[***]
|
|
|
10208
|
|
Cleaner
Set (Brush, 5 cotton swabs)
|
|
¥
|
[***]
|
|
|
10193
|
|
Pipette
for Solution (For 3 mL)
|
|
¥
|
[***]
|
|
|
10194
|
|
Pipette
for Hb Meas (For 40mL, 200L 1 each)
|
|
¥
|
[***]
|
|
|
10199
|
|
Sample
Rack (For 30 sample tubes)
|
|
¥
|
[***]
|
|
|
10699
|
|
Nozzle
Set (EZ) (Replacement Nozzle, 0-ring)
|
|
¥
|
[***]
|
|
|
10700
|
|
Tool
Set for Nozzle Replacement
|
|
¥
|
[***]
|
|
|
10701
|
|
Waste
Case (2 pieces)
|
|
¥
|
[***]
|
|
|
10702
|
|
Protective
Cover (2 pieces)
|
|
¥
|
[***]
|
|
|
18204
|
|
Portable
Centrifuge (CF-9520)
|
|
¥
|
[***]
|
|
|
10703
|
|
RS-232C,
Connection Cable
|
|
¥
|
[***]
|
|
|
10704
|
|
Carrying Case
|
|
¥
|
[***]
|
|
Attachment 2
No.
FINAL INSPECTION
CRITERIA
PRODUCT: SPOTCHEM II
REAGENT STRIPS
|
Established Date
|
|
01 November, 2004
|
|
Applicable Date
|
|
01 March, 2005
|
|
Prepared by:
|
|
/s/ [***]
|
|
|
|
[***]
|
|
Checked
by:
|
|
/s/ [***]
|
|
|
|
[***]
|
|
Approved
by:
|
|
/s/ [***]
|
|
|
|
[***]
|
ARKRAY Factory, Inc.
Reagent
Quality Control Dept.
Revision Record
Code Date Item Contents
1
[***] — 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.
Sheet 2 of 4
FINAL INSPECTION CRITERIA
I. Purpose
This Final Inspection Criteria is intended to assure
the product quality of SPOTCHEM II Reagent Strips manufactured by ARKRAY
Factory, Inc. and supplied by ARKRAY, Inc.
II. Scope
This Final Inspection Criteria should be applied to
the quality control of SPOTCHEM II Reagent Strips.
III. Types of Inspection
1. Performance test
1) Sensitivity
2) Accuracy
2. Visual Inspection
1) Labeling
2) Quantity
IV. Environmental Conditions
The inspections should be carried out under the
following environmental conditions:
|
|
1)
|
Ambient temperature
|
:
|
[***]
|
|
|
2)
|
Relative Humidity
|
:
|
[***]
|
|
|
3)
|
Others
|
:
|
No fluctuation in power supply.
|
|
|
|
|
No noise confounded with measurements.
|
V. Procedures
1. Performance test
1-1. Sensitivity
[Procedures]
|
|
1)
|
Perform calibration by inserting Single (or Multi)
Card provided in the reagent strip box to the SP-4430.
|
|
|
2)
|
Measure the SPOTCHEM Calibrator Kit (Low and High).
|
|
|
3)
|
Calculate an average of the following items.
|
Number of measurement :
|
Item
|
|
Low
|
|
High
|
|
Single
|
|
18
|
|
18
|
|
Multi
|
|
10
|
|
10
|
Note) CPK and ALP should be measured within two hours
after dissolution of calibrators, while the other items should be within four
hours after the dissolution.
[Standard]
The average should fall
in the range indicated in Appendix.
2
Sheet 3 of 4
1-2. Accuracy
[Procedures]
Calculate coefficient of variation (C.V.) using the
observed values in the previous section (1-1. Sensitivity):
Standard deviation
divided by average of x times 100.
An outlier should be treated in accordance with JIS Z
8402 (ISO 5725-2).
[Standard]
C.V. should fall in the range indicated in Appendix.
2. Visual Inspection
2-1. Labeling
[Procedures]
Confirm labels, package
and aluminum pack in terms of position, contents and colors. [Standard]
No defect which should impair the product quality is
found.
2-2. Quantity
[Procedures]
Confirm composition of
each package.
[Standard]
A package should consist
of the following items :
|
|
|
Reagent strips
|
|
: 5 strips / sheet
x 5 sheets
|
|
|
|
Molecular sieve
|
|
: 1 tablet / strip
|
|
|
|
Single Card (or Multi Card)
|
|
: 1 card / package
|
|
|
|
Package insert
|
|
: 1 sheet / package
|
VI. Judgement
1.
If a product fails to
meet a standard, confirm the environmental conditions and the inspection
methods, and perform inspection again.
2.
When the results of the
inspection meet the standards, the lot is considered to pass the inspection.
VII. Remarks
This Final Inspection Criteria shall become applicable
to those shipments which are made on and after March 1, 2005. To those
shipments which are made from November 1, 2004 till February 28, 2005, the
former Final Inspection Criteria shall apply.
3
[***] — Certain information on this page have been omitted and filed
separately with the Securities and Exchange Commission. Confidential treatment has been requested
with respect to the omitted portions.
Sheet 4 of 4
Appendix
[***]
|
Item
|
[***]
|
[***]
|
|
|
[***]
|
[***]
|
[***]
|
[***]
|
|
|
[***]
|
[***]
|
[***]
|
[***]
|
|
Glu
|
[***]
|
[***]
|
[***]
|
[***]
|
|
UA
|
[***]
|
[***]
|
[***]
|
[***]
|
|
T-Cho
|
[***]
|
[***]
|
[***]
|
[***]
|
|
TG
|
[***]
|
[***]
|
[***]
|
[***]
|
|
BUN
|
[***]
|
[***]
|
[***]
|
[***]
|
|
T-Bil
|
[***]
|
[***]
|
[***]
|
[***]
|
|
Ca
|
[***]
|
[***]
|
[***]
|
[***]
|
|
T-Pro
|
[***]
|
[***]
|
[***]
|
[***]
|
|
Alb
|
[***]
|
[***]
|
[***]
|
[***]
|
|
GOT/AST
|
[***]
|
[***]
|
[***]
|
[***]
|
|
GPT/ALT
|
[***]
|
[***]
|
[***]
|
[***]
|
|
CPK
|
[***]
|
[***]
|
[***]
|
[***]
|
|
Amy
|
[***]
|
[***]
|
[***]
|
[***]
|
|
GGT
|
[***]
|
[***]
|
[***]
|
[***]
|
|
ALP
|
[***]
|
[***]
|
[***]
|
[***]
|
|
Cre
|
[***]
|
[***]
|
[***]
|
[***]
|
|
FRA
|
[***]
|
[***]
|
[***]
|
[***]
|
|
IP
|
[***]
|
[***]
|
[***]
|
[***]
|
|
Mg
|
[***]
|
[***]
|
[***]
|
[***]
|
[***]
[***]
4
Attachment 3
|
ARKRAY brand specifications 1
|
Basic design system
|
|
|
1-4-1
|
|
|
|
|
Prototype
|
ARKRAY
brand
consists of
ARKRAY mark and logo.
|
|
|
|
|
|
/IRKRAY
|
Basically the prototype
should be used.
|
|
|
|
|
Sub-design
|
|
|
|
|
If the prototype cannot be
used due to the size of space, use the sub-design instead.
|
|
/IRKRAY
|
|
|
|
Isolation
|
|
|
|
The Isolation is the
minimum sized space surrounding the
|
|
·
Prototype
|
ARKRAY brand to set it
apart from other factors in order to
|
|
|
make the design prominent.
Do NOT allow other factors to
|
|
(ARKRAY Logo
measurements)
|
enter the space.
|
|
|
|
|
·
Sub-design
|
|
|
|
|
|
(ARKRAY Logo
measurements)
|
|
|
|
|
|
|
|
Color specifications
|
Basic design system
|
|
|
1-7-
1
|
|
|
|
|
ARKRAY blue (DIC641)
|
ARKRAY mark is expressed in the two
colors, ARKRAY blue and ARKRAY orange.
|
|
If D1C641 is not
available
|
ARKRAY blue is the corporate color,
|
|
- C100 + M60
|
representing fair, good faith and “truthful”
|
|
- PANTONE293
|
stated in our corporate philosophy.
|
|
|
|
|
ARKRAY orange (DIC205)
|
ARKRAY orange indicates vitality, meaning
|
|
|
“active” in the corporate philosophy.
|
|
If DIC205 is not
available
|
ARKRAY logo should be painted in black.
|
|
- M50 + Y90
|
In case the number of color is limited, follow
|
|
- PANTONE136
|
the coloring specifications below.
|
|
|
|
|
Coloring instruction
|
|
|
Color type
|
|
|
|
|
|
ARKRAY (logo — DIC205 and DIC641)
|
ARKRAY (DIC641) (logo — DIC205 and DIC641)
|
|
|
|
|
Prototype
(basically
used)
|
If the prototype cannot be used due to the
|
|
|
limitation of the number of colors, use
|
|
|
ARKRAY blue and ARKRAY orange as
|
|
|
shown above.
|
|
Monochrome types
|
|
|
|
|
|
ARKRAY (logo)
|
ARKRAY (logo)
|
|
|
|
|
Monochrome type 1
|
Monochrome type 2
|
|
|
|
|
Use black and meshed black 40% as shown
|
If the meshed black is not clearly shown in
|
|
above. If the black is not available to use, use
|
monochrome print, use black only.
|
|
ARKRAY blue (or the most similar color) instead
|
|
|
of black.
|
|
|
|
|
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Reversed
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ARKRAY (logo)
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If the ARKRAY colors don’t look attractive due
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to the color of foundation the ARKRAY brand
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is on, use white only shown at the left.
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Attachment 4
[GRAPHIC]
[GRAPHIC]
Exhibit 10.24
[***] — 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.
SUPPLY
AND DISTRIBUTION AGREEMENT
This Agreement entered into
by and between Heska Corporation, a Delaware corporation, having a principal
place of business at 1613 Prospect Parkway, Fort Collins, Colorado 80525 (“Heska,”)
and Boule Medical AB, a Swedish corporation, having a principal place of
business at Vastberga Alle 32, P.O. Box 42056, SE-126 13 Stockholm, Sweden (“Boule”).
In consideration of the covenants and obligations
set forth in this Agreement, the Parties hereby agree as follows:
1.
Definitions
1.1
“ABC System” shall mean the veterinary
hematology analyzer supplied to Heska under an agreement with Scil GmbH
(Formerly Praemix Wirkstoff GmbH) dated June 18, 1998.
1.2
“Analyzer” means the Ca 620-16 or Ca 530-16
Veterinary Hematology Analyzer manufactured by Boule. .
1.3
“Affiliate” means all entities at least fifty
percent (50%) owned or controlled by a Party, an entity which directly or
indirectly owns or . controls more than fifty percent (50%) of the
voting stock of a Party, and any entity, the majority ownership of which is
directly or indirectly common to the ownership of a Party.
1.4
“Calendar Year” shall mean, with respect to
the first Calendar Year, the period commencing on the first date of purchase of
Product by Heska for commercial sales and ending on December 31, 2004. The second year and all subsequent Calendar
Years shall commence on January 1 and end on December 31 of each year
thereafter. “Calendar Half Year” shall
mean each six months period ending on the last day of June and December. “Calendar Quarter” shall mean each three
month period ending on the last day of March, June, September and December.
1.5
“Effective Date” shall mean the date this
Agreement is executed by the last to sign Party.
1.6
“Field” shall mean the veterinary market.
1.7
“Party or Parties” shall mean Heska, Boule or
both as the context indicates.
[***] — Certain information on this page have been
omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested
with respect to the omitted portions.
1.8
“Product” shall mean the Analyzer and
associated spare parts, consumables and reagents listed in Appendix A, and ABC
System reagents.
1.9
“Territory” shall mean North America.
2.
Grant
2.1
Distribution Right.
Boule
hereby grants Heska the exclusive right to promote, market, sell and distribute
Product in the Field and within the Territory.
2.2
Subdistributors.
Heska
shall have the right to appoint subdistributors to promote, market, sell and
distribute Product in the Field and within the Territory.
2.3
Restrictions.
Without the prior written consent of Boule, Heska undertakes not to
manufacture or distribute within the Territory any products that are similar or
identical to or otherwise competing with any of the Products, except Heska shall
have the right, but not the obligation, to sell its inventory of reagents and
instruments purchased from Scil, Inc. for a period of one year from the
Effective Date of this Agreement.
Moreover, Heska will refrain
without Boule’s prior written consent, to the extent admissible under any
mandatory law applicable to this Agreement, from selling, directly or
indirectly, any Products to customers outside the Territory and/or the Field
or, to the best of Heska’s knowledge, Products otherwise intended for use outside
the Territory and/or outside the Field.
2.4
Should Boule decide not to commercialize ABC
System reagents in any country outside North America, Heska shall have the
first right of refusal for distribution in territories available under Boule’s
agreement with [***]. Boule agrees not
to commercialize the ABC System reagents before Heska starts selling the
product.
2.5
New Product Development.
Boule
shall provide timelines acceptable to Heska for the development of [***].
Should Boule fail to [***], Heska shall have the right to sell similar systems
without the loss of exclusive rights to distribute Boule products Heska is then
currently distributing, including, without limitation, the exclusive rights to
distribute Products or the ABC system reagents.
3. Supply of Product
3.1
Forecasts.
At least ninety (90) days prior
to each Calendar Quarter after the Product is available for purchase by Heska,
Heska shall provide Boule a binding forecast of anticipated purchases of
Product for such Calendar Quarter, and a non-binding rolling twelve (12) month
forecast of anticipated purchases of Product.
Product shall be available for purchase by Heska on or before October 1,
2003.
2
3.2
Purchase Orders.
Written purchase orders shall be submitted by Heska to Boule at least
ninety (90) days prior to the requested delivery date. No purchase orders for the Product shall be
binding upon Boule until accepted in writing by Boule. Boule agrees to review promptly all purchase
orders placed by Heska and to notify Heska of acceptance or rejection of such
purchase orders without delay. Boule
shall use its best efforts to deliver the Products on or before the date
specified in the accepted purchase orders or as soon thereafter as is
reasonably possible. Boule shall however
not be liable to pay any damages due to its late delivery.
3.3
Purchase Minimums.
The
minimum purchase commitment for the first Calendar Year of commercial sale
shall be two hundred (200) Analyzers.
For each subsequent Calendar Year, the Parties will mutually agree upon
annual minimums for the purchase of Analyzers by Heska at least three (3)
months prior to the beginning of each subsequent Calendar Year. Should the Parties fail to reach such an
agreement, the minimum commitment for the subsequent Calendar Year shall remain
the same as the minimum purchase commitment for the immediately preceding
Calendar Year. Should Boule fail to
deliver Product that conforms to the Specifications set forth in Appendix B
within 90 days of receiving a purchase order more than once per Calendar Year,
Boule agrees to readjust the minimum purchasing commitment as mutually
agreeable to the Parties.
3.4
Delivery and Acceptance.
Product shall be delivered F.O.B. Stockholm, Sweden (INCOTERMS 2000), in
accordance with Heska’s instructions and to the location specified by Heska.
Each shipment of Product to Heska will be
accompanied by a quality control certificate.
The certificate shall be issued in compliance with the specification of
Appendix B, which specification shall be used for acceptance or rejection of
Product by Heska. Heska will promptly
inspect each shipment and will inform Boule if a shipment is non-conforming to
such specifications. Unless Heska
advises Boule that a shipment is non-conforming within forty-five (45) days of
its receipt, the shipment will be deemed accepted by Heska. The provisions set out in Section 6.1 (c)
below shall apply in respect of any non-conforming Product. Boule shall pay a rejection rate of one
percent (1%) of
the purchase
price for any such non-conforming Product.
3.5
Labels.
Labels for Product, including
storage and handling instructions, shall be mutually agreed upon by the
Parties. Any additional labeling costs
incurred as a result of such agreement shall be borne by Heska, unless required
by Boule.
3.6
Consumables.
Unless Boule terminates this contract pursuant to Section 8.2 below,
Boule agrees that spare parts, consumables and reagents identified in Appendix
A (collectively referred to as “Consumables”) will continue to be supplied, on
a non-exclusive basis, to Heska by Boule under the terms of this agreement for
a period of five (5) years following the termination of this contract;
provided, however that Boule shall provide Heska Consumables at terms at least
as favorable as Boule offers to any other customer(s). Should Boule terminate this contract pursuant
to Section 8.2 (a), (b), or (e), Boule agrees to supply Consumables to Heska
and to allow Heska to be a supplier of Consumables to Heska’s customers for a
period of twelve (12) months from the termination. Thereafter, Boule agrees to supply
Consumables to Heska’s
3
[***] — Certain information on this page have been
omitted and filed separately with the Securities and Exchange Commission. Confidential treatment has been requested
with respect to the omitted portions.
customers in a country
within the Territory during the time Boule sells Consumables in that country
directly or through a distributor.
3.7
New Products.
Boule
shall offer Heska all new Boule products with potential veterinary application
(“New Products”). Heska shall have a
first right of refusal for period of sixty (60) days from receipt of a written
offer by Boule to express an interest in any New Product. If Heska expresses an interest in a New
Product, the Parties agree to engage in good faith negotiations to add the New
Product to this Agreement upon mutually acceptable terms signed by the Parties.
4.
Prices and Payment
4.1
Prices.
The purchase price of Product
to be paid by Heska to Boule shall be as set forth in Appendix A. All applicable sales taxes, shipping fees and
insurance with respect to the transfer of Product from Boule’s facility to
Heska’s designated location shall be paid by Heska. All prices and fees shall be defined in
Euros.
Beginning September 30, 2004
and every September 30 as long as this agreement shall be in effect, Heska and
Boule shall set the “Base Price” for both the CA 620-16 Vet, 110/60 and the
CA-16 Vet with MPA, 110/60, which shall be subject to cumulative annual price
adjustments as detailed later in this section, based on an “Exchange Rate”, as
defined later in this section, as follows:
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Base Price (EUR)
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[***]
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[***]
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[***]
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[***]
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[***]
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[***]
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Where Exchange Rate is the average USD/EUR exchange
rate for the period beginning on July 1 and ending on September 30 of the
current year as reported by the Financial Times of London.
Boule may, after January 1, 2004, and subject to the
restrictions set forth herein, adjust the Analyzer or Consumables purchase
prices in Appendix A to pass through actual changes in the raw material and
labor costs associated with the manufacture of the said Products, although the
adjustment for labor costs shall by itself not cause price increases of more
than 3% annually. There shall not be
more than one (1) upward adjustment of each of the Product prices during any
Calendar Year for any and all reasons.
Boule shall provide Heska prior written notice by September 30 of any
proposed increase in the purchase price for the next Calendar Year. Boule agrees to keep true and accurate books
of accounts relating to the manufacture of the said Products and agrees further
to make said books freely available to Heska during ordinary business hours to
the extent necessary to verify any such price adjustments. If the proposed increase in the purchase
price of Analyzer, Consumables or reagents is unacceptable to Heska, the
Parties shall mutually agree upon a reduced minimum purchase commitment for the
subsequent Calendar Year. If the Parties
are unable to reach a mutually agreeable minimum
4
purchase commitment, either Party shall have the
right to terminate the Agreement and Boule shall continue to supply Consumables
as provided in Section 3.6.
4.2
Payment.
For payment terms, see Appendix
A.
4.3
Resale Product Prices.
Heska
shall have the unrestricted right to determine the prices at which it resells
the Products purchased under this Agreement.
Boule shall not have the authority to require or suggest that Heska
charge a particular resale price for the Products purchased from Boule.
5.
Marketing
5.1
Marketing Support.
Notwithstanding Section 4.1, Boule agrees to provide fifteen (15)
Analyzers at a discount of thirty percent (30%) for use as demonstration units
for Heska’s marketing and sales activities.
This discount is not possible to combine with other discounts. Boule agrees to provide reasonable technical
assistance and training, as requested by Heska, to: (a) enable Heska to market,
sell and distribute Product; (b) enable Heska to install, operate and use the
Product, and (c) educate Heska about improvements to Product. Such technical assistance shall be provided
at Boule’s expense to the extent not exceeding five working days for one
person. Any additional technical assistance
shall be subject to the payment of a mutually acceptable consulting rate. Boule will provide an electronic copy of the
operator’s manual and all updates to Heska.
5.2
Trademarks.
Boule grants Heska a limited,
non-exclusive license to use Boule trademarks and brand names as set forth in
Appendix C for the purposes of marketing and selling Product. Except as specified in this Section, Heska
shall not derive any legal rights to Boule’s trademarks or brand names. Heska shall use Boule’s trademark and brand
names solely in accordance with such instructions as Boule may give from time
to time.
5.3
Product Improvements.
Boule
shall notify Heska in writing of any improvements to Product developed by Boule
useful for veterinary applications.
Subject always to mutual agreement and available resources in each
separate case, Boule further agrees to support on-going Product development
activities with Heska.
5.4
Complaints/Recalls.
Boule
will use reasonable efforts to assist Heska in investigating and correcting any
problems Heska or its customers may experience with the Product. Such efforts will include visiting the
Territory by Boule’s representatives only where deemed necessary by Boule. Heska will use reasonable efforts to
implement any corrective action deemed necessary by Boule. Heska further agrees to reasonably cooperate
with Boule in any mandatory or voluntary Product recall by assisting in the
notification of all affected customers, using materials and documentation that
are mutually acceptable to the Parties.
5.5
Marketing Efforts.
Heska
shall in performing this Agreement devote reasonable commercial efforts to
market, distribute and sell the Product in the Territory and in the Field.
5.6
Reports.
Heska shall within one month
from the expiry of each Calendar Half Year submit to Boule a report on the
sales of such Calendar Half Year together with such
5
[***] — 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.
general market information as may be deemed to be of
interest and relevant to Boule or as Boule may from time to time request. The report shall also specify major sales and
marketing activities.
5.7
Approvals, Etc.
Heska
shall at its own expense obtain all approvals and other authorisations and file
all notices which are required to be obtained or filed for the sale and use of
the Product in the Territory. Moreover,
Heska shall keep Boule currently informed of all laws, rules and regulations
applicable in the Territory directly affecting the sale and use of the
Product. The Parties acknowledge the
Products are currently not regulated by any government agency within the
Territory. Should the Products become
regulated during the term of this Agreement, the Parties shall negotiate in
good faith terms and conditions for allocating the responsibility and costs for
obtaining regulatory approval.
6.
Warranty
6.1
Warranty.
Boule warrants that:
(a)
the Product shall be free and clear of any
and all liens, encumbrances, or defects in title and shall be conveyed to Heska
with lawful and marketable title (save as said in paragraph (b) below);
(b)
to the best of its knowledge, neither the
Products nor their manufacture, use, importation or sale infringe upon the
proprietary rights held by a third party.
In the event of an allegation of infringement of any third party
intellectual property rights is made, or in Boule’s and Heska’s opinions is
likely to be made, in respect of the Product Boule may at its own expense (i)
obtain for Heska and its customers the
right to continue to import, sell and use the Product, (ii) modify the Product
so as to avoid infringement in a way reasonably acceptable to Heska or (iii) if
conditions (i) and (ii) cannot be complied with on terms which in Boule’s
opinion are reasonable, terminate this Agreement without any liability towards
Heska, unless such liability could be covered under the agreement between Boule
and [***]. If the Agreement is
terminated Boule undertakes during a period of twelve months following such
termination before appointing any new distributor in the Territory to offer
Heska the right of first refusal to such distribution rights; and
(c)
the Product conforms to the specifications as
set forth in Appendix B and are free from defects in material and workmanship
during a fifteen(15) month warranty period under normal use from the date of
delivery as per Section 3.4 (“Warranty Period”) for the Analyzers and 12 month
expiration dating for reagents. The
warranty covers, at Boule’s exclusive choice, its replacement or repair of the
non-conforming or defective Product. If
requested by Boule, Heska shall return to Boule at Heska’s cost and expense the
non-conforming or defective Product. In
order to avail itself of its rights hereunder Heska shall have given Boule
notice in writing of the non-conforming or defective Product within the
Warranty Period.
6
[***] — 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.
Save as stipulated in this paragraph (c) Boule shall
not be liable in respect of any non-conforming or defective Product.
(d)
Boule holds the exclusive rights to ABC
System reagents in the Territory from [***] and that the marketing, sale and
distribution of such reagents do not and will not infringe the intellectual
property rights of a third party.
6.2
Repairs.
During the Warranty Period,
Heska shall at the request of Boule and may at Heska’s choice elect to provide
warranty service at Heska’s designated facilities for the repair of defective
Products. Boule agrees to provide, at
Boule’s sole expense, one (1) week of service training to Heska’s personnel at
Heska’s facility. Boule further agrees
to provide additional training, as requested by Heska, at a mutually acceptable
consulting rate. Boule will provide an
initial pool of five (5) Analyzers at no charge to Heska to serve as loaners to
Heska’s customers during warranty service repairs. The Parties agree that additional Analyzers
may be added to the pool of loaner units depending on mean time between failure
(MTBF) rates and service turn around times required to perform warranty service
repairs.
6.3
Audits.
Heska shall have the right to
the extent necessary for the purpose of examining the Product quality standards
maintained by Boule to audit Boule’s original records and to inspect Boule’s
facilities upon reasonable written notice to Boule.
6.4
Product Changes.
Boule
will not make any changes to Product affecting its performance without
providing at least forty-five (45) days prior written notice to Heska.
6.5
Indemnification.
Boule
will defend, indemnify, and hold Heska and its directors, officers, employees,
agents and Affiliates, harmless from any and all claims, liabilities, direct
damages and reasonable out-of-pocket expenses, including reasonable attorney’s
fees and costs, arising from or related to any and all claims arising as a
result of the marketing, sale, or use of any defective Product by Heska or its
customers or arising from any breach of warranty under Section 6.1 hereof,
except to the extent that such losses, claims, liabilities, damages or expenses
result from the negligence or wrongful acts of Heska or any of its customers or
from a defect for which Boule is not responsible. Heska will defend, indemnify, and hold Boule
and its directors, officers, employees, agents and Affiliates, harmless from
any and all claims, liabilities, direct damages and reasonable out-of-pocket
expenses, including reasonable attorney’s fees and costs, arising from or
related to any and all claims arising as a result of the marketing, sale, or
use of any defective Product by Heska or its customers to the extent that such
losses, claims, liabilities, damages or expenses result from the negligence or
wrongful acts of Heska or any of its customers or from a defect for which Boule
is not responsible. Both Parties shall maintain during the term of this
Agreement and for a period of three years thereafter adequate product liability
insurance.
7
6.6.
Disclaimer.
EXCEPT AS OTHERWISE EXPRESSLY
PROVIDED HEREIN, BOULE DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING
WITHOUT LIMITATION WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE.
7.
Confidential Information
7.1
Obligation to Protect.
Each
of the Parties shall take such steps as are reasonably required (including
without limitation such steps as such Party takes to protect its own
proprietary information) to protect confidential and/or proprietary information
(“Confidential Information”) supplied or revealed to it by the other Party
pursuant to this Agreement, and shall not, directly or indirectly, disclose to
any third party or use such information except pursuant to this Agreement. Any Confidential Information and/or
proprietary information shall be in writing and clearly designated
Confidential, or if initially disclosed orally, confirmed in writing within
thirty (30) days of disclosure.
7.2
Scope of Obligation.
Nothing in this Article 7 shall be construed to impose a confidentiality
obligation on a Party in connection with any information to the extent such
information (a) is at the time of disclosure already known to the receiving
party (as clearly established by such Party’s prior written records); (b) is at
the time of disclosure or subsequently becomes part of the public domain
through no fault, act, or omission of the receiving Party; (c) is subsequently
disclosed to the receiving Party by a third party whose receipt and disclosure
of such Confidential Information does not, according to the receiving Party’s
knowledge, constitute a violation of any confidentiality obligation; (d) is
independently developed by the receiving Party by employees having no access to
or knowledge of Confidential Information received; or (e) is required by a
court or government agency; provided that the disclosing party shall use
reasonable efforts to provide the other party notice in writing of any proposed
disclosure under this subsection and an opportunity to object to the disclosure
or seek confidential treatment thereof.
7.3
Return of Information.
The
receiving Party shall return all Confidential Information provided by the
disclosing Party, and any documents or materials incorporating such
Confidential Information, upon the expiration or termination of this Agreement;
provided, however, one copy of all such Confidential Information may be
retained in the legal files of the receiving Party
to assure compliance with the confidentiality and non-use
provisions of this Article 7.
8.
Term and Termination
8.1
Term.
Unless terminated earlier as
provided herein, this Agreement shall be effective from the Effective Date and
shall remain in effect until December 31, 2008.
Thereafter, the term of this Agreement shall be automatically renewed
for additional one (1) year terms; provided, however that either Party may
provide written notification to the other Party of its intent not to renew at
least 180 days prior to the next expiration date.
8.2
Termination.
This
Agreement may be terminated:
(a)
at any time upon the mutual written consent
of the Parties;
(b)
by Boule if Heska fails to meet the minimum
purchasing commitments under Section 3.3 for two (2) contractual years;
8
(c)
for a material breach of this Agreement upon
sixty (60) days prior written notice to the breaching party if during such
sixty (60) day period, the default is not cured to the reasonable satisfaction
of the non-defaulting Party;
(d)
by giving the other Party sixty (60) days
written notice if such other Party has entered into or committed any act of
liquidation, bankruptcy, insolvency, receivorship, or assignment for the
benefit of creditors, to the extent such act is permitted by law; or
(e)
by Boule if Heska sells a competing product
as defined in Section 2.3.
8.3
Effect of Termination; Repurchase of
Products.
Except as otherwise specified in this
Agreement, upon termination of this Agreement Boule shall be entitled to
repurchase from Heska Products that Heska may have in stock when this Agreement
ceases to be in effect at a price equal to the price paid by Heska to Boule for
such Products plus transportation costs, customs duties and other expenses incurred
by Heska. Should Boule elect not to
repurchase such Products, Heska shall have the right, but not the obligation,
to sell Products in stock. Upon
termination of this Agreement, Boule shall continue to supply Consumables to
Heska as provided in Section 3.6.
8.4
Dispute Resolution.
The
Parties covenant and agree in good faith to attempt for a period of sixty (60)
days to resolve any disputes which may arise in connection with this Agreement
through negotiation and settlement prior to giving notice of termination or
bringing any legal action against the other Party in connection with this
Agreement. During such negotiations, the
Parties shall also consider the possibility of using alternative dispute
resolution methods, including arbitration and mediation, if the Parties are
unable to resolve the dispute. The
provisions of this section shall not apply if one Party refuses to negotiate
the dispute in good faith or if more prompt legal action is required to avoid material
loss or damage. Failure to resolve a
dispute by negotiated settlement shall not prejudice any subsequent legal
action with respect thereto.
9. Miscellaneous
9.1
Relationship of Parties.
The
relationship of Boule to Heska under this Agreement is intended to be that of
independent contractor. Nothing
contained in this Agreement is intended or is to be construed so as to
constitute Boule and Heska as employer/employee or principal/agent, or the
employees or the agents of any Party hereto as employees or agents of the other
Party hereto. Neither Party hereto has
any express or implied right or authority under this Agreement to assume or
create any obligations on behalf of or in the name of the other Party or to
bind the other Party to any contract, agreement, or undertaking with any third party,
other than the successors and permitted assigns of the respective parties
hereto.
9.2
Assigmnents.
This
Agreement shall be binding upon and inure to the benefit of the Parties
hereto and their respective successors and assigns; provided, however, that
neither Party shall have the right to transfer or assign its interest in this
Agreement without the prior written consent of the other Party, except that
either Party may make such transfer or assignment, to a partner, subsidiary or
entity otherwise controlling, controlled by or under common control with such
Party, or to an entity acquiring all or substantially all relevant assets of a
Party to which this Agreement pertains.
No transfer or assignment will relieve the transferor or assignor of any
liability or obligations hereunder.
9
[***] —
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.
9.3
Waiver of Performance.
A
failure of a Party hereto at any time to require performance by the other Party
hereto of any provision hereto required to be performed by such other Party,
will in no way affect the right of the first party to require such performance
at any time thereafter. The waiver of
any breach of any provision hereto will in no way be construed as a waiver of
any succeeding breach of such provision or a waiver of the provision itself.
9.4
Severability.
In
the event any provision of this Agreement shall be invalid, void, illegal, or
unenforceable, the remaining provisions hereof nevertheless will continue in
full force and effect without being impaired or invalidated in any way.
9.5
Survival.
The provisions of Section 5.4,
Articles 6, 7 and 8, and Section 9.8 shall survive the termination of this
Agreement.
9.6
Notices.
All notices under this
Agreement shall be in writing and shall be deemed given if sent by facsimile,
(except for the legal process in each case), certified or registered mail or
commercial courier (return receipt or confirmation of delivery requested), or
by personal delivery to the party to receive such notices or other
communications called for by this Agreement at the following addresses for a
party as shall be specified by such party by like notice:
If to Boule:
Boule
Medical AB
P.O.
Box 42056
SE-126
13 Stockholm, Sweden
Facsimile
[***]
Attention: President
If to Heska:
Heska
Corporation
1613
Prospect Parkway
Fort
Collins, CO 80525
Fax
[***]
Attention:
Chief Executive Officer
Copy
to: Executive Vice President,
Intellectual Property
and Business Development
Facsimile
[***]
9.7
Force majeure.
Either Party shall be excused from the performance of its obligations
hereunder, or such performance may be delayed, by causes beyond its reasonable
control, including without limitation, acts of God, war, riot, epidemic, fire,
flood, insurrection, military authorities, labor disputes, delay or inability
to obtain supplies, labor, raw materials, energy or failure of transportation
or communication and any other similar contingency, provided that if such
nonperformance continues for more than 90 days, the other party may terminate
the Agreement upon written notice.
10
9.8
Governing Law.
The
Parties agree that their rights and obligations under this Agreement will not
be governed by the United Nations Conventions on Contracts for the
International Sale of Goods, the application of which is expressly
excluded. Rather, this Agreement shall
be governed by and construed under the laws of the district where the
contracting party is a defendant who defends against the other Party, with
regard to the construction or interpretation of the Agreement. The English language employed herein shall be
controlling and this Agreement shall be deemed to have been executed at Fort
Collins, Colorado, United States of America and Stockholm, Sweden. Any dispute, controversy or difference
arising between the Parties, out of or in relation to or in connection with this
Agreement, or the breach thereof, which cannot otherwise be settled between the
Parties within a period of ninety (90) days shall be submitted to an
arbitration before a competent arbitration tribunal in Colorado, United States
of America in case Heska is a defendant, and Stockholm, Sweden, in case Boule
is a defendant, for binding resolution in accordance with the rules selected by
the arbitrator(s), provided the proceedings are conducted in the English
language.
9.9
General Terms of Sale.
Boule’s
General Terms of Sale as amended from time to time shall apply in respect of
all supplies hereunder save as varied by express provisions herein. The currently applicable General Terms of
Sale have been attached hereto as Appendix A.
9.10
Entire Agreement.
This
Agreement and the Appendices hereto constitute the entire agreement and
understanding of the Parties with regard to the subject matter hereof and
supercede all prior agreements and understanding, written or oral, between the
Parties. This Agreement may only be
amended by a written agreement signed by the Parties.
The Parties have caused this Agreement to be signed
by their duly authorized representatives.
|
BOULE MEDICAL AB
|
|
HESKA CORPORATION
|
|
By:
|
/s/ Ernst Westman
|
|
By:
|
/s/ Jason Napolitano
|
|
|
Name:
|
ERNST WESTMAN
|
|
Name:
|
JASON NAPOLITANO
|
|
|
Title:
|
President
|
|
Title:
|
Chief Financial Officer
|
|
|
Date:
|
June 17, 2003
|
|
Date:
|
June 17, 2003
|
|
11
[***] — 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.
Appendix A1
This Appendix forms an
integrated part of the Distributorship Agreement between BOULE and HESKA.
Payment Terms
All prices are based on EX
Works delivery terms, not insured, 50% in Euro and 50% in USD based on a fixed
exchange rate of 1.18 USD/EUR. For
example, if Heska buys two CA 620-16, 110-60, price Net Euro [***], Heska would
pay EUR [***]
and USD [***] for
the two instruments. Heska agrees to
make orders in units divisible by two.
Insurance could be organised
according to a request from the receiver.
All additional costs are on
the behalf of Heska, such as:
– L/C cost
– Legalisation costs
– Courier
Minimum order/invoicing
amount: Euro 100
Payment terms
–
Boule will invoice Heska twenty percent (20%)
of the purchase price of instruments
immediately upon acceptance of any purchase order. Heska shall wire the 20% payment fourteen (14)
days prior to shipment. Boule will
invoice the balance of the purchase price upon shipment of Product from Boule’s
facility and Heska shall pay such invoice within fifty-two (52) days from the
date of invoice. This term shall be
valid only as long as Heska complies with said payment term without delays, as
judged by Boule. For
payments received in advance Heska will
be granted a 2% discount.
–
Interest rate of 2% per month will be charged
for all invoices past due date. Interest
invoices will be made, at least, twice a year.
–
Credit limit is set to Euro five hundred
thousand (500.000)
12
[***] — 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.
Appendix A2
This Appendix forms an
integrated part of the Distributorship Agreement between BOULE and
HESKA.
Price schedule
|
Description
|
|
Price Net Euro
|
|
INSTRUMENTS
|
|
|
|
CA 620-16 Vet,
110/60
|
|
[***]
|
|
CA 620-16 Vet
with MPA, 110/60
|
|
[***]
|
|
CA 620-20 Vet,
110/60
|
|
[***]
|
|
CA 620-20 Vet
with MPA, 110/60
|
|
[***]
|
|
Micro Pipette
Adapter MPA
|
|
[***]
|
|
Micro caps for
MPA Pack size 10/1000
|
|
[***]
|
|
Medonic micro lancet
|
|
[***]
|
|
Printer DPU
414-2
|
|
[***]
|
|
Printer paper to
DPU 414-2, 5 rolls
|
|
[***]
|
|
Barcode reader
|
|
[***]
|
|
|
|
|
|
REAGENTS
|
|
|
|
Mediton vet, 10
Litre (for Medonic)
|
|
[***]
|
|
Medilyse vet, 5
Litre (for Medonic)
|
|
[***]
|
|
Reagent Pack
AB-Vet (for ABX)
|
|
[***]
|
|
ProClean Plus
|
|
[***]
|
|
Hypochlorite
|
|
[***]
|
|
|
|
|
|
CONTROLS &
CALIBRATORS
|
|
|
|
Boule- 8 VET CON
|
|
|
|
1x4, 5 ml normal
|
|
[***]
|
|
6x4, 5 ml normal
|
|
[***]
|
|
18x4, 5 ml
normal
|
|
[***]
|
|
Boule- 8 VET CAL
|
|
|
|
1x3, 0 ml
|
|
[***]
|
13
APPENDIX B
Product
Specification
Product Specification
CA 620 Vet
|
- Measuring principle RBC,
WBC, PLT
|
|
Impedance
|
|
- Measuring
principle HGB
|
|
Cyanide free method 540 nm
|
|
- Discriminator
|
|
Floating programmable
|
|
- Sampling
system
|
|
Shear valve
|
|
|
|
|
|
- Parameters
reported (16 par. model):
|
|
RBC, MCV, HCT,
PLT,MPV
HGB, MCH, MCHC
WBC,
RDW%
LYMPH abs, MID abs, GRAN abs.
LYMPH %, MID %, GRAN %
|
|
|
|
|
|
- Size
distributions printed for
|
|
RBC, PLT and WBC diff.
|
|
|
|
|
|
- Aspirated
blood volume (open tubes)
|
|
ca. 125 ul
|
|
- Blood volume
using the Micro Pipette Adapter
|
|
20 ul
|
|
|
|
|
|
- Prediluted
mode
|
|
1:200 to 1:250 using min. 20 ul blood
e.g. 20 ul to 5 ml diluent
30 u1 to 6 m1 diluent
40 u1 to 8 ml diluent
|
|
|
|
|
|
- Screen
|
|
LCD
|
|
- Keyboard
|
|
Numerical
|
|
- Total cycle
time
|
|
ca. 73 seconds
|
|
- Sample display
and print after
|
|
ca. 53 seconds
|
|
|
|
|
|
- Printer
|
|
external, IBM, HP format
or DPU414
|
|
|
|
|
|
- Memory
|
|
>350 samples
|
|
|
|
|
|
- QC capability
|
|
SD, CV, Xm
|
|
- HGB correction
on high WBC counts
|
|
Yes
|
|
|
|
|
|
- Warning flags
on parameter abnormalities
|
|
Yes
|
|
- Floating
discriminator RBC/ PLT
|
|
Yes (position printed)
|
|
- Mathematical
3-part diff. WBC calc.
|
|
Yes
|
|
|
|
|
|
- Automatic HGB
blank on each sample
|
|
Yes
|
|
- Carry Over
|
|
< 1%
|
|
- Bar-code
scanner input
|
|
Yes
|
|
- Serial output
|
|
Yes
|
|
|
|
|
14
|
- Mains voltage
|
|
230 V or, 120 V
|
|
|
|
|
|
- Mains voltage
tolerances
|
|
+15% /-20%
|
|
- Power
consumption
|
|
max 250 VA
|
|
- Power
consumption (standby)
|
|
max 50 VA
|
|
|
|
|
|
- Built-in test
/adjustment programs
|
|
Yes
|
|
|
|
|
|
Dimensions (mm)
|
|
H=350 W=420 D=460
|
|
Weight
|
|
ca. 22 Kg
|
15
[***] — 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.
June 1, 2004
Boule Medical AB
P. O. Box 42056
SE-126 13 Stockholm, Sweden
Attention: Ernst Westman, President
Re:
Supply
and Distribution Agreement (“
Distribution Agreement
”) by and between
Heska Corporation (“
Heska
”) and Boule Medical AB (“
Boule
”) dated
June 17, 2003
Dear Mr. Westman:
This letter confirms our
agreement to interpret and supplement the Distribution Agreement as follows
(capitalized terms not otherwise defined herein have the meanings ascribed to
them in the Distribution Agreement):
1.
Pricing and Payment
. Appendix Al and Appendix A2 of the
Distribution Agreement are hereby deleted in their entirety and replaced with
Appendices AI, A2, A3, A4 and A5 attached hereto. The last sentence of the first paragraph of
Section 4.1 of the Distribution Agreement is hereby amended to read as follows:
“All prices and fees shall be defined in Euros and/or US Dollars, as provided
in Appendices A2, A3, A4 and A5.”
2.
Appendix C
. Appendix C to
the Distribution Agreement is attached hereto.
3.
Returns
. Notwithstanding any provision of Section 6.1
(c) of the Distribution Agreement to the contrary, Boule shall reimburse Heska
for the cost and expense of returning non-conforming or defective Product as
contemplated therein.
4.
Indemnification
. Boule and Heska agree that the following
phrase shall be deleted at the end of the second sentence of Section 6.5 of the
Distribution Agreement and shall have no further force and effect: “or any of
its customers or from a defect for which Boule is not responsible”.
5.
Consumable Sales after
Termination
. Unless Boule terminates
the Distribution Agreement pursuant to Section 8 .2 thereof, Heska may purchase
Consumables following termination of the Distribution Agreement as provided in
Section 3.6 thereof, and for the avoidance of doubt, Heska’s right to make such
purchases shall not obligate Heska to comply
16
with the restrictions set forth in Section 2.3
thereof. However, if Heska sells
non-Boule spare parts, consumables or reagents for the Analyzer following
termination of the Distribution Agreement (other than due to Boule’s failure to
timely fill Heska’s orders for Consumables), then Heska’s right to purchase
Consumables shall expire.
6.
Sale of Refurbished ABC Systems
and Scil Inventory
. Notwithstanding
any provision of the Distribution Agreement to the contrary, including but not
limited to Section 2.3 thereof, Boule agrees that Heska shall have the right,
but not the obligation, to obtain and refurbish used ABC instruments (“
Refurbished
ABC Systems
”) and to sell such Refurbished ABC Systems within the Territory
at any time after the date of this Amendment.
In addition, Heska shall have the right, but not the obligation, to sell
its inventory of instruments and reagents purchased from Scil Animal Care
Company, America, Inc., within the Territory, at any time after the effective
date of this Amendment. Heska shall
provide monthly reports of sales of both new ABC Systems and Refurbished ABC
Systems to Boule.
This letter will
constitute a written agreement amending the Distribution Agreement as contemplated
by Section 9.10 thereof. If there is a
conflict between the terms of this letter and the Distribution Agreement, this
letter shall control.
|
|
Very truly yours,
|
|
|
|
|
|
HESKA
CORPORATION
|
|
|
|
|
|
|
|
|
By:
|
/s/ JASON NAPOLITANO
|
|
|
|
|
Jason Napolitano
|
|
|
|
|
Its:
|
Chief Financial Officer
|
|
|
|
|
|
|
|
|
ACCEPTED
AND AGREED:
|
|
|
|
|
|
|
|
BOULE MEDICAL AB
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ ERNST
WESTMAN
|
|
|
|
|
|
Ernst Westman
|
|
|
|
|
|
Its:
|
President
|
|
|
|
|
|
|
|
|
|
|
|
|
17
Appendix
A1
This Appendix forms an
integrated part of the Supply and Distribution Agreement between BOULE and
HESKA.
Payment Terms
All prices are based on EX Works delivery terms, not
insured.
Insurance could be organized according to a request
from the receiver.
All additional costs are on the behalf of Heska, such
as:
-
L/C
cost
-
Legalization
costs
-
Courier
Minimum order/invoicing amount: Euro 100
Payment terms
-
Boule
will invoice Heska twenty percent (20%) of the purchase price of instruments
immediately upon acceptance of any purchase order. Heska shall wire the 20% payment fourteen
(14) days prior to shipment. Boule will
invoice the balance of the purchase price upon shipment of Product from Boule’s
facility and Heska shall pay such invoice within fifty-two (52) days from the
date of invoice. This term shall be
valid only as long as Heska complies with said payment term without delays, as
judged by Boule. For payments received
in advance Heska will be granted a 2% discount.
-
Interest
rate of 2% per month will be charged for all invoices past due date. Interest
invoices will be made, at least, twice a year.
-
Credit
limit is set to Euro five hundred thousand (500.000).
18
[***] —
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.
Appendix
A2
This Appendix forms an
integrated part of the Supply and Distribution Agreement between BOULE and
HESKA.
Heska agrees to make
orders of the following Products in units divisible by two. Payment for fifty percent (50%)
of the units in each shipment shall be
made in Euros and fifty percent (50%)
in
U.S. dollars. The initial Euro prices
are set forth below, subject to adjustment for actual changes in material and
labor costs pursuant to the last paragraph of Section 4.1 of the Distribution
Agreement. The dollar prices shall be an
amount equal to the then-current Euro price, multiplied by 1.18.
|
Description
|
|
Price Net Euro
|
|
INSTRUMENTS
|
|
|
|
CA 629-20 Vet,
110/60
|
|
[***]
|
|
CA 620-20 Vet
with MPA, 110/60
|
|
[***]
|
|
Micro Pipette
Adapter MPA
|
|
[***]
|
|
Micro Caps for
MPA Pack size 10x1000
|
|
[***]
|
|
Medonic micro
lancet
|
|
[***]
|
|
Printer DPU
414-2
|
|
[***]
|
|
Printer paper to
DPU 414-2, 5 rolls
|
|
[***]
|
|
Barcode reader
|
|
[***]
|
|
|
|
|
|
REAGENTS
|
|
|
|
Mediton vet, 10
Litre (for Medonic)
|
|
[***]
|
|
Medityse vet, 5
Litre (for Medonic)
|
|
[***]
|
|
ProClean Plus
|
|
[***]
|
|
Hypochlorite
|
|
[***]
|
19
[***] —
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.
Appendix
A3
Payment for one hundred
percent (100%) of the units of the Products listed below shall be made in U.S.
dollars. The initial U.S. dollar price
for each of such Products shall be the price set forth below, subject to
adjustment for actual changes in raw material and labor costs pursuant to the
last paragraph of Section 4.1 of the Distribution Agreement.
|
Description
|
|
Price Net
|
|
REAGENTS
|
|
|
|
Reagent Pack
AB-Vet (for ABX)
|
|
[***]
|
|
|
|
|
|
CONTROLS
& CALIBRATORS
|
|
|
|
Boule — 8 VET
CON
|
|
|
|
1x4.5 ml normal
|
|
[***]
|
|
6x4.5 ml normal
|
|
[***]
|
|
18x4.5 ml normal
|
|
[***]
|
|
Boule — 8 VET
CAL
|
|
|
|
1x3.0 ml
|
|
[***]
|
20
[***] —
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.
Appendix
A4
Payment for one hundred
percent (100%) of the units of the Products listed below shall be made in
Euros. The initial Euro price for each
unit of such Products shall be the price set forth below, subject to adjustment
for actual changes in raw material and labor costs pursuant to the last paragraph
of Section 4.1 of the Distribution Agreement.
|
|
|
|
|
|
|
Spare Parts Price List
Medonic CA 530/620
|
|
|
|
|
|
|
View
|
|
Pos
|
|
Art. No.
|
|
Description
|
|
Recommended
for stock
|
|
Price
Euro
|
|
|
530-04
|
|
5
|
|
5814064
|
|
Asp. pip. predil.
blood/upps
|
|
Y
|
|
[***]
|
|
|
530-04
|
|
4
|
|
5306007
|
|
Asp. Pipette Whole
blood
|
|
Y
|
|
[***]
|
|
|
530-02
|
|
92
|
|
9990389
|
|
Bearing
|
|
|
|
[***]
|
|
|
530-02
|
|
83
|
|
9990676
|
|
Bi pin lampa
|
|
Y
|
|
[***]
|
|
|
530-03
|
|
20
|
|
5308004
|
|
Cable assay blood
detector
|
|
|
|
[***]
|
|
|
530-02
|
|
84
|
|
5308013
|
|
Cable assy Hgb lamp
|
|
|
|
[***]
|
|
|
530-02
|
|
70
|
|
5308008
|
|
Cable assy Hgb photocel
|
|
|
|
[***]
|
|
|
530-02
|
|
21
|
|
5308014
|
|
Cable assy opto-switch
|
|
|
|
[***]
|
|
|
530-02
|
|
43
|
|
5308011
|
|
Cable assy start/stop
detector
|
|
|
|
[***]
|
|
|
530-02
|
|
67
|
|
5308010
|
|
Cable assy syringe
motor
|
|
|
|
[***]
|
|
|
530-02
|
|
89
|
|
5308009
|
|
Cable assy transducer
coax
|
|
|
|
[***]
|
|
|
530-02
|
|
73
|
|
5306002
|
|
Cap. Holder complete
|
|
Y
|
|
[***]
|
|
|
530-03
|
|
34
|
|
5814143
|
|
Casing complete
|
|
Y
|
|
[***]
|
|
|
530-05
|
|
37
|
|
9990959
|
|
Check valve 1300-201.1
|
|
|
|
[***]
|
|
|
530-04
|
|
17
|
|
5304022
|
|
Cleaning device
|
|
|
|
[***]
|
|
|
530-02
|
|
78
|
|
5306004
|
|
Counting cup WBC
complete
|
|
|
|
[***]
|
|
|
530-02
|
|
71
|
|
5306003
|
|
Counting cup RBC
complete
|
|
|
|
[***]
|
|
|
530-04
|
|
55
|
|
9990434
|
|
Coupling T 20-6
|
|
Y
|
|
[***]
|
|
|
530-04
|
|
37
|
|
9990435
|
|
Coupling DD-6
|
|
Y
|
|
[***]
|
|
|
530-04
|
|
39
|
|
9990955
|
|
Coupling T 220-210-6
|
|
Y
|
|
[***]
|
|
|
530-04
|
|
36
|
|
9990989
|
|
Coupling T220-6
|
|
Y
|
|
[***]
|
|
|
530-04
|
|
38
|
|
9990437
|
|
Coupling Y220-6
|
|
Y
|
|
[***]
|
|
|
530-03
|
|
16
|
|
5304097
|
|
Detector
|
|
|
|
[***]
|
|
|
530-05
|
|
8
|
|
9990910
|
|
Fan for F-120
|
|
|
|
[***]
|
|
|
530-02
|
|
75
|
|
9990598
|
|
Filter VG9 4mm Ø 8
|
|
|
|
[***]
|
|
|
530-02
|
|
59
|
|
5306006
|
|
Gearbox complete
|
|
Y
|
|
[***]
|
|
|
530-03
|
|
22
|
|
5306005
|
|
Gearbox complete
|
|
Y
|
|
[***]
|
|
|
530-02
|
|
103
|
|
5304077
|
|
Glass cylinder
|
|
Y
|
|
[***]
|
|
|
530-02
|
|
10
|
|
5304011
|
|
Guiding rod
|
|
|
|
[***]
|
|
21
[***] — 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.
|
530-02
|
|
25
|
|
5304015
|
|
Guiding wheel
|
|
|
|
[***]
|
|
|
|
|
|
|
9990900
|
|
Hal switch TLE
4905L
|
|
|
|
[***]
|
|
|
530-2
|
|
105
|
|
5304075
|
|
Housing upper
glass cylinder
|
|
|
|
[***]
|
|
|
|
|
|
|
9990844
|
|
IC 82C55A
|
|
Y
|
|
[***]
|
|
|
|
|
|
|
9990891
|
|
IC LM338K
|
|
|
|
[***]
|
|
|
|
|
|
|
9990890
|
|
IC LT350AK
|
|
|
|
[***]
|
|
|
|
|
|
|
9990847
|
|
IC PBL 3773
|
|
Y
|
|
[***]
|
|
|
|
|
|
|
9990848
|
|
IC PBM 3960
|
|
Y
|
|
[***]
|
|
|
530-02
|
|
45
|
|
4804014
|
|
Ind. Lower
|
|
Y
|
|
[***]
|
|
|
530-04
|
|
23
|
|
5304002
|
|
Indicator
housing
|
|
|
|
[***]
|
|
|
620-01
|
|
2
|
|
6203018
|
|
Keyboard folio
|
|
|
|
[***]
|
|
|
530-05
|
|
27
|
|
5306001
|
|
Level detector
hemolyzer
|
|
|
|
[***]
|
|
|
530-05
|
|
26
|
|
5306000
|
|
Level detector
isoton
|
|
|
|
[***]
|
|
|
530-04
|
|
9
|
|
9990395
|
|
Locking ring RS
4
|
|
Y
|
|
[***]
|
|
|
530-01
|
|
38
|
|
9990479
|
|
Magnet lock
|
|
|
|
[***]
|
|
|
530-02
|
|
7
|
|
9990402
|
|
Magnet valve
one-way
|
|
Y
|
|
[***]
|
|
|
530-02
|
|
8
|
|
9990403
|
|
Magnet valve
two-way
|
|
Y
|
|
[***]
|
|
|
530-05
|
|
42
|
|
9991128
|
|
Mains inlet
|
|
|
|
[***]
|
|
|
530-02
|
|
47
|
|
5304026
|
|
Metering unit
|
|
Y
|
|
[***]
|
|
|
|
|
|
|
2606001
|
|
Micocaps for MPA
260 10x100
|
|
Y
|
|
[***]
|
|
|
530-04
|
|
20
|
|
5814036
|
|
Mixing
cup/bl.bägare
|
|
|
|
[***]
|
|
|
530-04
|
|
21
|
|
5303010
|
|
Mixing cup lid
|
|
Y
|
|
[***]
|
|
|
530-05
|
|
11
|
|
9990405
|
|
Nipple
|
|
|
|
[***]
|
|
|
530-02
|
|
16
|
|
5304020
|
|
Optical detector
|
|
|
|
[***]
|
|
|
530-02
|
|
44
|
|
9990475
|
|
O-ring 5.30x
2.40 silikon
|
|
Y
|
|
[***]
|
|
|
530-02
|
|
49
|
|
9990475
|
|
O-ring 5.30x
2.40 silikon
|
|
Y
|
|
[***]
|
|
|
530-02
|
|
77
|
|
9990597
|
|
O-ring 7.10x
1.60
|
|
Y
|
|
[***]
|
|
|
530-02
|
|
79
|
|
9990597
|
|
O-ring 7.10x
1.60
|
|
Y
|
|
[***]
|
|
|
530-03
|
|
36
|
|
9991164
|
|
O-ring 22.00x
2.00 nitril
|
|
Y
|
|
[***]
|
|
|
530-03
|
|
32
|
|
9990453
|
|
O-ring 5.10x1.60
nitril
|
|
Y
|
|
[***]
|
|
|
530-02
|
|
104
|
|
9990468
|
|
O-ring 12.10x
1.60 epdm
|
|
Y
|
|
[***]
|
|
|
530-02
|
|
74
|
|
9991085
|
|
O-ring 13.10x
1.6 nitril
|
|
Y
|
|
[***]
|
|
|
530-02
|
|
69
|
|
9990382
|
|
O-ring 20.24x
2.62 viton
|
|
Y
|
|
[***]
|
|
|
530-04
|
|
28
|
|
9990392
|
|
O-ring 22.10x
1.60 viton
|
|
Y
|
|
[***]
|
|
|
530-04
|
|
13
|
|
9990887
|
|
O-ring 6.10x1.60
nitril
|
|
|
|
[***]
|
|
|
530-06
|
|
3
|
|
5309021
|
|
PCB ampl 530
mounted complete
|
|
Y
|
|
[***]
|
|
|
530-06
|
|
2
|
|
5309001
|
|
PCB CPU 530
mounted complete
|
|
Y
|
|
[***]
|
|
|
620-01
|
|
4
|
|
6209001
|
|
PCB display
CA620
|
|
Y
|
|
[***]
|
|
|
530-06
|
|
8
|
|
5309011
|
|
PCB power
mounted complete
|
|
Y
|
|
[***]
|
|
|
530-06
|
|
27
|
|
9991161
|
|
Plastic cover
|
|
|
|
[***]
|
|
|
530-05
|
|
7
|
|
9990422
|
|
Pump F120-28 24
AC
|
|
Y
|
|
[***]
|
|
22
[***] — 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.
|
530-05
|
|
39
|
|
9980001
|
|
Repair kit for
pump 9990422
|
|
Y
|
|
[***]
|
|
|
530-03
|
|
9
|
|
5814120
|
|
Ring/främre
styrh. v.
|
|
|
|
[***]
|
|
|
530-03
|
|
6
|
|
5814119
|
|
Ring/mothåll fj.
|
|
|
|
[***]
|
|
|
530-02
|
|
24
|
|
5814082
|
|
Ring/stoppring
|
|
|
|
[***]
|
|
|
530-02
|
|
55
|
|
5304008
|
|
Rolled thread
ball screw Shbo 12*4
|
|
|
|
[***]
|
|
|
530-05
|
|
14
|
|
9990911
|
|
Rubber support,
M4
|
|
|
|
[***]
|
|
|
530-03
|
|
5
|
|
9990689
|
|
Sealing BA 8 18
5
|
|
Y
|
|
[***]
|
|
|
530-02
|
|
124
|
|
5306009
|
|
Sealing piston
complete
|
|
Y
|
|
[***]
|
|
|
503-02
|
|
123
|
|
5306008
|
|
Sealing rod
complete
|
|
Y
|
|
[***]
|
|
|
530-01
|
|
62
|
|
5303042
|
|
Shield plate
|
|
|
|
[***]
|
|
|
530-04
|
|
42
|
|
9990957
|
|
Spring
0,60*6,0*15
|
|
|
|
[***]
|
|
|
530-03
|
|
7
|
|
9990439
|
|
Spring 1,00*12,0*20
|
|
|
|
[***]
|
|
|
530-02
|
|
30
|
|
9990952
|
|
Spring
1,50*7,0*10
|
|
Y
|
|
[***]
|
|
|
530-04
|
|
2
|
|
5304104
|
|
Start plate 1
|
|
|
|
[***]
|
|
|
530-04
|
|
3
|
|
5304105
|
|
Start plate 2
|
|
|
|
[***]
|
|
|
530-05
|
|
46
|
|
5304167
|
|
Tube ground con.
|
|
|
|
[***]
|
|
|
530-04
|
|
54
|
|
9970031
|
|
Tubing pvc Ø
3.0/5.0
|
|
Y
|
|
[***]
|
|
|
530-04
|
|
50
|
|
9970022
|
|
Tubing tef Ø
0.7/1.6
|
|
Y
|
|
[***]
|
|
|
530-04
|
|
51
|
|
9970023
|
|
Tubing tef Ø
1.2/2.0
|
|
Y
|
|
[***]
|
|
|
530-04
|
|
52
|
|
9970041
|
|
Tubing tyg Ø
0.8/2.4
|
|
Y
|
|
[***]
|
|
|
530-04
|
|
53
|
|
9970042
|
|
Tubing tyg Ø
1.6/3.2
|
|
Y
|
|
[***]
|
|
|
530-04
|
|
47
|
|
9970001
|
|
Tubing Ø sil 1,0/3,0
|
|
Y
|
|
[***]
|
|
|
530-04
|
|
48
|
|
9970002
|
|
Tubing Ø sil
1,5/3,0
|
|
Y
|
|
[***]
|
|
|
530-04
|
|
46
|
|
9970005
|
|
Tubing Ø sil
2,0/5,0
|
|
Y
|
|
[***]
|
|
|
530-04
|
|
49
|
|
9970024
|
|
Tubing Ø tef,
1,6/3,2
|
|
Y
|
|
[***]
|
|
|
530-03
|
|
35
|
|
5814142
|
|
Valve part f.
|
|
|
|
[***]
|
|
|
530-03
|
|
10
|
|
5304048
|
|
Valve rear part
|
|
|
|
[***]
|
|
23
[***] —
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.
Appendix
A5
Heska agrees to make
orders of the following Products in units divisible by two. Payment for fifty percent (50%) of the units
of such Products in each shipment shall be made in Euros and fifty percent
(50%) in U.S. dollars. The Euro price
shall initially be EUR [***] and shall be determined annually in accordance
with the second paragraph of Section 4.1 of the Distribution Agreement, subject
to adjustment for actual changes in raw material and labor costs pursuant to
the last paragraph of Section 4.1 of the Distribution Agreement. The U.S. dollar price shall be fixed at USD
[***], subject to adjustment for actual changes in raw material and labor costs
pursuant to the last paragraph of Section 4.1 of the Distribution Agreement.
CA 620-16 Vet, 110/60
CA
620-16 Vet with MPA, 110/60
24
Appendix
C
Boule’s trademarks are:
Boule
Medonic
Swelab
25
December 31, 2004
Boule Medical AB
P. O. Box 42056
SE-126 13 Stockholm,
Sweden
Attention: Ernst Westman, President
Re:
Supply
and Distribution Agreement (“
Distribution Agreement
”) by and between
Heska Corporation (“
Heska
”) and Boule Medical AB (“
Boule
”) dated
June 17, 2003
Dear Mr. Westman:
This letter
confirms our agreement to amend our letter dated June 1, 2004 (the “
First
Amendment
”) to further interpret and supplement the Distribution Agreement
as follows (capitalized terms not otherwise defined herein have the meanings
ascribed to them in the Distribution Agreement):
1.
Pricing and Payment
. Appendix A1 attached to the First Amendment
is hereby deleted and replaced with Appendix A1 attached hereto.
This letter will constitute a written agreement
amending the Distribution Agreement as contemplated by Section 9.10
thereof. If there is a conflict between
the terms of this letter and the Distribution Agreement or the First Amendment,
this letter shall control.
|
|
Very truly yours,
|
|
|
|
|
|
HESKA
CORPORATION
|
|
|
|
|
|
|
|
|
By:
|
/s/ Jason Napolitano
|
|
|
|
|
Jason Napolitano
|
|
|
|
|
Its:
|
Chief Financial Officer
|
|
|
|
|
|
|
|
|
ACCEPTED
AND AGREED:
|
|
|
|
|
|
|
|
BOULE MEDICAL AB
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ Ernst
Westman
|
|
|
|
|
|
Ernst Westman
|
|
|
|
|
|
Its:
|
President
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26
Appendix
A1
This Appendix
forms an integrated part of the Supply and Distribution Agreement between BOULE
and HESKA.
Payment terms
All prices are based on
EX Works delivery terms, not insured.
Insurance could be
organized according to a request from the receiver.
All additional costs are
on the behalf of Heska, such as:
-
L/C
cost
-
Legalization
costs
-
Courier
Minimum order/invoicing
amount: Euro 100
Payment terms
-
Boule
will invoice the purchase price upon shipment of Product from Boule’s facility
and Heska shall pay such invoice within forty-two (42) days from the date of
invoice. This term shall be valid only
as long as Heska complies with said payment term without delays, as judged by
Boule. For full payments received in
advance of shipment Heska will be granted a 2% discount.
-
Interest
rate of 2% per month will be charged for all invoices past due date. Interest invoices will be made, at least,
twice a year.
-
Credit
limit is set to Euro five hundred thousand (500.000).
27
Exhibit 10.25
[***] — 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.
DISTRIBUTION
AGREEMENT
THIS DISTRIBUTION
AGREEMENT (this “
Agreement
”) is made as of October 1, 2004
(the “
Effective Date
”) by and between i-STAT Corporation, a Delaware
corporation having its principal place of business at 104 Windsor Center Drive,
East Windsor, New Jersey 08520 USA (“
i-STAT
”) and an Affiliate of Abbott
Laboratories, and Heska Corporation, a Delaware corporation, having its
principal place of business at 1613 Prospect Parkway, Fort Collins, Colorado
80525, USA (“
Heska
”).
W I T N E S S E T H
:
WHEREAS
,
i-STAT is a manufacturer of diagnostic health care equipment and reagents and
desires to obtain a distributor of Products (as hereinafter defined) in the
animal health care market (“
Field
” as hereinafter defined) in the
Territory (as hereinafter defined);
WHEREAS
,
Heska is a distributor of various products in the Field in the Territory;
WHEREAS
,
Heska and i-STAT previously executed a distribution agreement dated as of
February 9, 1998, which was amended and restated as of February 24, 1999, under
which Heska distributed products for i-STAT in the Field in the Territory (the “
Prior
Agreement
”); and
WHEREAS
, in accordance with the
terms and conditions hereof, i-STAT is willing to appoint Heska as its
exclusive distributor of Products in the Territory, and Heska is willing to accept
such appointment.
NOW,
THEREFORE
, in consideration of the mutual covenants and
agreements contained herein, and upon the terms and subject to the conditions
set forth below, Heska and i-STAT hereby agree as follows:
ARTICLE 1 — DEFINITIONS
The following
words and phrases, when used herein with initial capital letters, shall have
the meanings set forth or referenced below:
1
[***] —
Certain information on this page have been omitted and filed separately with
the Securities and Exchange Commission.
Confidential treatment has been requested with respect to the omitted
portions.
1.1
“
Affiliate
”
shall mean, with respect to each Party (as hereinafter defined), any legal
entity that is, directly or indirectly, controlling, controlled by or under
common control with such Party. For
purposes of this definition, a Party shall be deemed to control another entity
if it owns or controls, directly or indirectly, more than fifty percent (50%)
of the voting equity of the other entity (or other comparable ownership interest
for an entity other than a corporation).
1.2
“
Analyte
”
shall mean an individual compound, protein or fragment thereof, or substance
that is the target of quantitative or qualitative measurement.
1.3
“
Analyzer
”
shall mean a device that processes Cartridges (as hereinafter defined) and is
capable of detecting at least one (1) Analyte for use in the Field, and
specifically excludes analyzers designed primarily for use in patient
self-testing.
1.4
“
Base
Cartridge Target
” shall mean, for each Contract Year (as hereinafter
defined), the minimum unit number of Cartridge purchases required to be made by
Heska and its Affiliates during such Contract Year as set forth in
Section 2.4
and
Section 2.5
.
1.5
“
Business
Day
” shall mean any day other than a day which is a Saturday or Sunday or
other day on which commercial banks in New York, New York are authorized or
required to remain closed.
1.6
“
Calendar
Quarter
” shall mean a period of three (3) consecutive calendar months
commencing on January 1, April 1, July 1 or October 1 of any Contract Year.
1.7
“
Cartridge
”
shall mean the disposable test component of a particular Product that contains
one or more sensor chips and fluid handling channels and operates on an
Analyzer.
1.8
[***}
1.9
“
Cartridge
Purchases
” shall mean, pursuant to
Section 11.2
,
for each Contract Year, the unit number of Cartridges purchased by Heska and
its Affiliates from i-STAT. For the
purposes of this definition, a Cartridge shall be considered purchased in the
Contract Year in which it was delivered after having been duly ordered pursuant
to
Section 3.3
.
1.10
“
Cartridge Sales
” means the number
of units of Cartridges Sold in the Field in the Territory by Heska directly
to: (a) Dealers (as hereinafter defined)
for resale to End Users; or (b) End Users; net of returns and unpaid
Cartridges.
2
1.11
“
Change
of Control
” shall mean: (a) the consolidation or merger of Heska or any
Affiliate of Heska with or into any Third Party wherein the shareholders of
Heska immediately prior to such transaction shall cease to be the holders of at
least fifty percent (50%) of the outstanding securities of the surviving
corporation in such transaction; (b) the assignment, sale, transfer, lease or
other disposition of all or substantially all of the assets of Heska; or (c)
the acquisition by any Third Party or group of Third Parties acting in concert,
of beneficial ownership (within the
meaning of Rule 13d-3 of the Securities and Exchange Commission (“
SEC
”)
under the Securities and Exchange Act of 1934) of more than fifty percent (50%)
of the outstanding shares of voting stock of Heska.
1.12
“
Confidential
Information
” shall mean any and all technical data, information, materials
and other know-how, including trade secrets, presently owned by or
developed by, on behalf of, either Party and/or its Affiliates during the Term
(as hereinafter defined) which relates to a Product, its development,
manufacture, promotion, marketing, distribution, sale or use and any and all
financial data and information relating to the business of either of the
Parties and/or of their Affiliates, which a Party and/or its Affiliates
discloses to the other Party and/or its Affiliates in writing and identifies as
being confidential, or if disclosed orally, visually or through some other
media, is identified as confidential at the time of disclosure and is
summarized in writing within thirty (30) days of such disclosure and identified
as confidential, except any portion thereof which:
(a)
is
known to the receiving Party and/or its Affiliates at the time of the
disclosure, as evidenced by its written records;
(b)
is
disclosed to the receiving Party and/or its Affiliates by a Third Party having
a right to make such disclosure;
(c)
becomes
patented, published or otherwise part of the public domain through no fault of
the receiving Party and/or its Affiliates; or
(d)
is
independently developed by or for the receiving Party and/or its Affiliates
without use of Confidential Information disclosed hereunder, as evidenced by
its written records.
1.13
“
Contract
Year
” shall mean each consecutive twelve (12) month period prior to the
termination of this Agreement, beginning on January 1 and ending on December 31
of each such Contract Year.
1.14
“
Counterfeit
Products
” shall have the meaning set forth in
Section 4.10
.
3
[***] —
Certain information on this page have been omitted and filed separately with
the Securities and Exchange Commission.
Confidential treatment has been requested with respect to the omitted
portions.
1.15
“
Dealer
”
shall mean a natural person, corporation, partnership, trust, joint venture,
government authority or other legal entity or organization in the Territory,
other than Heska or i-STAT and/or their respective Affiliates, which purchases
Products from Heska for the purpose of resale to End Users for use in the
Field.
1.16
[***]
1.17
“
End
User
” shall mean a natural person, corporation, partnership, trust, joint
venture, government authority or other legal entity or organization in the
Field in the Territory, other than Heska or i-STAT and/or their respective
Affiliates, that purchases Products under this Agreement for its own use or
consumption in the Field, and excluding any Third Party use in the human
healthcare market.
1.18
“
Extended
Warranty
” shall have the meaning set forth in
Section 7.1
.
1.19
“
Extension
Term
” shall mean each additional Contract Year, if any, following the
Initial Term or another Extension Term, as set forth in
Section 10.1
.
1.20
“
Field
”
shall mean the animal health care market specifically excluding the human
health care market.
1.21
[***]
1.22
“
Incremental
Cartridge Purchases
” shall have the meaning set forth in
Section 3.6.1
.
1.23
[***]
1.24
“
Initial
Term
” shall mean the time beginning on the Effective Date and ending on December
31, 2009.
1.25 “
Most Favored Price
” shall have
the meaning set forth in
Section 2.14
.
1.26
“
Notice
Date Time
” shall mean the period of time beginning on January 1 and ending
on May 15 immediately following any Contract Year in which Cartridge Purchases
were less than the Base Cartridge Target.
4
[***] —
Certain information on this page have been omitted and filed separately with
the Securities and Exchange Commission.
Confidential treatment has been requested with respect to the omitted
portions.
1.27
“
Notice
Period
” shall mean a period of time, the length of which shall be set forth
in
Section 2.13
, which shall begin upon
the receipt by Heska of i-STAT’s written notice of i-STAT’s decision to
exercise its termination rights as set forth in
Section 2.6
and
during which time Heska shall maintain non-exclusive rights to Sell Products in
accordance with this Agreement.
1.28 “
Party
” shall mean i-STAT or
Heska and “Parties” shall mean i-STAT and Heska.
1.29
“
Products
”
shall mean the products manufactured by or for i-STAT listed on
Exhibit 1.29
.
1.30
“
Purchase
Price
” shall mean the price for Analyzers, Cartridges and other Products
purchased by Heska and its Affiliates from i-STAT and its Affiliates
hereunder, as set forth on
Exhibit 1.29
and more fully described in
Section 3.6.
1.31
[***]
1.32
“
Sale
”,
“
Sell
” or “
Sold
” shall mean to sell, hire, let, rent, lease or
otherwise dispose of Product to a Third Party or Affiliate, provided such
Affiliate is an end user of Products for commercial purposes for monetary or
other valuable consideration. “Sale”, “Sell”
or “Sold” shall not include a transaction where samples of Product are supplied
without charge to a Third Party or Affiliate for marketing or demonstration
purposes or in connection with clinical or other experimental trials.
1.33
“
Technical
Documentation
” shall mean all documents prepared by i-STAT in the ordinary
course of business that describe the Products in terms of their intended use
and Product claims. Such documents may
take the form of user instructions, system manuals, product updates or
technical bulletins, but are not limited to such forms.
1.34 “
Technical Support
” shall have
the meaning set forth in
Section 4.8
.
1.35 “
Term
” shall have the meaning
set forth in
Section
10.1
.
1.36 “
Territory
” shall mean the
entire world except Japan.
1.37
“
Third
Party
” shall mean a natural person, corporation, partnership, trust, joint
venture, governmental authority or other legal entity or organization other
than the Parties and/or their Affiliates.
5
ARTICLE 2 — APPOINTMENT
TO MARKET AND DISTRIBUTE
2.1
Exclusive
Appointment in the Territory
. As of
the Effective Date and subject to
Section 2.4
and
Section 2.5
below, i-STAT hereby appoints Heska and its Affiliates for the Term as i-STAT’s
exclusive distributor of Products in the Field in the Territory, and Heska
accepts such appointment. As exclusive
distributor in the Field in the Territory, Heska shall have the sole and
exclusive right to market, promote, Sell and distribute Products in the
Territory for use in the Field, which right shall operate to exclude all
others, including i-STAT, its Affiliates and all Third Parties;
provided, however
, that i-STAT may
maintain certain consultative and technical staff, at i-STAT’s expense,
to assist Heska in connection with such marketing, promotion, sales and
distribution efforts, in accordance with
Article
4
. In furtherance of this
exclusive grant to Heska and its Affiliates, i-STAT hereby agrees to use its
commercially reasonable efforts to ensure that any Products Sold outside the
Field are not Sold directly or indirectly by i-STAT distributors to End
Users. Nothing contained in this
Agreement shall limit or be interpreted to limit i-STAT or i-STAT’s Affiliates
from directly selling products not listed on
Exhibit
1.29
in the Territory.
2.2
Non-exclusive
Appointment in Japan
. As of the
Effective Date and subject to
Section 2.4
and
Section 2.5
below, i-STAT
hereby appoints Heska and its Affiliates for the Term as i-STAT’s
non-exclusive distributor of Products in the Field in Japan, and Heska accepts
such appointment. Heska shall have the
non-exclusive right to market, promote, Sell and distribute Products in Japan
for use in the Field.
2.3
Heska’s
Obligations
. Heska shall purchase
Products for distribution and Sale in the Field in the Territory exclusively
from i-STAT. Heska shall maintain, at
its own expense, a commercially reasonable inventory of Products for the Sale,
promotion and delivery of the Products and for managing customer satisfaction
with the Products. Heska shall not
promote, market or Sell any Product for use outside the Field. Recognizing the end use of the Products in
healthcare, Heska shall not solicit or Sell any Product to an End User or other
Third Party (including a Dealer) that Heska has, or should have, reason to
believe will redistribute Products or otherwise direct Products for use to
customers outside the Field. Heska
promptly shall take all reasonable actions to prevent Sales of Products to
customers, including Sales by Dealers, known or identified by Heska to be
outside the Field. Upon i-STAT’s
request, if and to the extent Heska or its Dealers Sells Products to customers
outside the Field, Heska shall remit to i-STAT an amount equal to the
difference between: (a) the amount of
sales billed by Heska from Sales of such Products (net of duties, freight,
replacements, returns, refunds and taxes); and (b) the Purchase Price paid to
i-STAT. The Cartridge units Sold outside
the Field shall not be included in Cartridge Purchases for the purpose of
meeting the minimum purchase requirements of
Sections
2.4 and 2.5
.
6
[***] —
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.
2.4
Minimum
Purchase Requirements during the Initial Term
. Subject to
Sections 2.6
,
2.7
and
2.9
, Cartridge
Purchases shall be greater than or equal to the Base Cartridge Target for each
Contract Year during the Initial Term, which, for purposes of this Agreement,
shall be as set forth in the following
Table
2.4
; provided, that Cartridge
Sales shall be at least ninety-five percent (95%) of Cartridge Purchases during
such Contract Year.
Table 2.4
|
Contract Year
|
|
Base Cartridge Target
|
|
Balance of 2004
|
|
[***]
|
|
2005
|
|
[***]
|
|
2006
|
|
[***]
|
|
2007
|
|
[***]
|
|
2008
|
|
[***]
|
|
2009
|
|
[***]
|
For example, if Heska has 2007 Cartridge Purchases of [***] and 2007
Cartridge Sales of [***], Heska shall have fulfilled the requirements of this
Section 2.4
([***] Cartridge Purchases and
Cartridge Sales are 95.3% Cartridge Purchases).
In a separate example, if Heska has 2007 Cartridge Purchases of [***]
and 2007 Cartridge Sales of [***], Heska shall not have fulfilled the requirements
of this
Section 2.4
(since Heska
would have met the Cartridge Purchases requirement, but would have Cartridge
Purchases of 94.9% of Cartridge Sales, less than the required 95%).
2.5
Minimum
Purchase Requirements during any Extension Term
. Subject to
Sections 2.6
,
2.7
and
2.9
,
Cartridge Purchases shall be greater than or equal to the Base Cartridge Target
for each Contract Year during any Extension Term, which for purposes of this
Agreement, shall be calculated as set forth in the following
Table 2.5
; provided, that Cartridge Sales shall be at least
ninety-five percent (95%) of Cartridge Purchases during such Contract Year.
Table 2.5
|
Contract Year
|
|
Base Cartridge Target
|
|
n
|
|
2009 Base
Cartridge Target * [***]
|
7
[***] —
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.
For example, if the [***], then the 2010 Base Cartridge Target will be
equal to [***], calculated as follows: [***]
. In
this example, the 2011 Base Cartridge Target will be equal to [***], calculated
as follows: [***].
2.6
Implications of Failure to Meet Minimum
Purchase Requirements.
i-STAT’s sole remedy for Heska’s failure to meet the Base Cartridge Target in
Sections 2.4
or
2.5
in any
Contract Year shall be to terminate this Agreement upon prior written notice to
Heska as set forth in
Section 2.13
;
provided, however
, that i-STAT shall meet with
Heska to discuss under what terms and conditions, if any, Heska may continue to
distribute Products hereunder; and
provided,
further
, that such failure to meet the Base Cartridge Target shall not be
considered as a breach of this Agreement.
2.7
Failure to Supply Minimum Purchase
Requirements.
If during any Contract Year, i-STAT is
unable to supply Cartridges properly forecasted and ordered hereunder pursuant
to
Article 3
, the Base Cartridge Target
for such Contract Year shall be reduced by the number of such Cartridges ordered
by Heska pursuant to the terms of this Agreement and not supplied by i-STAT
hereunder during such Contract Year.
i-STAT, shall consider in good faith the impact of a material
interruption in supply on Heska’s ability to achieve future Base Cartridge Targets
in subsequent Contract Years and shall consider in good faith reasonable
adjustments to Base Cartridge Targets proposed by Heska for such subsequent
Contract Years;
provided, however
, that any
decision regarding any reduction to future Base Cartridge Targets shall be at
i-STAT’s sole discretion.
2.8
Right
of First Offer
. As long as Heska is
i-STAT’s exclusive distributor of Products in the Field in the Territory,
i-STAT shall, prior to offering any other or new products to any Third Party
for resale in the Field in the Territory, first offer in writing (which for the
purposes of this Section 2.8 may be by e-mail) to Heska the opportunity to
negotiate with i-STAT in good faith to include such products as a Product
hereunder on such terms and conditions as are mutually acceptable to the
Parties.
2.9
Discontinued
Products
. i-STAT shall have the
right to discontinue the manufacture of any Product hereunder. If i-STAT, in its sole discretion, decides to
discontinue the manufacture of any Product, i-STAT shall: (a) provide written notice to Heska as
follows: (i) for Analyzers, upon
twelve (12) months’ prior written notice; and (ii) for all other Products, upon
one hundred eighty (180) days’ prior written notice; and (b) negotiate in
good faith with Heska an adjustment to the Base Cartridge Targets set forth in
Sections 2.4
and
2.5
;
provided
,
that no adjustment shall be made if a discontinued Product is replaced by an
equivalent Product at an equivalent price.
If the
8
Parties are unable to agree on an adjustment, if any, to the Base
Cartridge Targets as a result of good faith negotiations under clause (b) of
the preceding sentence, they will follow the procedures set forth in
Section 11.9
to establish an adjustment, if any. i-STAT may materially alter the
performance of any or all of the Products upon ninety (90) days’ prior written
notice to Heska. i-STAT shall use
commercially reasonable efforts to provide to Heska reasonable quantities of
repair and/or replacement parts, on an as needed basis, for Analyzers for at
least three (3) years from the date of discontinuance of manufacture or sale of
Analyzers or introduction of a materially altered Product for which parts are
not interchangeable. i-STAT also shall
use commercially reasonable efforts to consult with Heska prior to any
discontinuance of the manufacture of any Product or material alteration of any
Product where such alteration, in i-STAT’s reasonable opinion, would impact
applicable regulatory approvals of Heska and / or marketing of the Products by
Heska.
2.10
Selling
Price
. Heska, in its sole
discretion, shall determine the final sales price of Products Sold by Heska to
Third Parties in the Field in the Territory, and no other term or provision in
this Agreement shall be interpreted or deemed to provide i-STAT with any right
to determine the final sales price of Products Sold by Heska hereunder. Heska or its appointed Dealers solely shall
be responsible for seeking and obtaining all pricing approvals from all
applicable authorities in those countries in the Territory where Heska is
distributing Products in the Field.
2.11
Heska’s
Sales Efforts
. Heska shall use
commercially reasonable efforts to offer for Sale, Sell, have Sold, use, have
used, market, have marketed, distribute, have distributed and import Products
in the Field in the Territory, as more fully set forth in
Article 4
.
2.12
Appointment
of Dealers
. Heska shall have the
right to appoint Dealers
for the
sale of the Products in the Field in the Territory. Heska agrees that, if it enters into an
agreement or arrangement with any Dealer to allow such Dealer to offer for
Sale, Sell, have Sold, use, have used, market, have marketed, distribute, have
distributed, import and have imported Products in the Field in any country or
region of the Territory, Heska shall restrict such Dealer’s activities to sales
of Products in the Field for use in the Field by affirmatively restricting the
Dealer from reselling Products to Third Parties outside the Field. Heska shall name i-STAT as the “third party
beneficiary” for the purposes of enforcing this provision in any agreement or
arrangement with a Third Party for Sale of Products in the Field.
2.13
Termination
Notice Provisions
. In the event that
i-STAT exercises its right to terminate this Agreement in any given Contract
Year for failure to meet the Base Cartridge Target in such Contract Year
pursuant to
Section 2.6
, such termination
shall be effective upon expiration of the Notice Period, determined as follows:
9
[***] —
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.
(a) Six (6) months if
[***];
(b)
Twelve
(12) months if [***];
(c)
Eighteen
(18) months if [***];
(d)
Twenty-four
(24) months if [***]; or
(e)
Thirty-six
(36) months if [***].
In order to terminate the Agreement pursuant to
Section 2.6
,
i-STAT must give written notice during the Notice Date Time. Upon receipt of written notice, Heska’s distributorship
rights in the Field in the Territory shall become non-exclusive and remain non-exclusive
throughout the Notice Period.
For example, Heska has [***], Heska receives
written notice of termination from i-STAT on January 15, 2008 and the Parties meet
to discuss this situation on February 1, 2008 but cannot agree on amended terms
under which Heska would continue to distribute Products. Pursuant to
Sections
1.8
and
1.27
, [***], which under
Section 2.13
, results in a Notice Period of
twenty-four (24) months. Thus, in this
example, the Agreement would terminate on January 15, 2010.
2.14
Most
Favored Pricing
. If, during any time
period in which Heska is a non-exclusive distributor hereunder (including any
time period set forth in
Section 2.13
),
i-STAT shall sell Products in the Field in the Territory to any other
distributor, dealer or Third Party at a price lower than the Purchase Price
then paid by Heska hereunder (the “
Most Favored Price
”), then i-STAT
shall give Heska prior written notice of the Most Favored Price and the period
it is to be in effect and Heska shall be entitled to such Most Favored Price
for such Product for so long as such lower price is in effect for any other
distributor, dealer or Third Party in the Field in the Territory.
2.15
Restoration
of Exclusivity and Cancellation of Termination
. If, following any Contract Year in which
Cartridge Purchases were less than the Base Cartridge Target, Heska’s Cartridge
Purchases for the subsequent Contract Year are equal to or greater than Base
Cartridge Target for the subsequent Contract Year, i-STAT shall consider in
good faith restoring exclusivity to Heska as described in
Section 2.1
and canceling the notice of termination
previously sent to Heska;
provided, however
,
that such restoration of exclusivity shall be only to the extent i-STAT
has not made alternative contractual
10
arrangements that would preclude restoring Heska’s exclusivity in any
part of the Territory.
2.16
Competitive
Products
. In furtherance of its
duties and in recognition of the unique healthcare and related responsibilities
in connection with the distribution of the Products, during the Term Heska
shall not anywhere in the Territory promote, market, distribute or Sell any
hand held device performing any tests performed by the Products, including new
Products, if any, added to this Agreement pursuant to the terms and conditions
set forth in this Agreement. Heska shall
exclusively use the i-STAT control products set forth on
Exhibit 1.29
unless i-STAT gives prior written approval for substitution.
2.17
EU
Commission Directive
. In accordance
with the
EU Commission Directive on Vertical Agreements
, the covenant
not to sell competitive products set forth in
Section 2.16
for countries in the European Union (“
EU
”) shall be for no
longer than five (5) years after the Effective Date. Heska agrees that if Heska has maintained
exclusivity as set forth in
Sections 2.4
and
2.5
during the Term, that Heska will
meet with i-STAT to negotiate in good faith the terms, if any, under which the
covenant not to sell competitive products in the EU may be extended (if any).
ARTICLE 3 —
MANUFACTURE, SUPPLY AND DELIVERY OF PRODUCTS
3.1
Manufacture, Sale
and Purchase of Products
. During the
Term, i-STAT shall use commercially reasonable efforts to manufacture or have
manufactured, release, sell and deliver to Heska those units of Products as are
consistent with the forecasting process, lead times and terms and conditions of
this Agreement and as are ordered by Heska hereunder. i-STAT shall manufacture or have
manufactured, release, sell and deliver each such Product in accordance with
each Product’s Specifications and all
applicable rules and regulations applicable to the manufacture or sale of
Products in the Territory in the Field, including as applicable, those rules
and regulations of the FDA, including QSRs (including applicable cGMPs), and in
accordance with all other applicable laws and regulations of countries in which Heska sells Products.
3.2
Rolling
Forecasts
. Thirty (30) days after the
Effective Date, Heska shall provide i-STAT with a monthly forecast of its
requirements of the Products for the first full Contract Year. On or before the fifth (5th) day prior to
the beginning of each subsequent calendar month during the Term, Heska shall
provide i-STAT with a rolling 12-month forecast, the first three (3) months of
which will be firm purchase orders binding on Heska, the last nine (9) months
of each shall consist of Heska’s best estimate forecast of its requirements of
Products.
3.3
Product
Orders
. Heska shall order Products on purchase
orders consistent with the process set forth in
Section 3.2
. All
purchase order forms shall specify the quantities of
11
[***] —
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.
each Product ordered, requested delivery dates, the identity of
Products ordered
, Product
price, and delivery and shipping instructions including carrier selected. All orders will be governed by the terms of
this Agreement. To the extent that any
purchase order, confirmation of acceptance or other document contains terms in
conflict with, or in addition to, the terms of this Agreement, such conflicting
or additional terms shall not be binding on the Parties unless agreed upon in
advance by the Parties.
3.4
Acceptance
of Purchase Orders
. i-STAT shall
within five (5) Business Days notify Heska of any purchase order (or partial
purchase order) accepted, rejected, or delayed, and the reason for any such
rejection or delay. No purchase order
shall be binding upon i-STAT until accepted by i-STAT. Purchase orders not rejected within five (5)
Business Days shall be deemed accepted.
Heska may not modify any purchase order after its acceptance by i-STAT
without i-STAT’s prior consent. All
purchase orders shall provide i-STAT with no less than ninety (90) days notice
to the requested shipping date from i-STAT after receipt of the purchase
order. Heska understands and agrees that
optimum dating of Products shipped cannot be assured for Products shipped in
connection with purchase orders placed less than ninety (90) days prior to the
requested
shipment date of Product
from i-STAT.
3.5
Firm
Order Changes.
If, before submitting
a purchase order form to i-STAT, Heska requests an increase to binding
forecasts for the three (3) month firm forecast timeframe and such increase is
no more than one hundred twenty percent (120%) of the amount of Products (on a
Product-by-Product basis) originally reflected in forecasts, i-STAT shall use
commercially reasonable efforts to accommodate such increases within reasonable
manufacturing capabilities and efficiencies, taking into account other orders
and forecasts. If such increases
reflects an increase of more than one hundred twenty percent (120%) of the
amount of Products (on a Product-by-Product basis) originally reflected in
Heska’s binding forecasts, i-STAT shall advise Heska of any additional costs
associated with manufacturing such increased number of Products in such
timeframe, and if Heska indicates to i-STAT that i-STAT should proceed to
manufacture such increased amount of Products, i-STAT shall use reasonable
commercial efforts to manufacture such increased number of Products, and Heska
shall bear all costs reasonably associated with such manufacturing
increases. Such payments shall be
payable within thirty (30) days of receipt of i-STAT’s invoice for such
charges.
3.6
Purchase
Prices
. Purchase Prices for the
Products are listed on
Exhibit 1.29
.
3.6.1
Rebates
. [***]
12
3.6.2
Pricing Adjustments
. At the end of the Initial Term and each
Extension Term thereafter, Purchase Prices
may be adjusted at i-STAT’s sole discretion for inflationary increases in
production costs. Such increase shall be
at the rate of increase in the U.S. PPI (Producer Price Index) since the
Effective Date of the Agreement for the Initial Term or since the last
inflationary adjustment for each Extension Term.
3.6.3
Increased Manufacturing
Costs
. If i-STAT experiences an increase in Product
manufacturing costs that exceed ten percent (10%) for any Product during any
Contract Year, i-STAT and Heska shall meet and
negotiate in good faith to determine whether an adjustment to the
Purchase Price for that Product is appropriate in the circumstances.
3.6.4
Taxes
. All Purchase Prices for Product are
calculated for delivery as set forth in
Section 3.7
. The Purchase Prices do not include insurance,
freight, customs, duties, taxes, any foreign, federal, state or local taxes
that may be applicable to Products including, without limitation, sales,
excise, value-added, withholding, and other taxes other than taxes based upon i-STAT’s
net income and other similar charges. Customs duties and charges, if any, shall
be borne by Heska. Any and all export
and import licenses or approvals shall be obtained by Heska at its expense. When i-STAT has the legal obligation to
collect such taxes, the appropriate amount shall be added to Heska’s invoice
and paid by Heska unless Heska provides i-STAT with a valid tax exemption
certificate authorized by the appropriate taxing authority.
3.7
Delivery of Product
.
3.7.1
Delivery;
Determination
of Method of Transportation
.
Products shall be delivered FCA (Incoterms 2000) i-STAT’s U.S. warehouse
or other i-STAT warehouse. The method of
transportation of the Products, shipping
destination and the carrier selected shall be as specified by Heska in
its purchase orders.
3.7.2
Risk of Loss
. Risk of loss for Products shall pass to
Heska, FCA (Incoterms 2000) i-STAT’s
warehouse site.
3.7.3
Title
. Title shall pass to Heska when Products are
transferred to Heska’s designated courier at i-STAT’s warehouse site.
3.8
Payments
Due; Credit Limits
. All payments due
and payable hereunder shall be made by check or wire transfer within thirty
(30) days from the date of the invoice. All
payments shall be made without set-off or counterclaim and free and clear of
and without deduction for any other charges of any kind. The invoiced amount shall be paid by Heska to
i-STAT by: (a) wire transfer to the bank
listed on
Exhibit 3.8
or otherwise
13
specified by i-STAT, or (b)
certified bankers check. i-STAT reserves
the right to change the payment or credit terms at any time upon ninety (90)
days’ prior notice to Heska. Any invoiced
amount not received within thirty (30) days of the date the payment was due
shall be subject to a service charge of the lesser of one and one-half percent
(1.5%) per month or the maximum rate permitted by law. All exchange, interest, banking collection
and other charges shall be at Heska’s expense.
Decreases in Heska’s credit limit will be based on i-STAT’s evaluation
of Heska’s financial performance over the previous six (6) months and/or Heska’s
payment history with i-STAT over the past immediate twelve (12) months. If Heska disagrees with any notice of a
change in payment terms or decrease in credit limit, Heska may dispute the
decision with the President of Abbott’s Point of Care business and discuss
options for resolution. The resolution
to the disputed decrease in credit limit shall be at the sole discretion of the
President of Abbott Point of Care division.
If Heska believes the resolution reached by the President of Abbott
Point of Care is inequitable, Heska may enter into alternative dispute
resolution with i-STAT. Notwithstanding
anything in this Agreement or any exhibit attached hereto to the contrary: (y) all costs for Heska and i-STAT associated
with such alternative dispute resolution shall be borne solely by Heska,
regardless of the decision by the neutral in the alternative dispute resolution
process; and (z) such alternative dispute resolution, if requested by Heska for
this issue, shall be only for this specific issue, and no other issue shall be
added to the process.
3.9
Currency
Basis
. All prices including Product
Prices for Products and payments therefor shall be in U.S. dollars.
3.10
Acceptance
of Product
. Heska shall not be
obligated to accept any Product that does not meet the applicable i-STAT
specifications as set forth in the Analyzer’s operators’ manuals, or the
Cartridges’ product inserts, if any, as registered in the Territory. i-STAT shall provide Heska with thirty (30)
days’ advance notice of a change or issuance of new Analyzer operator manuals
or Cartridge product inserts. Heska
shall inspect all Products upon delivery in a commercially reasonable manner. Failure by Heska to give notice of defective
or damaged Product within the time periods specified in
Section 3.11
shall be deemed a waiver of i-STAT’s obligations as stated herein,
with respect to such defect or damage only.
3.11
Defective
and Improper Delivery; Product Returns
.
If Heska or a Dealer or End User claims that: (a) any Product shipped
directly by i-STAT hereunder was damaged in transit to the End User; (b)
incorrect Product was shipped; or (c) that there was a shortage in the
shipment, and notice in writing of such damage, incorrect shipment or shortage
is provided to i-STAT within thirty (30) days of receipt of the shipment by the
End User then, upon receipt of such notice, i-STAT’s sole obligation shall be
to either replace any damaged or incorrectly shipped Product, make up any
shortfall or refund any Purchase Price paid by Heska, at i-STAT’s option. If any Product is claimed by Heska, a Dealer
or End User to be defective and i-STAT is notified in writing of such
14
defect within thirty (30) days of receipt of the Product by the End
User or, in the case of a latent defect, i-STAT is notified in writing within
fifteen (15) days of discovery of such latent defect within the warranty period
stated in
Section 7.2
, then i-STAT’s
sole obligation shall be to either repair of replace any Product found by
i-STAT to be defective. If Heska claims
a credit pursuant to this
Section 3.11
,
such claim shall be accompanied by the original invoice issued by Heska to the
End User or Dealer returning the Product.
Upon request by i-STAT, Heska shall deliver to i-STAT, at Heska’s cost,
any returned Product with regard to which the credit is claimed. i-STAT solely shall determine in good faith
the amount of any credit due Heska, if any, and to the extent any returned
Product is defective, reimburse Heska for reasonable freight expenses directly
related to delivering said Product to i-STAT.
In the event that i-STAT issues a Product recall and requests that Heska
return Products to i-STAT as a result of such recall, i-STAT shall
reimburse Heska for reasonable freight expenses directly related to such
recall. There will be no Product returns
accepted except as set forth in this
Section
3.11
.
ARTICLE 4.
MARKETING OF PRODUCTS
4.1
Marketing
. Heska shall, at its own expense, use
commercially reasonable efforts to market and promote the Products in the
Territory. Heska’s promotional
activities shall include, but shall not be not limited to: (a) including the
Products in its appropriate catalogs, promotional mailings and like
publications, (b) developing, preparing and placing advertising concerning the
Products in appropriate media or through appropriate direct mail; (c)
exhibiting the Products at appropriate trade shows and exhibitions, (d)
conducting appropriate market research as it deems necessary or desirable; and
(e) rendering other services customarily rendered by a distributor of
veterinary medical products;
provided
, that by October 31 of each
Contract Year, Heska shall provide i-STAT with a list of all proposed trade
shows and exhibitions that it plans to attend in the next Contract Year. Heska may develop printed sales and promotional
materials relating to the Products in the local language at its own expense. Heska shall provide such materials, if any,
which have not been previously approved to i-STAT for i-STAT’s review and
approval, which approval shall not be unreasonably delayed or withheld. i-STAT shall review such materials
within fifteen (15) Business Days, and i-STAT’s failure to object to any
materials within such fifteen (15) Business Days of sending shall be deemed
approval. If i-STAT objects to the material,
Heska shall modify such materials accordingly.
4.2
Catalogs,
Bulletins
. At Heska’s written
request, i-STAT shall provide Heska with reasonable quantities of brochures, instructional
material, advertising literature and other relevant Technical Documentation
regarding the Products, at no charge to Heska.
Such documents shall be in the English language, and may be in other
languages to the extent already available.
Heska, at its own cost, may provide a translation of the
15
documents into the local language.
Such translations shall be made available to i-STAT for review and
comment before dissemination.
4.3
Follow-up
Training
. At Heska’s reasonable
written request, i-STAT shall provide follow-up training, as mutually agreed by
the Parties, at Heska’s facility. i-STAT
shall pay for its employees’ salaries and their travel and travel-related
expenses, including meals, lodging and other living expenses. For training situations not covered by this
Section 4.3
, the Parties shall discuss how
to equitably share the travel and related expenses.
4.4
Strategy
Meetings
. Periodically during the
Term (but not less than once per Contract Year) while Heska is the exclusive
distributor of Products in the Field in the Territory, Heska and i-STAT shall
review topics which may include Heska’s marketing and selling strategy,
training of End Users, inventory, and other practices with a view toward
maximizing End Users’ use of and satisfaction with Products.
4.5
Quality
Assurance Audit
. Heska agrees that
upon a minimum fifteen (15) days notice from i-STAT, representatives of i-STAT,
during normal business hours, shall be permitted to visit all locations where
Heska maintains inventory of Products to conduct a quality assurance audit of
such facilities and/or an on-site surveillance of the inventory storage tracking. i-STAT shall have the right during reasonable
business hours, to inspect the books and records of Heska relating to Product
complaint documentation. In the event
that an audit reveals items that i-STAT determines should be corrected by
Heska, i-STAT shall provide, in writing, within thirty (30) days of such audit,
a list of such items and any proposed corrective action to be taken by
Heska. Heska shall respond within
fifteen (15) days of receiving i-STAT’s notification of the corrective action
to be taken and an estimated completion date.
If the parties disagree as to whether corrective action is necessary,
the matter shall be resolved in accordance with the alternative dispute
resolution procedures set forth in
Section
11.9
.
4.6
Sales
Personnel
. Heska, at its sole cost
and expense, shall engage, compensate, supervise, train and maintain such
competent, qualified personnel as may be reasonably required to, deliver,
promote, market, sell, distribute, provide technical service and support for
the Products, and End User complaint handling in the Territory.
4.7
Training
For Heska and End Users
. i-STAT
shall provide Heska personnel such training, at i-STAT’s expense, as
Heska may request in writing and that i-STAT, at its sole discretion, deems
reasonable. Notwithstanding the above,
all expenses incurred by Heska’s personnel in connection with such training,
including without limitation, travel and other per diem expenses shall be borne
by Heska. Heska, at its own cost, shall
provide adequate Product training for its End User’s on the use and storage of
the Products. Heska, prior to shipment
of Products to an End User, shall provide to each such End User Product storage
and use instructions, and shall provide its End Users
16
with commercially reasonable training and support within two (2) months
after delivery of the first shipment of Products to an End User. Heska shall use commercially reasonable
efforts to ensure that all introductory training is made available to End Users
within the first week after receipt of Analyzers and Cartridges. Heska shall, in its discretion, make
appropriate use of training materials and Technical Documentation supplied by
i-STAT.
4.8
Technical
Support
. Heska agrees to be responsible
as the first point of contact for technical support with the End User. Heska will further provide technical support
on the usage of Products by the End Users based upon information supplied by
i-STAT, at no cost to i-STAT. The term “
Technical
Support
” shall mean, without limitation, problem resolution, explanation of
functionality and collection of incident reports. i-STAT will provide technical service
support to Heska as i-STAT deems reasonably necessary, but not to any Dealers
appointed by Heska.
4.9
Modified
and New Products
. Heska agrees to
provide timely comprehensive information to its Dealers or End Users, as
appropriate, with respect to newly available Products, discontinuance of
Products and changes in existing Products, including, but not limited to,
performance specification changes and required software upgrades in Analyzers
(which may or may not be coupled to specific lots of Cartridges). Heska agrees to use commercially reasonable
efforts, which shall depend on the circumstance involved and whether the End
User is utilizing Products, to ensure that each End User in the Territory makes
any such performance specification changes and software upgrades in a timely
manner.
4.10
Counterfeit
Products
. If Heska is offered the
opportunity to purchase or otherwise becomes aware of any counterfeit products
similar in look and/or function to Analyzer or Cartridge Products (as listed on
Exhibit 1.29
) manufactured by an entity
other than i-STAT (“
Counterfeit Products
”), Heska shall promptly
notify i-STAT thereof. Heska covenants
and agrees not to purchase any Counterfeit Products, and the failure of Heska
to comply with the foregoing covenant and agreement shall constitute grounds
for immediate termination of this Agreement by written notice to such effect
sent by i-STAT. Such termination
of this Agreement shall be effective as of the date of receipt of any such
notice by Heska. In addition, Heska
acknowledges that its purchase of Counterfeit Products will cause i-STAT
irreparable harm and that i-STAT shall have the right to equitable and
injunctive relief, in addition to money damages, in the case of such action by
Heska.
i-STAT acknowledges and agrees that Counterfeit Products do not include,
and Heska shall be permitted to sell and/or license in the Field, any products
that Heska offers to Heska’s End Users that would allow Heska’s End Users to
print test results from an Analyzer on standard sized paper and combine such
results with test results from other diagnostic products Heska sells in the Field.
17
4.11
Inventory
Levels
. Heska shall maintain a
commercially reasonable supply of Product to meet the demands of End Users,
taking into account the order and shipping lead times set forth in this
Agreement.
4.12
Warranty
Services
. Heska shall provide a technical
liaison and assistance to End Users for warranty service of the Products, at no
cost to i-STAT or the End Users. In
addition, at the written request of i-STAT, Heska shall perform certain
warranty repairs during the term of the warranty, which shall be billed to and
paid by i-STAT at mutually agreed upon labor rates.
4.13
Books
and Records
. Heska shall maintain
books and records in keeping with standard industry practice regarding the
performance of its obligations hereunder including monthly Cartridge unit Sales
to Dealers and End Users that Heska Sells to directly, aggregated monthly in
each country or region, and shall retain such records during the Term and for
three (3) years thereafter. Heska shall
provide to i-STAT annually within thirty (30) days following the end of
each Contract Year, a report that provides Cartridge unit Sales to Dealers and
End Users that Heska Sells to directly, aggregated monthly in each country or
region, and the calculation of the percentage of Cartridges Sold to customers
by country or region, beginning with the first report of Contract Year
2005. Such books and records shall be in
accordance with generally accepted accounting principles reflecting each
Product’s unit Sales and per country or region in the Territory. Upon thirty (30) days’ prior written notice
to Heska (but not more frequently than once in any Contract Year, unless there
is a dispute, then as frequently as is necessary), Heska’s books and records
relating to the matters described herein shall be open for inspection. To conduct such inspection, i-STAT shall
retain, at its own expense, an independent certified public accountant
reasonably acceptable to Heska. Such
examination shall occur at Heska’s principal place of business during normal
business hours for the sole purpose of verifying the accuracy of such
calculations. Such independent
accountant shall be required to execute a mutually acceptable confidentiality
agreement and shall report to i-STAT only the amount of any discrepancy, if
any, in the calculations. Such
examination rights may be exercised by the Parties only with respect to records
for the then-current Contract Year and the immediately prior Contract
Year. i-STAT shall bear the cost of such
audit, unless the audit reveals an underreporting of unit Sales of greater than
one percent (1%) or a value of Ten Thousand US Dollars (US $10,000) (whichever is the greater), in which
case Heska shall reimburse i-STAT for its reasonable expenses incurred in
connection with such audit.
4.14
Corrupt
Practices
. Heska shall not use any
compensation hereunder as payment to any government official or employee of any
country in the Territory for the purpose of influencing such person’s decisions
or actions regarding the Products.
18
ARTICLE 5. INTELLECTUAL PROPERTY RIGHTS
5.1
i-STAT
Markings
. Heska shall not omit or
alter patent numbers, trade names or trademarks, numbers or series or any other
i-STAT markings affixed on the Products obtained from i-STAT or alter Product
labeling. Heska shall, however, be
entitled to mark the Products with its trademark or trade name in prominent
place, subject to i-STAT’s prior written consent, not to be unreasonably
withheld. Heska is not authorized to use the trademark and trade name “i-STAT”
or any other trademark or trade name of i-STAT in any manner except to indicate
that i-STAT is the manufacturer of the Products and, consistent with the
provisions of
Section 5.2
and
during the Term of this Agreement and only in the Field in the Territory, that
Heska is an independent distributor for i-STAT and is selling i-STAT’s
Products. Heska shall acquire no rights
in the i-STAT trademark and trade name, or any other trademark owned by i-STAT.
5.2
Use
of Trademarks and Tradenames
. i-STAT
hereby authorizes Heska to use, on a nonexclusive basis for the Term, without
cost to Heska other than payment for the Products, the trademark “i-STAT” and
any other trademarks, service marks or tradenames used by i-STAT to identify
the Products (the “
Marks
”), solely to identify i-STAT as the
manufacturer of the Products and for Heska’s distribution of Products and
related performance under this Agreement.
The Marks and the goodwill associated therewith are and shall remain the
exclusive property of i-STAT. Heska
shall not: (a) use the Marks as
part of any composite mark including any elements not approved in advance in
writing by i-STAT; (b) challenge the validity or enforceability of the Marks
(unless such restriction is illegal); (c) acquire any proprietary rights in the
Marks by reason of any activities under this Agreement or otherwise. All uses of the Marks by Heska and any
additional goodwill created thereby shall inure to the exclusive benefit of
i-STAT. i-STAT, at all times during the
Term on reasonable notice, shall have the right to inspect the materials and
services on or in connection with which the Marks are used in order to assure
i-STAT that its quality standards relating to the Products and Heska’s
servicing and other Mark-pertinent provisions of this Agreement are being
observed. If at any time i-STAT shall
reasonably object to any use to which the Marks are put, Heska shall promptly
cease any such use.
5.3
License
to Use Computer Software
. All
software, on whatever media and in whatever form, i-STAT shall deliver to Heska
hereunder (the “
Software
”) is and shall remain the property of i-STAT
and its suppliers and licensors thereof and shall only be used in accordance
with the terms of this Agreement and any End User License Agreements (each, a “
EULA
”)
distributed therewith. Software contains
copyrighted and proprietary trade secrets of i-STAT (and its suppliers
and licensors), and Heska shall keep the Software in confidence. Heska shall not copy, use or disassemble the
Software unless agreed by i-STAT.
Heska shall have the right to reproduce Software only for: (a) one backup/archival copy; and (b)
installation on and use with equipment designated by i-STAT as suitable
therefor and for use solely with the Products distributed by Heska.
19
Heska shall reproduce the copyright and other proprietary notices of
i-STAT and Third Parties present in the Software delivered to Heska. Heska’s license to use and distribute the
Software shall terminate on the earlier of:
(w) termination of this Agreement; (x) discontinuance of use of the
designated equipment for the Software; (y) discontinuance of payment of
periodic license and maintenance fees, if any; or (z) breach by Heska of
any of the above given terms; provided, that End Users’ license rights shall
continue in accordance with each EULA.
All copies of Software with respect to which the license hereunder is
terminated shall be returned to i-STAT within thirty (30) days after such
termination. Heska shall deliver to each
End User a copy of i-STAT’s EULA, which shall inform them that such
Software is and shall remain the property of i-STAT and its suppliers and
licensors. Copies of the translated
materials shall be provided by Heska to i-STAT for inclusion in the technical
file before any CE marked Product is distributed in Heska’s territory in the
Field.
ARTICLE 6. REGULATORY MATTERS
6.1
Regulatory
Compliance
. Heska shall advise
i-STAT promptly of all government regulations outside of the United States
affecting the importation, use, Sale, record maintenance and disposal of the
Products, and shall be responsible for compliance therewith. Without limiting the foregoing, Heska shall
obtain from competent governmental authorities outside the United States such
import permits, licenses, exemptions from customs duties and governmental
approvals and consents required in connection with the execution and
performance of this Agreement. All
governmental permits, registrations, licenses, exemptions and consents outside
the United States specifically relating to Products shall be sought, where
applicable and where possible, in the name of and shall, at the end of the
Term, be the exclusive property of i-STAT.
Heska shall not take any action which would, or fail to take any action
where such failure would, directly or indirectly result in or constitute a
violation by Heska of any applicable law, treaty, ruling or regulation in the
Territory relating to the Products, including, without limitation, laws and
regulations relating to the export, resale and distribution of the Products and
laws and regulations requiring the reporting of adverse medical events to
government authorities in the Territory. When needed for sales or regulatory
compliance purposes, Heska shall provide at
Heska’s expense any additional translations of labels, labeling, and
instructions consistent with the regulatory requirements of the competent
authority in each country of the Territory and shall ensure that all users are
provided with such translated materials.
6.2
Compliance
with U.S. Regulations
. Heska
understands and acknowledges that i-STAT is subject to regulation by agencies
of the U.S. Government, including but not limited to, the U.S. Department of
Treasury which prohibit the sale, export or diversion of products and
technology to certain countries (“
Prohibited Countries
”), which
countries, as of the Effective Date, are Iran, Sudan and Cuba. Heska hereby warrants that it shall not Sell,
20
directly or indirectly, any Products to Dealers or End Users which it
knows or reasonably should know will resell or export the Product to Third
Parties in Prohibited Countries.
Furthermore, any and all obligations of i-STAT to provide the Products,
as well as any other technical information and assistance, is subject to United
States laws and regulations which govern the license and delivery of technology
and products abroad by persons subject to the jurisdiction of the United
States, including without limitation the Export Administration Act of 1979, as
amended, any successor legislation, and the Export Administration Regulations
issued by the Department of Commerce, Bureau of Industry and Security. Heska agrees to cooperate with i-STAT in
order to maintain compliance with the applicable export regulations.
6.3
Notice
of Certain Events; Adverse Event Reporting
.
Each Party shall promptly notify the other after it becomes aware of any
of the following events: alleged infringement of the Trademarks or patents
applicable to a Product by any third party; alleged infringement of the
trademark, patent or proprietary rights of others in connection with actions
taken hereunder; liability claims relating to a Product and any other event
that may reasonably be expected to have a material adverse effect upon the sale
or distribution of a Product in the Territory.
6.4
Product
Changes; Labeling
. Heska may affix
its label on catalogs and Products being distributed by Heska in the Field in
the Territory during the Term;
provided
, i-STAT shall have been provided
with a catalog and a photograph of each Product with Heska’s label affixed in
the same manner in which the Products will be distributed and shall have
approved such label, such approval not to be unreasonably withheld and such
approval not required for Products being sold with the Heska label affixed as
of the Effective Date. If i-STAT shall
reasonably object to the manner in which such label is affixed, Heska shall
promptly cease any such use and change its use to comply with the i-STAT’s
requirements. Heska shall bear the cost
of packaging and labeling changes requested by Heska and approved by i-STAT.
6.5
Traceability
. i-STAT and Heska shall each maintain such
traceability records with respect to the Product as shall be necessary to comply with applicable laws and
local “Good Manufacturing Practices” regulations
.
6.6
Reliability
Reporting
. Each Party shall promptly
report in writing to the other any substantial failure of the Product, material
change in the statistically demonstrated reliability of the Product or other
material information relevant to the reliability of a Product of which such
Party becomes aware.
6.7
Recall
or Advisory Actions
. If either Party
proposes to recall a Product or issue an advisory letter regarding reliability
of or defects in a Product, then such Party shall first notify the other in
writing or by telecommunication in a timely manner prior to making such recall
or issuing such advisory letter. Each
Party shall endeavor to reach an
21
Agreement with the other regarding the manner, text and timing of any
publicity to be given such matters in time to comply with any applicable
regulatory requirements, but such Agreement shall not be a precondition to any
action that a Party deems necessary to protect users of a Product or to comply
with any applicable governmental orders.
In the event i-STAT should request Heska to recall a Product, Heska
shall take all appropriate actions to recall such Product. i-STAT shall bear the expenses of any recall
requested by it or resulting from defective manufacture, or packaging by
i-STAT. Heska shall bear the expenses of
any recall resulting from improper storage, handling or delivery by Heska. In cases where the recall is unrelated to any
fault of either Party, the expense of the recall shall be borne by the Parties
equally. For the purposes of this
Agreement, expenses of recall include, without limitation, the expense of notification
and destruction or return of the recalled Product, but not the expense
or service fees associated with salesmen’s
time which shall be borne by Heska.
6.8
Translation
of Technical Documents
. Consistent
with
Section 4.2
, as required by local
regulatory laws or regulations, Heska shall translate Technical Documents into
the local language(s) of End Users and shall revise such translation in accordance
with the changes to the Technical Documents that may be made from time to time
by i-STAT. Such translation shall at a
minimum meet all regulatory requirements of the Territory and be of a standard
deemed appropriate for veterinary products and comparable with that provided
for other products sold into the animal health care market in the
Territory. Heska will provide any
documents translated into the local language to i-STAT for review and shall
revise such translation according to i-STAT’s comments.
ARTICLE 7. REPRESENTATIONS AND WARRANTIES
7.1
Product
Warranty to End Users
. Heska shall
pass through to End Users i-STAT’s standard written limited warranty for all
Products. Heska shall not alter or
expand such warranty; provided, however, that nothing in this Agreement limits
Heska’s ability to provide its own warranty on any of the Products to its End
Users (an “
Extended Warranty
”) so long as Heska is responsible for
satisfying any obligations under such Extended Warranty.
7.2
Warranty
. i-STAT shall extend to Heska and to Heska’s
Dealers or End Users standard product warranties, as modified from time to time
upon thirty (30) days prior written notice to Heska, the current version of
which is attached as
Exhibit 7.2
;
provided,
however
,
that any modification
to any such product warranties shall apply only to Products the Sales of which
are made after the effective date of such product warranties.
7.3
Heska’s
Warranty
. Heska represents and
warrants that it has obtained or will obtain all required approvals of local
governments in connection with this Agreement.
22
7.4
Disclaimer
of Warranties
. EXCEPT FOR THE
LIMITED WARRANTIES PROVIDED IN
SECTIONS 7.1
AND
7.2
, i-STAT MAKES NO OTHER
REPRESENTATIONS OR WARRANTIES OF ANY KIND, AND THE WARRANTIES OF i-STAT ARE IN
LIEU OF ALL OTHER WARRANTIES, INCLUDING BUT NOT LIMITED TO ANY IMPLIED WARRANTY
OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR OF NONINFRINGEMENT OF
ANY THIRD PARTY PATENTS, COPYRIGHTS OR MARKS.
EXCEPT FOR THE WARRANTY PROVIDED FOR IN
SECTIONS 7.1
AND
7.2
, i-STAT MAKES NO WARRANTY OF
ANY KIND TO END USERS OF HESKA HEREUNDER.
ARTICLE 8. INDEMNIFICATION
8.1
Indemnification
by Each Party
. During the Term and
for two (2) years thereafter, i-STAT and Heska shall each at all times
indemnify and hold the other Party and their respective Affiliates,
stockholders, directors, officers, employees and agents harmless from and
against all liabilities, losses, claims, damages and expenses, including
reasonable attorneys’ fees and disbursements (“Claims”), to the extent that
such
arise out of or are in
connection with a breach of any covenant, agreement, warranty or representation
made by it herein; provided, however, that i-STAT shall not hold Heska and its
respective Affiliates, stockholders, directors, officers, employees and agents
harmless to the extent that such Claims arise out of or are in connection with
a breach of any covenant, agreement, warranty or representation made by Heska
regarding the Products (including but not limited to any Extended Warranty). In the event of any Third Party action, the
indemnified Party shall have the right to participate in the defense, at its
own expense, with counsel of its own choosing.
8.2
Indemnification
by Heska
. Heska shall indemnify i-STAT
against all claims, losses, damages, liabilities and expenses, including
reasonable attorneys’ fees and disbursements, incurred by i-STAT arising with
respect to the sale, distribution or use of a Product to the extent caused by
any action or omission of Heska or its stockholders, directors, officers,
employees or agents. Heska shall
indemnify, defend and hold i-STAT harmless against all claims, liabilities,
costs and expenses (including the reasonable fees of attorneys and other
professionals) incurred by, or threatened against, i-STAT in connection with
any representation or warranty by Heska (including any Extended Warranty of the
Products provided by Heska) or Heska’s personnel inconsistent with: (a) the foregoing limited warranty and
disclaimer of i-STAT; or (b) publications of i-STAT concerning the Products.
8.3
Infringement
Indemnification by i-STAT.
i-STAT
shall indemnify Heska against all claims, losses, damages, liabilities and
expenses, including reasonable attorneys’ fees and disbursements, incurred by
Heska arising with respect to, out of or in connection with any claim that the
Products or the Software infringe any copyright, patent, trade
23
secret, trademark, or other proprietary right of any third party;
provided that i-STAT is notified promptly in writing of the claim and Heska
provides reasonable assistance in the settlement or defense of such claim;
provided, that Product or Software are not altered by Heska except as
specifically directed by i-STAT. If a
Product or Software is held to constitute an infringement and its use as
contemplated by this Agreement is enjoined or threatened to be enjoined, i-STAT
shall at its option and expense:
(a) procure for Heska the right to continue to Sell and distribute
the Products or the Software; (b) replace or modify the Products or the
Software with a version that is non-infringing; or (c) discontinue manufacture
and/or sales of the Product in affected countries. In the event that i-STAT discontinues the
manufacture and/or sale of a Product pursuant to this
Section 8.3
in any affected country, such
discontinuance shall not be considered a breach of this Agreement, and the
Parties shall negotiate in good faith an adjustment, if any, to the Base
Cartridge Targets set forth in
Sections 2.4
and
2.5
.
If the Parties are unable to agree on an adjustment, if any, to the Base
Cartridge Targets as a result of good faith negotiations under the preceding
sentence, they will follow the procedures set forth in
Section 11.9
to establish an adjustment, if any.
8.4
Limitation
of Liability
. UNDER NO CIRCUMSTANCES
SHALL A PARTY BE RESPONSIBLE TO THE OTHER PARTY FOR INDIRECT, SPECIAL,
INCIDENTAL OR CONSEQUENTIAL DAMAGES ARISING OUT OF OR IN CONNECTION WITH THE
SALE, DELIVERY, NONDELIVERY, SERVICING, USE, MAINTENANCE, SUPPORT, CONDITION OR
POSSESSION OF PRODUCTS.
ARTICLE 9. CONFIDENTIALITY
9.1
Confidentiality
. Neither Party shall use for any purpose,
other than as contemplated by this Agreement, or divulge to any Third Party,
any Confidential Information provided to such Party by the other Party, except
as may be required by law or judicial order.
9.2
Public
Announcements
. Neither Party shall
make any public announcement concerning this Agreement, nor make any public
statement which includes the name of the other Party or any of its Affiliates,
or otherwise use the name of the other Party or any of its Affiliates in any
public statement or document, except as may be required by law, including the
requirements of the SEC, or judicial order, without the written consent of the
other Party, which written consent shall not be withheld unreasonably.
24
ARTICLE 10. TERM AND TERMINATION
10.1
Effective
Date and Term
. The initial term of
this Agreement shall commence as of the Effective Date and expire as of December
31, 2009 (the “
Initial Term
”), unless sooner terminated as expressly
provided in this
Article 10
or
Section 2.6
. THIS AGREEMENT WILL RENEW AUTOMATICALLY FOR
ADDITIONAL ONE (1) YEAR TERMS (EACH, AN “
EXTENSION TERM
”), UNLESS SOONER
TERMINATED AS EXPRESSLY PROVIDED IN THIS
ARTICLE 10
OR
SECTION 2.6
. The
Initial Term and all Extension Terms are sometimes referred to herein as the “
Term
.”
10.2
Termination
For Cause By Either Party
. In
addition to the rights of the Parties to terminate this Agreement as provided
hereinabove, either Party may terminate this Agreement for cause upon written
notice to the other Party in the event the other Party: (a) appoints a
receiver, executes an assignment for the benefit of creditors or files or
otherwise becomes subject to bankruptcy or insolvency proceedings; or (b)
materially breaches this Agreement and fails to cure such breach within sixty
(60) days after receipt of written notice of breach from the non-breaching
Party, as such cure period may be extended for such additional period as the
non-breaching Party reasonably determines that the breaching Party is
diligently pursuing a cure of such breach.
10.3
By
i-STAT for a Change of Control under Certain Circumstances
. If Heska undergoes a Change of Control, Heska
or the controlling entity following the Change of Control shall notify i-STAT
within thirty (30) days of such Change of Control. Such notice shall inform i-STAT of the
identify of the entity involved in the Change of Control with Heska, and of the
parent corporation, if any, of the entity involved in the Change of Control
with Heska. i-STAT shall have the
right to terminate this Agreement within six (6) months of such notice if Heska
has a Change of Control to an entity that, in i-STAT’s sole opinion, competes
with i-STAT or its Affiliates or, in i-STAT’s reasonable business judgment,
would harm i-STAT’s position in, the human blood and/or veterinary diagnostics
market; provided, that if Heska believes that i-STAT’s determination is
unreasonable, the Parties shall follow the procedure set forth in Section 11.9
to make the determination.
10.4
Effect of Termination
. Upon the termination of this Agreement:
(a)
The
Parties shall immediately cease the use of any Confidential Information of the
other Party and, in the case of Heska, of the Marks, except as permitted in
this
Section 10.4
.
25
(b)
Unless
this Agreement is terminated by i-STAT for Heska’s breach or bankruptcy, and
subject to i-STAT’s rights as provided in this
Section 10.4
,
(i) i-STAT shall honor all accepted purchase orders providing for
delivery of Product within thirty (30) days of the date of termination and for
which Heska pays in full prior to shipment, and (ii) Heska may Sell Products on
a nonexclusive basis but otherwise on the terms set forth in this Agreement its
remaining inventory of Products for a period of up to ninety (90) days
following the date of termination.
(c)
i-STAT
shall have the right (but not the obligation), upon prior written notice to
Heska given within ten (10) days after termination to purchase from Heska all
or any portion of the Products in its inventory at the time of such termination
for credit against outstanding invoices, or for cash refund to the extent there
are no invoices then outstanding. Any
credit or refund due Heska for such Product shall be equal to the Purchase
Price of the Product, less any discounts or credits previously received.
(d)
Heska
shall return to i-STAT all promotional and sales training materials provided to
Heska by i-STAT under this Agreement.
(e)
To
the extent permitted by law, Heska shall assign to i-STAT and deliver to i-STAT
any import permits, health resignations, licenses, exemptions from customs
duties and governmental consents of any nature specifically relating to i-STAT
Products, which Heska may have or retain directly or indirectly in connection
with the Products imported, Sold and/or distributed under this Agreement, which
it has not yet assigned or waived, or which have not yet been delivered prior
to termination.
(f)
Heska
shall not, in the final six months of any notification of termination (or such
actual time after notice and before actual termination, if shorter), undertake
any actions intended or designed to cause End Users or Dealers to purchase
higher than normal levels of inventory of Products.
10.5
Continuing
Obligations
. Upon any termination of
this Agreement (except termination for cause by Heska due to i-STAT’s breach),
at i-STAT’s election and in accordance with i-STAT’s instructions, Heska
shall: (a) cooperate in referring End
Users to i-STAT or to such other persons as i-STAT may direct for continuing
purchase of Products and related services; (b) transfer to i-STAT or its
nominees all outstanding maintenance contracts for the Products; and (c)
provide i-STAT with a list of each
End User who purchased Product through Heska, including records of all Software
updates performed.
26
[***] — 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.
Following termination of this Agreement for any reason, Heska shall
have no further obligations to End Users with respect to Software updates and
maintenance or technical support.
Nothing in this Agreement shall be construed as preventing Heska from
soliciting End Users for other products following the termination of this
Agreement.
10.6
Survival
. The following Articles and Sections shall
survive termination of the Agreement:
Articles 1, 7, 8, 9, 10
and
11
and
Sections
3.6, 3.8, 3.9, 3.11
,
4.12
and
4.13
. In addition, all provisions that survive
termination, that are irrevocable or that arise due to termination shall
survive in accordance with their terms.
Any other provisions of this Agreement contemplated by their terms to
pertain to a period of time following termination of this Agreement shall
survive for the specified period of time only.
ARTICLE 11. MISCELLANEOUS
11.1
Notices
. All written notices and other communications
between the Parties shall be in the English language and shall be deemed
effective on the date they are received by certified air mail or confirmed
facsimile addressed to the other Party at the address or facsimile number
stated below.
If to i-STAT:
i-STAT Corporation
104 Windsor Center Drive
East Windsor, New Jersey
08520
Attn: Vice-President, Sales and Marketing
Telephone Number:
(609) 443-9300
Facsimile
Number: [***]
With copy to: Divisional Vice President, Medical
Products Group
Domestic Legal
Operations
D-322,
Building AP6D
100 Abbott Park
Road
Abbott Park,
Illinois 60064-6049
Facsimile Number: [***]
If to Heska:
Heska Corporation
1613 Prospect
Parkway
Fort Collins,
Colorado 80525
Attn: Chief
Financial Officer
27
[***] — 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
Telephone
Number: (970) 493-7272
Facsimile
Number: [***]
With copy to:
Osborn Maledon,
P.A.
Attn: William M.
Hardin, Esq.
2929 North Central
Ave.
Suite 2100
Phoenix, AZ 85012
Telephone
Number: 602-640-9322
Facsimile
Number: [***]
11.2
Annual Cartridge Purchases
Calculation
. Following each Contract
Year, the number of Cartridge Purchases for such Contract Year shall be
determined as set forth in
Subsections 11.2.1
and
11.2.2
and the Parties shall
execute and attach to this Agreement the “Annual Cartridge Purchase Calculation”
form set forth on Exhibit 11.2 completed for such Contract Year.
11.2.1
i-STAT Provides i-STAT Calculation
. Within forty (40) days after the end of each
Contract Year, i-STAT shall provide Heska in writing with i-STAT’s calculation
of Heska’s Cartridge Purchases in such Contract Year (the “
i-STAT
Calculation
”). If Heska disagrees
with the i-STAT Calculation, Heska shall have thirty (30) days after receipt of
the i-STAT Calculation to respond in writing, with (a) Heska’s estimate; (b)
the difference between Heska’s estimate and the i-STAT Calculation; and (c)
purchase order level detail so that i-STAT may verify the i-STAT
Calculation. If i-STAT disagrees with
Heska’s calculation and Heska requests, in writing, purchase order level detail
for the i-STAT Calculation, i-STAT shall provide such information. If the exchange of such information does not
resolve the dispute, the Parties shall negotiate in good faith to determine the
actual Cartridge Purchases in such Contract Year and, if such dispute is not
resolved within thirty (30) days, the dispute shall be resolved pursuant to
Section 11.9
.
11.2.2
i-STAT Does Not Provide i-STAT
Calculation
. If i-STAT fails to
provide Heska with the i-STAT Calculation within forty (40) days after the end
of a given Contract Year, Heska shall provide i-STAT, in writing, with Heska’s
calculation of Heska’s Cartridge Purchases in such Contract Year (the “
Heska
Calculation
”) within seventy (70) days after the end of such Contract
Year. If i-STAT disagrees with the Heska
Calculation, i-STAT shall have thirty (30) days after receipt of the Heska
Calculation to respond, in writing, with (i) i-STAT’s estimate, (ii) the
28
[***] — 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.
difference between i-STAT’s estimate and the Heska Calculation, and
(iii) purchase order level detail so that Heska may verify the Heska
Calculation. If Heska disagrees with
i-STAT’s calculation and i-STAT requests, in writing, purchase order level
detail for the Heska Calculation, Heska shall provide such information. If the exchange of such information does not
resolve the dispute, the Parties shall negotiate in good faith to determine the
actual Cartridge Purchases in such Contract Year and, if such dispute is not
resolved within thirty (30) days, the dispute shall be resolved pursuant to
Section 11.9
.
11.3
[***].
11.3.1
[***].
11.3.2
[***].
11.4
Binding
Effect/Assignment
. This Agreement
shall be binding upon and inure to the benefit of the Parties hereto and their
successors and assigns. Neither Party
shall have the right to assign any of its rights or obligations under this
Agreement without the prior written consent of the other Party;
provided, however
, that without such written
consent, i-STAT shall have the right to assign its rights hereunder to an
Affiliate of i-STAT and Heska shall have the right to assign this
Agreement to any corporation controlled by Heska which has, as one of its
principal lines of business, the sale of diagnostic equipment for the
veterinary market. In the event that a
Change of Control of Heska does not involve a competitor of i-STAT (pursuant to
Section 10.3
of this Agreement)
Heska shall have the right to assign this Agreement without i-STAT’s consent in
connection with a Change of Control;
provided
, that i-STAT has not
terminated this Agreement in the time frame provided in, and pursuant to the
terms and conditions set forth in,
Section
10.3
.
11.5
Waivers
. Any waiver by either of the Parties hereto of
any rights arising from a breach of any covenants or conditions of this
Agreement shall not be construed as a continuing waiver of other breaches of
the same nature or other covenants or conditions of this Agreement. Any failure by one of the Parties to assert
its rights for or upon any breach of this Agreement shall not be deemed to be a
waiver of such rights, nor shall such waiver be implied from the acceptance of
any payment.
11.6
Relationship
of the Parties
. Nothing in this
Agreement or any other document or agreement between the Parties shall
constitute or be deemed to constitute a partnership or joint venture between
the Parties. The relationship between
Heska and i-STAT shall be that of buyer and seller. No officer, agent or
employee of one Party shall under any
29
circumstances be considered the agent, employee or representative of
the other Party. Neither Party shall
have the right to enter into any contracts or binding commitments in the name
of or on behalf of the other Party in any respect whatsoever.
11.7
Force
Majeure
. Neither Party shall be
liable to the other Party or in default hereunder by reason of any delay or
omission caused by fire, flood, strike, lockout, civil or military authority,
insurrection, war, embargo, container or transportation shortage or delay of
suppliers due to such causes, and delivery dates shall be extended to the extent
of any delays resulting from the foregoing or similar causes. In the event of a Product shortage, i-STAT
shall have the right to allocate its available Product among Heska and all
other customers of i-STAT in such a manner as i-STAT, in its sole discretion,
considers equitable, and the Parties shall negotiate in good faith an
adjustment to the Base Cartridge Targets set forth in
Section 2.7
.
11.8
Governing
Law
. This Agreement shall in all
respects be governed by, and construed in accordance with, the internal laws
(and not the laws of conflicts) of the State of New Jersey. The United Nations Convention on Contracts
for the International Sale of Goods (1980), as amended, is specifically
excluded from application to this Agreement.
11.9
Alternative
Dispute Resolution
. Any and all
disputes, controversies or claims arising out of or relating to this Agreement,
or the breach, termination, or invalidity thereof, including but not limited to
the resolution of potential issues described in various provisions of this
Agreement that expressly refer to this
Section 11.9
(including but not limited to
Sections 2.9, 4.5, 8.3 and
10.3
) shall be finally settled pursuant to the dispute resolution
procedures set forth on Exhibit 11.9.
11.10
Severability
. If any provision of this Agreement for any
reason shall be held invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any other term or
provision hereof, and this Agreement shall be interpreted and construed as if
such term or provision, to the extent the same shall have been held to be
invalid, illegal or unenforceable, had never been contained herein.
11.11
Entire Agreement
. This Agreement, including the exhibits,
constitutes the entire understanding of the Parties with respect to the subject
matter hereof, and supersedes all prior or contemporaneous writings or
discussions, including but not limited to the Prior Agreement. Except as otherwise expressly provided, no
agreement varying or extending the terms of this Agreement shall be binding on
either Party unless in a writing signed by an authorized representative of each
Party.
11.12
Headings
. The headings of the paragraphs and
subparagraphs of this Agreement have been added for the convenience of the
parties and shall not be deemed a part hereof.
30
11.13
Counterparts
. This Agreement may be executed in any number
of counterparts, all of which together shall constitute a single
Agreement. In proving this Agreement, it
shall be necessary to produce or account for more than one counterpart signed
by the Party with respect to whom proof is sought.
(Remainder
of page intentionally left blank)
31
IN
WITNESS WHEREOF, each Party has caused this Distribution Agreement to be
executed on its behalf by its duly authorized officer as of the Effective Date.
|
i-STAT
Corporation
|
|
|
Heska Corporation
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ John Mooradian
|
|
|
By:
|
/s/ Jason Napolitano
|
|
|
JOHN MOORADIAN
|
|
|
|
JASON NAPOLITANO
|
|
Its:
|
President
|
|
|
Its:
|
Chief Financial Officer
|
|
Date:
|
October 29, 2004
|
|
|
Date:
|
October 28, 2004
|
32
[***] — 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.
LIST OF EXHIBITS
|
Exhibit Number
|
|
Exhibit Name
|
|
1.16
|
|
[***]
|
|
1.29
|
|
Products and Purchase Prices
|
|
3.8
|
|
Bank Wire Transfer Information
|
|
7.1
|
|
End User Warranties
|
|
11.2
|
|
Annual Cartridge Purchase Calculation
|
|
11.3A
|
|
[***]
|
|
11.3B
|
|
[***]
|
|
11.3C
|
|
[***]
|
|
11.3D
|
|
[***]
|
|
11.3E
|
|
[***]
|
|
11.3F
|
|
[***]
|
|
11.9
|
|
Alternative Dispute Resolution
|
i
[***] —
Certain information on this page have been omitted and filed separately with
the Securities and Exchange Commission.
Confidential treatment has been requested with respect to the omitted
portions.
EXHIBIT 1.16
[***]
ii
[***] —
Certain information on this page have been omitted and filed separately with
the Securities and Exchange Commission.
Confidential treatment has been requested with respect to the omitted
portions.
Exhibit 1.29
PRODUCTS AND
PURCHASE PRICES
Analyzer and Associated Parts Price List
|
Analyzer
Product No.
|
|
Description
|
|
Price
|
|
|
—
|
|
—
|
|
|
|
|
210002
|
|
Series 200 analyzer
|
|
[***]
|
|
|
111700
|
|
HP Portable Printer
|
|
[***]
|
|
|
111501
|
|
Portable printer Paper
|
|
[***]
|
|
|
111502
|
|
HP Portable Printer AC
Adapter
|
|
[***]
|
|
|
112102
|
|
Printer Cradle w/o IR
Link
|
|
[***]
|
|
|
111003
|
|
9 Volt lithium
batteries (6/box)
|
|
[***]
|
|
|
131000
|
|
Aqueous Controls Level
1
|
|
[***]
|
|
|
131500
|
|
Aqueous Controls Level
2
|
|
[***]
|
|
|
132000
|
|
Aqueous Controls Level
3
|
|
[***]
|
|
|
135681
|
|
Calibration
Verification Set
|
|
[***]
|
|
|
136400
|
|
Level 1 ACT Control
(Kit)
|
|
[***]
|
|
|
136500
|
|
Level 2 ACT Control
(Kit)
|
|
[***]
|
|
|
111400
|
|
Capillary tubes 65 µL
|
|
[***]
|
|
|
112202
|
|
IR Link with cradle
|
|
[***]
|
|
|
112212
|
|
Analyzer programming
kit
|
|
[***]
|
|
|
011996-01
|
|
i-STAT Binders
|
|
[***]
|
|
|
620001
|
|
i-STAT System Manual -
UK English
|
|
[***]
|
|
|
620002
|
|
i-STAT System Manual -
German
|
|
[***]
|
|
|
620003
|
|
i-STAT System Manual -
French
|
|
[***]
|
|
|
620004
|
|
i-STAT System Manual -
Spanish
|
|
[***]
|
|
|
620005
|
|
i-STAT System Manual -
Italian
|
|
[***]
|
|
|
620006
|
|
i-STAT System Manual
-Dutch
|
|
[***]
|
|
|
620007
|
|
i-STAT System Manual -
Swedish
|
|
[***]
|
|
|
NOT
Available
|
|
i-STAT System Manual -
Portuguese
|
|
[***]
|
|
|
130100
|
|
Electronic Simulator
|
|
[***]
|
|
|
SRP200
|
|
Analyzer repair
cost-non warranty
|
|
[***]
|
|
|
SRP230
|
|
Portable printer repair cost
|
|
[***]
|
|
iii
[***] —
Certain information on this page have been omitted and filed separately with
the Securities and Exchange Commission.
Confidential treatment has been requested with respect to the omitted
portions.
Exhibit 1.29
PRODUCTS AND
PURCHASE PRICES
Cartridge
Price List
|
Cartridge
|
|
|
|
|
|
United States
|
|
Rest of World
|
|
|
Product No.
|
|
Description
|
|
Qty/Box
|
|
Price/Test
|
|
Price/Box
|
|
Price/Test
|
|
Price/Box
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
220300
|
|
EG7+
|
|
25
|
|
[***]
|
|
[***]
|
|
[***]
|
|
[***]
|
|
|
220200
|
|
EG6+
|
|
25
|
|
[***]
|
|
[***]
|
|
[***]
|
|
[***]
|
|
|
220100
|
|
G3+
|
|
25
|
|
[***]
|
|
[***]
|
|
[***]
|
|
[***]
|
|
|
125000-02
|
|
EC8+
|
|
25
|
|
[***]
|
|
[***]
|
|
[***]
|
|
[***]
|
|
|
121000-02
|
|
6+
|
|
25
|
|
[***]
|
|
[***]
|
|
[***]
|
|
[***]
|
|
|
123000-02
|
|
EC6+
|
|
25
|
|
[***]
|
|
[***]
|
|
[***]
|
|
[***]
|
|
|
121500-02
|
|
EC4+
|
|
25
|
|
[***]
|
|
[***]
|
|
[***]
|
|
[***]
|
|
|
120100-02
|
|
G
|
|
25
|
|
[***]
|
|
[***]
|
|
[***]
|
|
[***]
|
|
|
320100
|
|
creatinine
|
|
25
|
|
[***]
|
|
[***]
|
|
[***]
|
|
[***]
|
|
|
220400
|
|
CG8+
|
|
25
|
|
[***]
|
|
[***]
|
|
[***]
|
|
[***]
|
|
|
420300
|
|
ACT
|
|
25
|
|
[***]
|
|
[***]
|
|
[***]
|
|
[***]
|
|
|
220550
|
|
CG4+
|
|
25
|
|
[***]
|
|
[***]
|
|
[***]
|
|
[***]
|
|
|
120500-02
|
|
E3+
|
|
25
|
|
[***]
|
|
[***]
|
|
[***]
|
|
[***]
|
|
iv
[***] — Certain information on
this page have been omitted and filed separately with the Securities and
Exchange Commission. Confidential
treatment has been requested with respect to the omitted portions.
Exhibit 1.29
PRODUCTS AND
PURCHASE PRICES
Service
Repair Parts
|
i-STAT Part Number
|
|
Description
|
|
Price
|
|
|
|
|
|
|
|
|
|
010762-01
|
|
10 pin connector
Digital Bd
|
|
[***]
|
|
|
010559-01
|
|
20 pin Connector -
Nyebar
|
|
[***]
|
|
|
011882-01
|
|
200 Cover Screw
|
|
[***]
|
|
|
012378-01
|
|
200 Display (Double)
|
|
[***]
|
|
|
011678-01
02
|
|
200 Display (Single)
|
|
[***]
|
|
|
011832-01
|
|
200 External Back
Housing
|
|
[***]
|
|
|
012086-01
|
|
200 Housing Feet
|
|
[***]
|
|
|
012203-01
01
|
|
200 Hybrid Flex Cable
|
|
[***]
|
|
|
010534-01
|
|
200 Thermal Probe
|
|
[***]
|
|
|
012156-01
|
|
5 Minute Epoxy
|
|
[***]
|
|
|
010760-01
|
|
9 pin connector Digital
Bd.
|
|
[***]
|
|
|
010941-02
01
|
|
Abbott Boxes
|
|
[***]
|
|
|
012369-01
|
|
Assy, Battery Cable
|
|
[***]
|
|
|
012369-01
01
|
|
Battery Flex Assembly
|
|
[***]
|
|
|
010501-01
01
|
|
Bowed Clip
|
|
[***]
|
|
|
010941-01
|
|
Boxes (i-STAT)
|
|
[***]
|
|
|
010087-02
|
|
BT101- Lithium Battery
(Double)
|
|
[***]
|
|
|
012333-01
01
|
|
BT1-Lithium Battery
(Single)
|
|
[***]
|
|
|
012328-01
01
|
|
C119 / C124
|
|
[***]
|
|
|
010032-05
|
|
Capcitor-C186
|
|
[***]
|
|
|
012217-01
01
|
|
Cartridge Door
|
|
[***]
|
|
|
015506-01
|
|
Clip Retainer
|
|
[***]
|
|
|
012055-01
|
|
Cover, Battery
compartment
|
|
[***]
|
|
|
011856-02
|
|
Damper (Double Length)
|
|
[***]
|
|
|
011856-05
|
|
Damper (Double Width)
|
|
[***]
|
|
|
011856-04
|
|
Damper (Quad Length)
|
|
[***]
|
|
|
011856-03
|
|
Damper (Triple Length)
|
|
[***]
|
|
|
012378-01
|
|
Display- (Double bd.)
|
|
[***]
|
|
|
011678-02
|
|
Display- (Single bd.)
|
|
[***]
|
|
|
012605-01
01
|
|
Display block,
Hantronix
|
|
[***]
|
|
|
010091-01
|
|
Display Window
|
|
[***]
|
|
|
010618-01
|
|
FLASH U56(U109)
|
|
[***]
|
|
|
010500-01
01
|
|
Flat Clip
|
|
[***]
|
|
|
015384-01
02
|
|
Follower Arm Assembly
|
|
[***]
|
|
|
015473-01
03
|
|
Fork
|
|
[***]
|
|
|
012341-01
02
|
|
Front Housing (AID
Keypad)
|
|
[***]
|
|
|
010491-01
02
|
|
Guide Pin
|
|
[***]
|
|
|
012368-01
|
|
Harness flex cable (200
single board)
|
|
[***]
|
|
|
010731-01
|
|
Hybrid
|
|
[***]
|
|
|
012203-01
|
|
Hybrid Flex cable
|
|
[***]
|
|
v
|
i-STAT Part Number
|
|
Description
|
|
Price
|
|
|
012023-01
|
|
Keypad PCB Rivet
|
|
[***]
|
|
|
012278-01
|
|
Keypad PCB Screw
|
|
[***]
|
|
|
012340-01
05
|
|
Keypad PCB-Double bd.
|
|
[***]
|
|
|
012891-01
01
|
|
Latch
|
|
[***]
|
|
|
012373-01
01
|
|
Latch Retainer
|
|
[***]
|
|
|
010087-02
|
|
Lithium battery-200
analyzer
|
|
[***]
|
|
|
010493-01
|
|
Pivot Pin
|
|
[***]
|
|
|
010627-01
|
|
R120
|
|
[***]
|
|
|
010070-26
|
|
Ram U57 (U106)
|
|
[***]
|
|
|
010070-27
|
|
RTC (DP8570A)
|
|
[***]
|
|
|
010572-01
03
|
|
Spiral, Spring Latch
|
|
[***]
|
|
|
010763-01
|
|
Start Cycle Switch
double board
|
|
[***]
|
|
|
010764-01
|
|
Start Cycle Switch
single board
|
|
[***]
|
|
|
010534-01
|
|
Thermal probes
|
|
[***]
|
|
|
010311-01
|
|
Threadlocker 222
|
|
[***]
|
|
|
010070-05
|
|
U105 / U112
|
|
[***]
|
|
|
010070-27
|
|
U107 - RTC (DP8570A)
|
|
[***]
|
|
|
012324-11
01
|
|
U53 - RTC
|
|
[***]
|
|
|
012324-01 01
|
|
U89 - FPGA
|
|
[***]
|
|
vi
[***] — Certain information on
this page have been omitted and filed separately with the Securities and
Exchange Commission. Confidential
treatment has been requested with respect to the omitted portions.
EXHIBIT 3.8
Bank Wire Transfer
Information
Domestic wires:
Wachovia Bank
Charlotte, NC
ABA# 053000219
Account Name: Abbott - i-STAT USD
Account Number: [***]
Reference: Your Company Name & Invoice #
International wires:
Wachovia Bank
Charlotte, NC
SWIFT: PNBPUS33
Account Name: Abbott - i-STAT USD
Account Number: [***]
Reference: Your Company Name & Invoice #
vii
EXHIBIT 7.1
CUSTOMER
WARRANTIES
Warranty
i-STAT warrants this
medical product (excluding disposable or consumable supplies) against defects
in materials and workmanship for one year from the date of shipment. If i-STAT receives notice of such defects
during the warranty period, i-STAT shall, at its option, either repair or
replace products which prove to be defective.
With respect to software or firmware, if i-STAT receives notice of
defects in these products during the warranty period, i-STAT shall repair or
replace software media and firmware which does not execute their programming
instructions due to such defects. i-STAT
does not warrant that the operating of the software, firmware or hardware shall
be uninterrupted or error free. If
i-STAT is unable, within a reasonable time, to repair or replace any product to
a condition as warranted, Buyer shall be entitled to a refund of the purchase
price upon return of the product to i-STAT.
Note: Warranty rights may vary from state to state,
province to province and country to country.
Limitations of Warranty
The foregoing warranty
shall not apply to defects resulting from:
1.
Improper or inadequate maintenance by Buyer or an unauthorized person,
2.
Using accessories and/or consumables that are not approved by i-STAT,
3.
Buyer-supplied software or interfacing,
4.
Unauthorized repairs, modifications, misuse, or damage caused by disposable
batteries, or rechargeable batteries not supplied by Abbott.
5.
Operating outside of the environmental specifications of the product, or
6.
Improper site preparation or maintenance.
THE WARRANTY SET FORTH
ABOVE IS EXCLUSIVE AND NO OTHER WARRANTY, WHETHER WRITTEN OR ORAL, IS EXPRESSED
OR IMPLIED. ABBOTT SPECIFICALLY
DISCLAIMS THE IMPLIED WARRANTIES OR MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE.
viii
EXHIBIT 11.2
ANNUAL CARTRIDGE
PURCHASE CALCULATION
|
Contract Year:
|
|
|
|
|
|
|
|
|
|
|
|
i-STAT Calculation:
|
|
|
date provided to Heska:
|
|
|
|
|
|
|
|
|
Approved by Heska:
|
Yes /
No*
|
|
date approved/rejected by Heska:
|
|
|
|
|
|
|
|
|
*if No:
|
|
|
|
|
|
Heska Estimate:
|
|
|
date provided to i-STAT:
|
|
|
|
|
|
|
|
|
Approved by i-STAT:
|
Yes /
No**
|
|
date approved/rejected by i-STAT:
|
|
|
|
|
|
|
|
|
**if No:
|
|
|
|
|
|
Agreed Calculation:
|
|
|
date agreed:
|
|
|
|
|
|
|
|
|
Official
Determination of Cartridge Purchases
for
Contract Year
is:
.
|
i-STAT Corporation
|
|
Heska Corporation
|
|
|
|
|
|
|
|
|
|
By:
|
|
|
By:
|
|
|
|
|
|
|
|
|
|
|
Its:
|
|
|
Its:
|
|
|
|
|
|
|
|
|
|
|
Date:
|
|
|
Date:
|
|
|
ix
[***] — Certain information on
this page have been omitted and filed separately with the Securities and
Exchange Commission. Confidential
treatment has been requested with respect to the omitted portions.
EXHIBIT 11.3A
[***]
x
[***] — Certain information on
this page have been omitted and filed separately with the Securities and
Exchange Commission. Confidential
treatment has been requested with respect to the omitted portions.
EXHIBIT 11.3B
[***]
xi
[***] — Certain information on
this page have been omitted and filed separately with the Securities and
Exchange Commission. Confidential
treatment has been requested with respect to the omitted portions.
EXHIBIT 11.3C
[***]
xii
[***] — Certain information on
this page have been omitted and filed separately with the Securities and
Exchange Commission. Confidential
treatment has been requested with respect to the omitted portions.
EXHIBIT 11.3D
[***]
xiii
[***] — Certain information on
this page have been omitted and filed separately with the Securities and Exchange
Commission. Confidential treatment has
been requested with respect to the omitted portions.
EXHIBIT 11.3E
[***]
xiv
[***] — Certain information on
this page have been omitted and filed separately with the Securities and
Exchange Commission. Confidential
treatment has been requested with respect to the omitted portions.
EXHIBIT 11.3F
[***]
xv
EXHIBIT 11.9
ALTERNATIVE
DISPUTE RESOLUTION
The
parties recognize that from time to time a dispute may arise relating to either
party’s rights or obligations under this Agreement. The parties agree that any
such dispute shall be resolved by the Alternative Dispute Resolution (“
ADR
”)
provisions set forth in this Exhibit, the result of which shall be binding upon
the parties.
To begin
the ADR process, a party first must send written notice to the other party in
accordance with the terms of the Agreement describing the dispute and
requesting attempted resolution by good faith negotiations between their
respective president or principal executive officer(s) (or their designees) of
the affected subsidiaries, divisions, or business units within twenty-eight
(28) days after such notice is received (all references to “days” in this ADR
provision are to calendar days). If the matter has not been resolved within
twenty-eight (28) days of the notice of dispute, or if the parties fail to meet
within such twenty-eight (28) days, either party may initiate an ADR proceeding
as provided herein. The parties shall have the right to be represented by
counsel in such a proceeding.
1. To begin an ADR proceeding, a party
shall provide written notice to the other party in accordance with the terms of
the Agreement of the issues to be resolved by ADR. Within fourteen (14) days after its receipt
of such notice, the other party may, by written notice to the party initiating
the ADR, add additional issues to be resolved within the same ADR.
2. Within twenty-one (21) days
following receipt of the original ADR notice, the parties shall select a
mutually acceptable neutral to preside in the resolution of any disputes in
this ADR proceeding. If the parties are unable to agree on a mutually
acceptable neutral within such period, either party may request the President
of the CPR Institute for Dispute Resolution (“
CPR
”), 366 Madison Avenue,
14th Floor, New York, New York 10017, to select a neutral pursuant to the
following procedures:
(a) The CPR shall submit to the parties a list of not less than
five (5) candidates within fourteen (14) days after receipt of the request,
along with a
Curriculum Vitae
for
each candidate. No candidate shall be an employee, director, shareholder or
Affiliate of either party or any of their subsidiaries or affiliates.
(b) Such list shall include a statement of disclosure by each
candidate of any circumstances likely to affect his or her impartiality.
(c) Each party shall number the candidates in order of
preference (with the number one (1) signifying the greatest preference) and
shall deliver the list to the CPR within seven (7) days following receipt of
the list of candidates. If a party believes a conflict of interest exists
regarding any of the candidates, that party shall provide a
xvi
written explanation of the conflict to the CPR along
with its list showing its order of preference for the candidates. Any party
failing to return a list of preferences on time shall be deemed to have no
order of preference.
(d) If the parties collectively have identified fewer than
three (3) candidates deemed to have conflicts, the CPR immediately shall
designate as the neutral the candidate for whom the parties collectively have
indicated the greatest preference. If a tie should result between two
candidates, the CPR may designate either candidate. If the parties collectively
have identified three (3) or more candidates deemed to have conflicts, the CPR
shall review the explanations regarding conflicts and, in its sole discretion,
may either (i) immediately designate as the neutral the candidate for whom the
parties collectively have indicated the greatest preference, or (ii) issue a new
list of not less than five (5) candidates, in which case the procedures set
forth in subparagraphs 2(a) - 2(d) shall be repeated.
3. No earlier than twenty-eight (28)
days or later than fifty-six (56) days after selection, the neutral shall hold
a hearing to resolve each of the issues identified by the parties. The ADR
proceeding shall take place at a location agreed upon by the parties. If the
parties cannot agree, the neutral shall designate a location other than the
principal place of business of either party or any of their subsidiaries or
Affiliates.
4. At least seven (7) days prior to the
hearing, each party shall submit the following to the other party and the
neutral:
(a) a copy of all exhibits on which such party intends to rely
in any oral or written presentation to the neutral;
(b) a list of any witnesses such party intends to call at the
hearing, and a short summary of the anticipated testimony of each witness;
(c) a proposed ruling on each issue to be resolved, together
with a request for a specific damage award or other remedy for each issue. The
proposed rulings and remedies shall not contain any recitation of the facts or
any legal arguments and shall not exceed one (1) page per issue. The
parties agree that neither side shall seek as part of its remedy any punitive
damages.
(d) a brief in support of such party’s proposed rulings and
remedies, provided that the brief shall not exceed twenty (20) pages. This page
limitation shall apply regardless of the number of issues raised in the ADR proceeding.
Except
as expressly set forth in subparagraphs 4(a) - 4(d), no discovery shall be
required or permitted by any means, including depositions, interrogatories,
requests for admissions, or production of documents.
5. The hearing shall be conducted on
two (2) consecutive days and shall be governed by the following rules:
xvii
(a) Each party shall be entitled to five (5) hours of hearing
time to present its case. The neutral shall determine whether each party has
had the five (5) hours to which it is entitled.
(b) Each party shall be entitled, but not required, to make an
opening statement, to present regular and rebuttal testimony, documents or
other evidence, to cross-examine witnesses, and to make a closing argument.
Cross-examination of witnesses shall occur immediately after their direct
testimony, and cross-examination time shall be charged against the party
conducting the cross-examination.
(c) The party initiating the ADR shall begin the hearing and,
if it chooses to make an opening statement, shall address not only issues it
raised but also any issues raised by the responding party. The responding
party, if it chooses to make an opening statement, also shall address all
issues raised in the ADR. Thereafter, the presentation of regular and rebuttal
testimony and documents, other evidence, and closing arguments shall proceed in
the same sequence.
(d) Except when testifying, witnesses shall be excluded from
the hearing until closing arguments.
(e) Settlement negotiations, including any statements made
therein, shall not be admissible under any circumstances. Affidavits prepared
for purposes of the ADR hearing also shall not be admissible. As to all other
matters, the neutral shall have sole discretion regarding the admissibility of
any evidence.
6. Within seven (7) days following
completion of the hearing, each party may submit to the other party and the
neutral a post-hearing brief in support of its proposed rulings and remedies,
provided that such brief shall not contain or discuss any new evidence and
shall not exceed ten (10) pages. This page limitation shall apply regardless of
the number of issues raised in the ADR proceeding.
7. The neutral shall rule on each
disputed issue within fourteen (14) days following completion of the hearing.
Such ruling shall adopt in its entirety the proposed ruling and remedy of one
of the parties on each disputed issue but may adopt one party’s proposed
rulings and remedies on some issues and the other party’s proposed rulings and
remedies on other issues. The neutral shall not issue any written opinion or
otherwise explain the basis of the ruling.
8. The neutral shall be paid a
reasonable fee plus expenses. These fees and expenses, along with the
reasonable legal fees and expenses of the prevailing party (including all
expert witness fees and expenses), the fees and expenses of a court reporter,
and any expenses for a hearing room, shall be paid as follows:
(a) If the neutral rules in favor of one party on all disputed
issues in the ADR, the losing party shall pay 100% of such fees and expenses.
xviii
(b) If the neutral rules in favor of one party on some issues
and the other party on other issues, the neutral shall issue with the rulings a
written determination as to how such fees and expenses shall be allocated
between the parties. The neutral shall allocate fees and expenses in a way that
bears a reasonable relationship to the outcome of the ADR, with the party
prevailing on more issues, or on issues of greater value or gravity, recovering
a relatively larger share of its legal fees and expenses.
9. The
rulings of the neutral and the allocation of fees and expenses shall be
binding, non-reviewable, and non-appealable, and may be entered as a final
judgment in any court having jurisdiction.
10. Except
as provided in paragraph 9 or as required by law, the existence of the dispute,
any settlement negotiations, the ADR hearing, any submissions (including
exhibits, testimony, proposed rulings, and briefs), and the rulings shall be
deemed Confidential Information. The neutral shall have the authority to impose
sanctions for unauthorized disclosure of Confidential Information.
11. All ADR hearings shall be conducted
in the English language.
xix
Exhibit
10.27
[***] — 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.
THIRD
AMENDED AND RESTATED
CREDIT AND SECURITY
AGREEMENT
BY AND BETWEEN
HESKA
CORPORATION,
DIAMOND ANIMAL HEALTH,
INC.,
AND
WELLS
FARGO BANK, NATIONAL ASSOCIATION
as
successor in interest to Wells Fargo Business Credit, Inc.
Dated as of December 30, 2005
THIRD
AMENDED AND RESTATED
CREDIT
AND SECURITY AGREEMENT
Dated as of
December 30, 2005
HESKA CORPORATION,
a Delaware corporation (“Heska”) and DIAMOND ANIMAL HEALTH, INC., an Iowa
corporation (“Diamond”) (each of Heska and Diamond may be referred to herein
individually as a “Borrower” and collectively as the “Borrowers”) and WELLS
FARGO BANK, NATIONAL ASSOCIATION, acting through its Wells Fargo Business
Credit operating division (the “Lender”), as successor in interest to Wells
Fargo Business Credit, Inc., hereby agree as follows:
RECITALS
The Borrowers and
Center Laboratories, Inc., a Delaware corporation (“Center”), and the Lender
entered into a Second Amended and Restated Credit and Security Agreement dated
as of June 14, 2000 (the “Former Credit Agreement”).
Shortly after the
Former Credit Agreement was executed, Center was sold to an unrelated entity
and is no longer a Borrower under the Former Credit Agreement or under this
Agreement.
The Borrowers have
requested that the Former Credit Agreement be amended and restated in its
entirety as set forth herein.
NOW THEREFORE, in
consideration of the premises and the mutual promises herein contained, the
parties hereto agree that the Former Credit Agreement be amended and restated
to read in its entirety as follows:
ARTICLE I
Definitions
Section
1.1
Definitions
. For all purposes of this Agreement,
except as otherwise expressly provided or unless the context otherwise
requires:
(a)
the
terms defined in this Article have the meanings assigned to them in this Article,
and include the plural as well as the singular; and
(b)
all
accounting terms not otherwise defined herein have the meanings assigned to
them in accordance with GAAP.
“Accounts” means all of the Borrowers’ accounts, as
such term is defined in the UCC, including each and every right of the
Borrowers to the payment of money, whether such right to payment now exists or
hereafter arises, whether such right to payment arises
out of a sale, lease or
other disposition of goods or other property, out of a rendering of services,
out of a loan, out of the overpayment of taxes or other liabilities, or
otherwise arises under any contract or agreement, whether such right to payment
is created, generated or earned by the Borrowers or by some other person who
subsequently transfers such person’s interest to the Borrowers, whether such
right to payment is or is not already earned by performance, and howsoever such
right to payment may be evidenced, together with all other rights and interests
(including all Liens) which the Borrowers may at any time have by law or agreement
against any account debtor or other obligor obligated to make any such payment
or against any property of such account debtor or other obligor; all including
but not limited to all present and future accounts, contract rights, loans and
obligations receivable, chattel papers, bonds, notes and other debt
instruments, tax refunds and rights to payment in the nature of general
intangibles.
“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, (c) net cash proceeds from a Borrower’s
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.
“Affiliate” or “Affiliates”, for any Borrower, means
any Person controlled by, controlling or under common control with such
Borrower, including (without limitation) any Subsidiary of such Borrower. For
purposes of this definition, “control,” when used with respect to any specified
Person, means the power to direct the management and policies of such Person,
directly or indirectly, whether through the ownership of voting securities, by
contract or otherwise.
“Aggregate Borrowing Base” means at any time the
lesser of (a) the Maximum Line or (b) the sum of each Borrower’s Borrowing
Base.
“Aggregate L/C Amount” means at any time the sum of
each Borrower’s L/C Amount.
“Agreement” means this Third Amended and Restated
Credit and Security Agreement, as amended, supplemented or restated from time
to time.
“Availability” for a Borrower means the difference of
(i) such Borrower’s Borrowing Base and (ii) the sum of (A) the outstanding
principal balance of such Borrower’s Revolving Note and (B) such Borrower’s L/C
Amount.
3
[***] — Certain information on
this page have been omitted and filed separately with the Securities and
Exchange Commission. Confidential
treatment has been requested with respect to the omitted portions.
“Banking Day” means a day other than a Saturday,
Sunday or other day on which banks are generally not open for business in
Denver, Colorado and Minneapolis, Minnesota.
“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 (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, in each case after December 31, 2004.
“Borrower” means Heska or Diamond, and “Borrowers”
means Heska and Diamond.
“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)
During the Foreign Accounts Eligibility
Period, the lesser of (A) 85% of Eligible Foreign Accounts or (B) the FREP
Sublimit, plus
(iii)
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)
$4,500,000 less (2) the aggregate amount of Advances made to all Borrowers
other than such Borrower in reliance on Eligible Inventory.
“Capital” of a Borrower means the sum of Book Net
Worth plus Subordinated Debt of such Borrower plus the lesser of (a) the amount
of Debt that was formerly Subordinated Debt payable to Agri-Laboratories, Ltd.
but that has been forgiven and is booked as a long-term liability, such as
deferred revenue, or (b) $500,000.
“Capital Expenditures” for any Borrower for a period
means the sum of (a) any expenditure of money for the purchase or construction
of assets, or for improvements or additions thereto during such period, which
are capitalized on such Borrower’s balance sheet, whether financed or
unfinanced, but excluding expenditures to purchase Rental Inventory, plus (b)
all expenditures of money to purchase [***] in excess of $1,500,000 during the
fiscal year in which such period occurs.
4
“Cash” means instantly available cash and cash
equivalents (including, without limitation, investments permitted by Section
7.4(a)(i) and the investments identified at item (i) on Schedule 7.4).
“Collateral” means all of the Borrowers’ Accounts,
chattel paper, deposit accounts, documents, Equipment, General Intangibles,
goods, instruments, Inventory, Investment Property, letter-of-credit rights,
letter of credit, all sums on deposit in any Collateral Account, and any items
in any Lockbox; together with (i) all substitutions and replacements for
and products of any of the foregoing; (ii) in the case of all goods, all
accessions; (iii) all accessories, attachments, parts equipment and repairs now
or hereafter attached or affixed to or used in connection with any goods;
(iv) all warehouse receipts, bills of lading and other documents of title
now or hereafter covering such goods; (v) all collateral subject to the Lien of
any Security Document; (vi) any money, or other assets of any Borrower that now
or hereafter come into the possession, custody, or control of the Lender; (vii)
all sums on deposit in the Special Account; and (viii) proceeds of any and all
of the foregoing.
“Collateral Account” for Diamond means (a) the
Collateral Account, as defined in the Collateral Account Agreement and (b) the Deposit
Account listed on Exhibit A of Diamond’s Deposit Account Control Agreement, and
for Heska means (a) the “Lender Account” as defined in the Heska’s Lockbox
Agreement and (b) the Deposit Account listed on Exhibit A of Heska’s Deposit
Account Control Agreement.
“Collateral Account Agreement” means the Collateral
Account Agreement dated as of October 16, 1997, by and among Diamond, the
Lender, as successor in interest to Norwest Bank Iowa, NA, and the Lender.
“Commitment” means the Lender’s commitment to make
Advances to or for the Borrowers’ account pursuant to Article II.
“Credit Facility” means the credit facility being made
available to the Borrowers by the Lender pursuant to Article II.
“Debt” of any Person means all items of indebtedness
or liability which in accordance with GAAP would be included in determining
total liabilities as shown on the liabilities side of a balance sheet of that
Person as at the date as of which Debt is to be determined. For purposes of
determining a Person’s aggregate Debt at any time, “Debt” shall also include
the aggregate payments required to be made by such Person at any time under any
lease that is considered a capitalized lease under GAAP.
“Default” means an event that, with giving of notice
or passage of time or both, would constitute an Event of Default.
“Default Period” means any period of time beginning on
the day on which a Default or Event of Default has occurred and ending on the
date the Lender notifies the Borrowers in writing that such Default or Event of
Default has been cured or waived.
5
“Default Rate” means, (i) with respect to the
Revolving Advances, an annual rate equal to three percent (3.0%) over the
Revolving Floating Rate, which rate shall change when and as the Revolving
Floating Rate changes, and (ii) with respect to the Term Advances, an annual
rate equal to three percent (3.0%) over the Term Floating Rate, which rate
shall change when and as the Term Floating Rate changes.
“Deposit Account Control Agreement” for a Borrower
means the Deposit Account Control Agreement dated as of February 21, 2005, by
and among such Borrower, the Lender, as successor in interest to Wells Fargo
Business Credit, Inc., and the Lender.
“Diamond Equipment Note” means the Equipment Note
(Diamond) dated as of July 26, 2005, payable to the order of the Lender in the
original principal amount of $2,000,000, and any note or notes issued in
substitution therefor, as the same may hereafter be amended, supplemented or
restated from time to time.
“Diamond Revolving Note” means the Second Amended and
Restated Revolving Note (Diamond Animal Health) dated as of March 26, 2004,
payable to the order of the Lender in the original principal amount of
$12,000,000, as the same may hereafter be amended, supplemented or restated
from time to time.
“Director” means, with respect to any Borrower, a
director if such Borrower is a corporation, a governor, manager, or managing
member if such Borrower is a limited liability company, or a partner if such
Borrower is a partnership.
“Discretionary Reduction” means any of the following
that is unilaterally adopted by the Lender through the exercise of its sole
discretion: (a) a reduction (in accordance with subsection (b) of the
definition of Borrowing Base) in any advance rate under any Borrower’s Borrowing
Base; (b) disqualification (in accordance with subsection (xiv) of the
definition of Eligible Accounts) of any Account that would otherwise have been
an Eligible Account; or (c) disqualification (in accordance with subsection (x)
of the definition of Eligible Inventory) of any Inventory that would otherwise
have been Eligible Inventory.
“Discretionary Reduction Date” means any date on which
the Aggregate Borrowing Base is at least $3,000,000 less than it would have
been had no Discretionary Reductions been adopted.
“ERISA” means the Employee Retirement Income Security
Act of 1974, as amended.
“Eligible Accounts” for a Borrower means all unpaid
Accounts of such Borrower, net of any credits, except the following shall not
in any event be deemed Eligible Accounts:
(i)
That
portion of Accounts with terms of 60 days or less that are over 60 days past
due, and all other Accounts over 90 days past the invoice date;
provided
,
however
, that certain Accounts which are billed pursuant to dated term
6
invoices with payment terms of not greater than 180 days from the
invoice date (“Dated Term Accounts”) which (A) do not remain unpaid more than
180 days from such Dated Term Account’s invoice date, (B) are not more than 30
days past due, and (C) are approved by the Lender in its sole discretion,
shall, despite the terms of this subsection (i), be deemed Eligible Accounts;
(ii)
That
portion of Accounts that is disputed or subject to a claim of offset or a
contra account (up to the amount of such dispute), including that portion of
Accounts due from customers who have made prepayments, up to the amount of the
prepayment;
(iii)
That portion of Accounts
not yet earned by the final delivery of goods or rendition of services, as
applicable, by such Borrower to the customer;
(iv)
Accounts
owed by any unit of government, whether foreign or domestic (provided, however,
that there shall be included in Eligible Accounts that portion of Accounts owed
by such units of government for which such Borrower has provided evidence
satisfactory to the Lender that (A) the Lender has a first priority
perfected security interest and (B) such Accounts may be enforced by the
Lender directly against such unit of government under all applicable laws);
(v)
Accounts
owed by an account debtor located outside the United States and Canada which
are not (A) backed by a bank letter of credit naming the Lender as
beneficiary or assigned to the Lender, in the Lender’s possession or control,
and with respect to which a control agreement concerning the letter-of-credit
rights is in effect, and acceptable to the Lender in all respects, in its sole
discretion, or (B) covered by a foreign receivables insurance policy
acceptable to the Lender in its sole discretion;
(vi)
Accounts
owed by an account debtor that such Borrower has learned or has determined to
be insolvent, is the subject of bankruptcy proceedings or has gone out of
business;
(vii)
Accounts owed by an Owner,
Subsidiary, Affiliate, officer or employee of any Borrower;
(viii)
Accounts not subject to a duly
perfected security interest in the Lender’s favor or which are subject to any
lien, security interest or claim in favor of any Person, other than Permitted
Liens;
(ix)
That
portion of Accounts that has been restructured, extended, amended or modified;
(x)
That
portion of Accounts that constitutes advertising, finance charges, service
charges or sales or excise taxes;
7
[***] —
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.
(xi)
Accounts
owed by an account debtor, regardless of whether otherwise eligible, if 10% or
more of the total amount due under Accounts from such debtor is ineligible
under clauses (i), (ii) or (ix) above;
(xii)
That portion of the
aggregate Accounts of a single customer owed to all Borrowers in the aggregate
that exceeds 15% of all Accounts of all Borrowers in the aggregate; provided,
however, that for the customers listed below, such limit shall instead be the
greater of the foregoing or the amount set forth opposite such customer in the
following table:
|
Customer
|
|
Concentration Limit
|
|
|
[***]
|
|
25
|
%
|
|
[***]
|
|
20
|
%
|
(xiii)
That
portion of Accounts that arises from research contracts;
(xiv)
Accounts, or portions thereof,
otherwise deemed ineligible by the Lender in its sole discretion.
“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;
(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;
8
(vii)
Equipment consisting of
computer hardware, software, tooling, or molds;
(viii)
Equipment consisting of Rental
Inventory; and
(ix)
Equipment
otherwise deemed unacceptable to Lender in its sole discretion.
“Eligible
Foreign Accounts” for a Borrower means all Accounts due and owing by an account
debtor located outside the United States to such Borrower; but excluding any
Accounts having any of the following characteristics:
(i)
That
portion of Accounts (other than dated Accounts) unpaid 120 days or more after
the invoice date, (B) that portion of dated Accounts unpaid more than 90 days
after the stated due date, and (C) that portion of Accounts that do not provide
for payment in full within 120 days after the shipment date;
(ii)
That portion of Accounts related to goods or
services with respect to which such Borrower has received notice of a claim or
dispute, which are subject to a claim of offset or a contra account, or which
reflect a reasonable reserve for warranty claims or returns;
(iii)
That portion of Accounts not yet earned by
the final delivery of goods or rendition of services, as applicable, by such
Borrowers to the customer;
(iv)
That portion of Accounts for which an invoice
has not been sent to the applicable account debtor;
(v)
Accounts
owed by any unit of government;
(vi)
Accounts owed by an account debtor that is
insolvent, the subject of bankruptcy proceedings or has gone out of business;
(vii)
Accounts owed by an Owner, Subsidiary,
Affiliate, Officer or employee of any Borrower;
(viii)
Accounts
not subject to a duly perfected security interest in the Lender’s favor or
which are subject to any Lien in favor of any Person other than the Lender,
other than Permitted Liens;
(ix)
That portion of Accounts that has been
restructured, extended, amended or modified;
(x)
That portion of Accounts that constitutes advertising,
finance charges, service charges or sales or excise taxes;
9
(xi)
That portion of Accounts owed by any one
account debtor that would permit Revolving Advances supported by such account
debtor’s Accounts to exceed $300,000 at any one time;
(xii)
Accounts denominated in any currency other
than United States dollars, Canadian dollars, Swiss francs, Japanese yen,
United Kingdom pounds sterling or European Union euros;
(xiii)
Accounts with respect to which the Borrower
has not instructed the Account debtor to pay the Account to the Collateral
Account;
(xiv)
Accounts owed by debtors located in countries
not acceptable to the Lender in its sole discretion;
(xv)
Accounts
owed by an account debtor, regardless of whether otherwise eligible, if 10% or
more of the total amount due under Accounts from such debtor is ineligible
under clauses (i), (ii) or (ix) above;
(xvi)
Accounts otherwise deemed unacceptable to the
Lender in its sole discretion.
“Eligible Inventory” for a Borrower means all
Inventory of such Borrower, at the lower of cost or market value as determined
in accordance with GAAP; provided, however, that the following shall not in any
event be deemed Eligible Inventory:
(i)
Inventory
that is: in-transit; located at any
warehouse, job site or other premises not approved by the Lender in writing;
located outside of the states, or localities, as applicable, in which the
Lender has filed financing statements to perfect a first priority security
interest in such Inventory; covered by any negotiable or non-negotiable
warehouse receipt, bill of lading or other document of title; on consignment
from or to any Person or subject to any bailment unless such consignee or
bailee has executed an agreement with the Lender;
(ii)
Supplies,
packaging or parts Inventory;
(iii)
Work-in-process
Inventory;
(iv)
Inventory
that is damaged, obsolete, or not currently saleable in the normal course of
such Borrower’s operations;
(v)
Inventory
that such Borrower has returned, has attempted to return, is in the process of
returning or intends to return to the
vendor thereof;
10
(vi)
Inventory
that is perishable or live; provided, however, that Inventory with an
expiration date shall be deemed Eligible Inventory, up to 90 days before the
expiration date of such Inventory;
(vii)
Inventory that is subject to
a security interest in favor of any Person other than the Lender, except for
Permitted Liens;
(vii)
Inventory manufactured by
any Borrower pursuant to a license that (A) prohibits the Lender from
exercising its rights against such Inventory or (B) restricts such Borrower’s
ability to grant the Lender the right to sell such Inventory, in either case
unless the applicable licensor has agreed in writing to permit the Lender to
exercise its rights and remedies against such Inventory;
(viii)
Sample Inventory;
(ix)
all
Rental Inventory that has been delivered to, or is in transit to, a customer,
and all Rental Inventory that is not substantially the same in functionality
and quality as other Inventory carried for sale by such Borrower; and
(x)
Inventory
otherwise deemed ineligible by the Lender in its sole discretion.
“Environmental Laws” has the meaning specified in
Section 5.12.
“Equipment” of a Borrower means all of such Borrower’s
equipment, as such term is defined in the UCC, whether now owned or hereafter
acquired, including but not limited to all present and future machinery,
vehicles, furniture, fixtures, manufacturing equipment, shop equipment, office
and recordkeeping equipment, parts, tools, supplies, and including specifically
(without limitation) the goods described in any equipment schedule or list
herewith or hereafter furnished to the Lender by any Borrower.
“Equipment Advance” has the meaning given in Section
2.3.
“Equipment Note” means the Heska Equipment Note or the
Diamond Equipment Note.
“Event of Default” has the meaning specified in
Section 8.1.
“Existing Revolving Advances” has the meaning
specified in Section 2.1.
“Excess Collateral Base” for a Borrower means the
difference of (i) such Borrower’s Borrowing Base calculated without taking into
account the limitation imposed by the Maximum Line, and (ii) the sum of (A) the
outstanding principal balance of such Borrower’s Revolving Note and (B) such
Borrower’s L/C Amount.
11
“Factory Mortgage” means the Combination Mortgage, Assignment
of Rents and Fixture Financing Statement, executed by Diamond for the benefit
of the Lender, dated as of September 8, 1998, concerning the Factory Mortgaged
Property, as amended.
“Factory Mortgaged Property” means Mortgaged Property
as defined in the Factory Mortgage.
“Farm Mortgage” means the Combination Mortgage,
Assignment of Rents and Fixture Financing Statement, executed by Diamond for
the benefit of the Lender, dated as of September 8, 1998, concerning the Farm
Mortgaged Property, as amended.
“Farm Mortgaged Property” means Mortgaged Property as
defined in the Farm Mortgage.
“Foreign Accounts Eligibility Period” means the period
beginning on the first day of any month in which a Borrower requests in writing
that Eligible Foreign Accounts be included in the Borrowing Base and ending on
the last day of any month in which a Borrower requests in writing that Eligible
Foreign Accounts no longer be included in the Borrowing Base; provided,
however, that the Foreign Accounts Eligibility Period shall automatically
terminate on the earlier of the Termination Date or on the first date on which
(i) the Borrowers have failed to make any payment of the fee provided for in
Section 2.9(e), or (ii) the foreign receivables eligibility program in which
the Lender participates becomes unavailable to the Lender, or (iii) any
Borrower’s foreign Accounts cease for any reason to be eligible for coverage
under such foreign receivables eligibility program.
“Former Credit Agreement” has the meaning given in the
Recitals.
“FREP Sublimit” means an amount from zero to $500,000,
as adjusted from time to time in increments of $100,000 in the Borrowers’
discretion.
“GAAP” means generally accepted accounting principles,
applied on a basis consistent with the accounting practices applied in the
financial statements described in Section 5.5.
“General Intangibles” of a Borrower means all of such
Borrower’s general intangibles, as such term is defined in the UCC, whether now
owned or hereafter acquired, including (without limitation) all present and
future patents, patent applications, copyrights, trademarks, trade names, trade
secrets, customer or supplier lists and contracts, manuals, operating
instructions, permits, franchises, the right to use the Borrower’s name, and
the goodwill of the Borrower’s business.
“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.
“Hazardous Substance” has the meaning given in Section
5.12.
12
“Heska Equipment Note” means the Equipment Note
(Heska) dated as of July 26, 2005, payable to the order of the Lender in the
original principal amount of $500,000, as the same may hereafter be amended,
supplemented or restated from time to time.
“Heska Revolving Note” means the Second Amended and
Restated Revolving Note (Heska) dated as of March 26, 2004, payable to the
order of the Lender in the original principal amount of $12,000,000, as the
same may hereafter be amended, supplemented or restated from time to time.
“Intellectual Property License” means a license owned
by any Borrower, which license allows such Borrower the use of any patent,
trademark, trade name, or copyrighted material owned by a Person that is not a
Borrower.
“Inventory” of a Borrower means all of such Borrower’s
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 Rental Inventory.
“Investment Property” of a Borrower means all of such
Borrower’s investment property, as such term is defined in the UCC, whether now
owned or hereafter acquired, including but not limited to all securities,
security entitlements, securities accounts, commodity contracts, commodity
accounts, stocks, bonds, mutual fund shares, money market shares and U.S.
Government securities.
“L/C Amount” for a Borrower means the sum of (i) the
Aggregate Face Amount of any issued and outstanding Letters of Credit for which
such Borrower is the account party and (ii) the unpaid amount of the Obligation
of Reimbursement with respect to such Letters of Credit.
“L/C Application” means an application and agreement
for Letters of Credit in a form acceptable to the Lender.
“Letter of Credit” has the meaning given it in Section
2.18.
“Lien” means any security interest, mortgage, deed of
trust, pledge, lien, charge, encumbrance, title retention agreement or
analogous instrument or device, including the interest of each lessor under any
capitalized lease and the interest of any bondsman under any payment or
performance bond, in, of or on any assets or properties of a Person, whether
now owned or hereafter acquired and whether arising by agreement or operation
of law.
“Liquidity” means the sum of Cash (excluding Cash
located in accounts outside the United States or owned by an entity not
incorporated in the United States) plus Excess Collateral Base less Past Due
Payables.
“Loan Documents” means this Agreement, the Notes and
the Security Documents.
13
“Lockbox” for any
Borrower has the meaning given in such Borrower’s Lockbox Agreement.
“Lockbox Agreement” for
Diamond means the Agreement as to Lockbox Service by and among Diamond, the
Lender, as successor in interest to Norwest Bank Iowa, NA, and the Lender, as
successor in interest to Wells Fargo Business Credit, Inc., dated as of October
16, 1997, and for Heska means the Lockbox and Collection Account Agreement
among Heska, Regulus West LLC (“Regulus”), the Lender, as successor in interest
to Wells Fargo Business Credit, Inc., and the Lender, dated as of June 14,
2000.
“Maturity Date” means
June 30, 2009.
“Maximum Line” means
$12,000,000, unless said amount is reduced pursuant to Section 2.12, in
which event it means the amount to which said amount is reduced.
“Minimum Interest Charge”
has the meaning given in Section 2.8(d).
“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.
“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.
“Obligation of
Reimbursement” has the meaning given in Section 2.19.
“Obligations” means each
and every debt, liability and obligation of every type and description which
any Borrower may now or at any time hereafter owe to the Lender, related to the
indebtedness arising under this Agreement, the Notes or any other agreement
between any such Borrower and the Lender, entered into in connection with the
Credit Facility, including without limitation the Obligation of Reimbursement.
14
“Owner” means with
respect to a Borrower, each Person having legal or beneficial title to an
ownership interest in such Borrower or a right to acquire such an interest.
“Past Due Payables” means
accounts payable (other than accounts payable to Affiliates) that are 60 days
or more past due.
“Permitted Lien” has the
meaning given in Section 7.1.
“Person” means any
individual, corporation, partnership, joint venture, limited liability company,
association, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
“Plan” means an employee
benefit plan or other plan maintained for any Borrower’s employees and covered
by Title IV of ERISA.
“Premises” means all
premises where any Borrower conducts its business and has any rights of
possession, including (without limitation) the premises legally described in
Exhibit A attached hereto.
“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.
“Prime Rate” means the
rate publicly announced from time to time by Wells Fargo Bank, N.A. as its “prime
rate” or, if such bank ceases to announce a rate so designated, any similar
successor rate designated by the Lender.
“Raw Materials Advance
Rate” means 35%.
“Receivables” of a
Borrower means each and every right of such Borrower to the payment of money,
whether such right to payment now exists or hereafter arises, whether such
right to payment arises out of a sale, lease or other disposition of goods or
other property, out of a rendering of services, out of a loan, out of the
overpayment of taxes or other liabilities, or otherwise arises under any
contract or agreement, whether such right to payment is created, generated or
earned by such Borrower or by some other person who subsequently transfers such
person’s interest to such Borrower, whether such right to payment is or is not
already earned by performance, and howsoever such right to payment may be
evidenced, together with all other rights and interests (including all liens
and security interests) which such Borrower may at any time have by law or
agreement against any account debtor or other obligor obligated to make any
such payment or against any property of such account debtor or other obligor;
all including but not limited
15
to all present and
future accounts, contract rights, loans and obligations receivable, chattel
papers, bonds, notes and other debt instruments, tax refunds and rights to
payment in the nature of general intangibles.
“Rental Inventory” of a
Borrower means diagnostic and monitoring instruments purchased by such Borrower
for the purpose of demonstrating, loaning, leasing or renting to customers,
whether accounted for as equipment or as inventory.
“Reportable Event” shall
have the meaning assigned to that term in Title IV of ERISA.
“Revolving Advance” has
the meaning given in Section 2.2.
“Revolving Floating Rate”
means an annual rate equal to the sum of the Prime Rate plus the Spread, which
annual rate shall change when and as the Prime Rate changes.
“Revolving
Note” means the Heska Revolving Note or the Diamond Revolving Note.
“Security Documents”
means this Agreement, each Collateral Account Agreement, each Lockbox
Agreement, each Deposit Account Control Agreement, the Factory Mortgage, the
Farm Mortgage, and any other document delivered to the Lender from time to time
to secure the Obligations, as the same may hereafter be amended, supplemented
or restated from time to time.
“Security Interest” has
the meaning given in Section 3.1.
“Special Account” means a
specified cash collateral account maintained by a financial institution
acceptable to the Lender in connection with Letters of Credit, as contemplated
by Sections 2.20 and 3.8.
“Spread” has the meaning
given in Section 2.7.
“Subordinated Debt” of a
Borrower means all Debt of such Borrower that is subject to a Subordination
Agreement.
“Subordination Agreement”
means any subordination agreement accepted by the Lender from time to time.
“Subsidiary” means any
Person of which more than 50% of the outstanding ownership interests having
general voting power under ordinary circumstances to elect a majority of the
directors or the equivalent of such Person, regardless of whether or not at the
time ownership interests of any other class or classes shall have or might have
voting power by reason of the happening of any contingency, is at the time
directly or indirectly owned by a Borrower, by a Borrower and one or more other
Subsidiaries, or by one or more other Subsidiaries.
16
“Tangible Net Worth” of a
Borrower means the difference between (i) the tangible assets of such Borrower,
which, in accordance with GAAP are tangible assets, after deducting adequate
reserves in each case where, in accordance with GAAP, a reserve is proper and
(ii) all Debt of such Borrower; provided, however, that notwithstanding the
foregoing in no event shall there be included as such tangible assets patents,
trademarks, trade names, copyrights, licenses, goodwill, receivables from
Affiliates, directors, officers or employees, prepaid expenses, deposits,
deferred charges or treasury stock or any securities or Debt of such Borrower
or any other securities unless the same are readily marketable in the United
States of America or entitled to be used as a credit against federal income tax
liabilities, and any other assets designated from time to time by the Lender,
in its reasonable discretion.
“Tax Expense” for a
Borrower as of any date means state and federal income taxes recorded by such
Borrower for the year-to-date
period ending
on such date.
“Term Advances” means the
Equipment Advance and the Term Loan B Advances.
“Term Floating Rate”
means an annual rate equal to the sum of the Prime Rate plus the Spread, which
annual rate shall change when and as the Prime Rate changes.
“Term Loan B Advance” has
the meaning specified in Section 2.5.
“Term Loan B Note” means
the Term Loan B Note of the Borrowers, dated as of June 14, 2000 and payable to
the order of the Lender in the original principal amount of $2,062,500, and any
note or notes issued in substitution therefor, as the same may hereafter be amended,
supplemented or restated from time to time.
“Termination Date” means
the earliest of (i) the Maturity Date, (ii) the date the Borrowers terminate
the Credit Facility, or (iii) the date the Lender demands payment of the
Obligations after an Event of Default pursuant to Section 8.2
“UCC” means the Uniform
Commercial Code as in effect from time to time in the state designated in
Section 9.15 as the state whose laws shall govern this Agreement, or in any
other state whose laws are held to govern this Agreement or any portion hereof.
“Wells Fargo Bank” means
Wells Fargo Bank West, National Association.
Section
1.2
Other Definitional
Terms; Rules of Interpretation
. The words ‘hereof’, ‘herein’ and ‘hereunder’
and words of similar import when used in the Agreement shall refer to this
Agreement as a whole and not to any particular provision of this Agreement. All
accounting terms not otherwise defined herein have the meanings assigned to
them in accordance with GAAP. All terms defined in the UCC and not otherwise
defined herein have the meanings assigned to them in the UCC. References to
Articles, Sections, subsections, Exhibits, Schedules and the like, are to
Articles, Sections and subsections of, or Exhibits or Schedules attached to,
this Agreement unless otherwise expressly provided. The words ‘include’, ‘includes’
and ‘including’ shall be deemed to be followed by the phrase ‘without
limitation’. Unless the context in which used herein otherwise clearly
requires, ‘or’ has the inclusive meaning represented by the
17
phrase ‘and/or’. Defined
terms include in the singular number the plural and in the plural number the
singular. Reference to any agreement (including the Loan Documents), document
or instrument means such agreement, document or instrument as amended or
modified and in effect from time to time in accordance with the terms thereof
(and, if applicable, in otherwise explicitly provided, and reference to any
promissory note includes any promissory note which is an extension or renewal
thereof or a substitute or replacement therefore. Reference to any law, rule,
regulation, order, decree, requirement, policy, guideline, directive or
interpretation means as amended, modified, codified, replaced or reenacted, in
whole or in part, and in effect on the determination date, including rules and
regulations promulgated thereunder.
ARTICLE
II
Amount
and Terms of the Credit Facility
Section 2.1
Existing
Revolving Advances
. The Lender has
made various revolving advances to the Borrowers (the “Existing Revolving Advances”)
in accordance with the Former Credit Agreement. As of December 28, 2005, the
outstanding principal balance of the Existing Revolving Advances to Heska was
$8,545,126.50 and the outstanding principal balance of the Existing Revolving
Advances to Diamond was $541,186.19. Upon execution and delivery of this
Agreement, the Existing Revolving Advances shall be deemed to be Revolving
Advances pursuant to Section 2.2.
Section
2.2
Revolving Advances
. 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 until 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 Borrower’s Borrowing Base, or
(b) the sum of the outstanding and unpaid Revolving Advances would exceed the
Aggregate Borrowing Base. Each Borrower’s obligation to pay the Revolving
Advances shall be evidenced by such Borrower’s 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:
(a) Such Borrower shall make each request
for a Revolving Advance to the Lender before 11:00 a.m. (Denver time) of the
day of the requested Revolving Advance. Requests may be made in writing or by
telephone, specifying the date of the requested Revolving Advance and the
amount thereof. Each request shall be by (i) any officer of such Borrower;
or (ii) any person designated as such Borrower’s agent by any officer of
such Borrower in a writing delivered to the Lender; or (iii) any person
whom the Lender reasonably believes to be an officer of such Borrower or such a
designated agent.
(b) Upon fulfillment of the applicable
conditions set forth in Article IV, the Lender shall disburse the proceeds
of the requested Revolving Advance by crediting the same to such Borrower’s
demand deposit account maintained with Wells Fargo Bank
18
unless the Lender and such Borrower shall agree in
writing to another manner of disbursement. Upon the Lender’s request, such
Borrower shall promptly confirm each telephonic request for an Advance by
executing and delivering an appropriate confirmation certificate to the Lender.
Each Borrower shall repay all such Advances even if the Lender does not receive
such confirmation and even if the person requesting such Advance was not in
fact authorized to do so. Any request for an Advance by a Borrower, whether
written or telephonic, shall be deemed to be a representation by such Borrower
that the conditions set forth in Section 4.2 have been satisfied as of the
time of the request.
Section
2.3
Equipment Advances
. On July 28, 2005, the Lender made an
Equipment Advance to Heska in the amount of $500,000 and an Equipment Advance
to Diamond in the amount of $2,000,000, each in accordance with the Former
Credit Agreement. As of December 28, 2005, the outstanding principal balance of
the Equipment Advance to Heska was $500,000, and the outstanding principal
balance of the Equipment Advance to Diamond was $2,000,000. Each Borrower’s
obligation to pay the Equipment Advances shall be evidenced by such Borrower’s
Equipment 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.
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
(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.
Section
2.5
Term Loan B Advances
.
The Lender has previously made advances to Diamond in the amount of $2,250,000
(the “Term Loan B Advances”). As of
December 28, 2005, the outstanding principal balance of the Term Loan B
Advances was $904,738.00. The Borrowers’ obligation to pay the Term Loan B
Advances shall be evidenced by the Term Loan B 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.
Section
2.6
Payment of Term Loan B
Note
. The outstanding principal balance of the Term Loan B Note shall be
due and payable as follows:
(a) On June 1, 2000 and the first day of
each month thereafter, in monthly installments of $17,658; and
(b) On the 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.
19
Section
2.7
Spread
. The spread (the “Spread”) means the
percentage set forth in the table below opposite the applicable
prior-fiscal-year Net Income of the Borrowers, which percentage shall change
annually effective as of the first day of the month following the month in
which the Borrowers delivers to the Lender their audited financial statements
for the prior fiscal year; provided, however, that so long as no Default Period
then exists, if Heska raises Additional Capital of not less than $1,500,000 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 $1,500,000 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 $1,500,000
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 the Default Period:
|
Prior Fiscal Year Net Income
|
|
Spread
|
|
|
|
|
|
|
|
Less than $0
|
|
2.75
|
%
|
|
|
|
|
|
|
Greater than or
equal to $0
|
|
|
|
|
|
|
|
|
|
but less than
$2,500,000
|
|
1.75
|
%
|
|
|
|
|
|
|
Greater than or equal
to $2,500,000
|
|
0.75
|
%
|
Section
2.8
Interest; Minimum
Interest Charge; Default Interest; Participations; Usury
. Interest accruing
on the Notes shall be due and payable in arrears on the first day of each
month.
(a)
Revolving Note.
Except as set forth in Sections 2.8(e), 2.8(f) and 2.8(g), the outstanding
principal balance of the Revolving Note shall bear interest at the Revolving
Floating Rate.
(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.
(c)
Term Loan B Note.
Except as set forth in Sections 2.8(e), 2.8(f) and 2.8(g), the outstanding
principal balance of the Term Loan B Note shall bear interest at the Term
Floating Rate.
(d)
Minimum Interest Charge
.
Notwithstanding Sections 2.8(a), 2.8(b), 2.8(c) and 2.8(e), the Borrowers
shall pay to the Lender interest of not less than $100,000 per calendar year
(the “Minimum Interest Charge”) during the term of this Agreement, and the
Borrowers shall pay any deficiency between the Minimum Interest Charge and
20
the amount of interest otherwise calculated under
Sections 2.8(a), 2.8(b), or 2.8(c) on the date and in the manner provided
in Section 2.10; provided, however, that if the period for which the
Minimum Interest Charge is being calculated is shorter than one year, such
amount shall be prorated on a per diem basis for such shorter period.
(e)
Default Interest Rate
.
At any time during any Default Period, in the Lender’s sole discretion and
without waiving any of its other rights and remedies, the principal of the
Advances outstanding from time to time shall bear interest at the Default Rate,
effective for any periods designated by the Lender from time to time during
that Default Period.
(f)
Participations
.
If any Person shall acquire a participation in the Advances under this
Agreement, the Borrowers shall be obligated to the Lender to pay the full
amount of all interest calculated under this Section 2.8, along with all other
fees, charges and other amounts due under this Agreement, regardless if such
Person elects to accept interest with respect to its participation at a lower rate
than the Revolving Floating Rate or the Term Floating Rate, or otherwise elects
to accept less than its prorata share of such fees, charges and other amounts
due under this Agreement.
(g)
Usury
.
In
any event no rate change shall be put into effect which would result in a rate
greater than the highest rate permitted by law.
Section
2.9
Fees
.
(a)
Unused Line Fee
.
For the purposes of this Section 2.9(a), “Unused Amount” means the Maximum
Line reduced by (i) outstanding Revolving Advances and (ii) the L/C Amount. The Borrowers agree to pay to the Lender an
unused line fee at the rate of one-quarter of one percent (0.25%) per annum on
the average daily Unused Amount from the date of this Agreement to and
including the Termination Date, due and payable monthly in arrears on the first
day of the month and on the Termination Date.
(b)
Audit Fees
.
The
Borrowers hereby agree to pay the Lender, on demand, audit fees in connection
with any audits or inspections conducted by the Lender of any Collateral or any
Borrower’s operations or business at the rates established from time to time by
the Lender as its audit fees (which fees are currently $100 per hour per
auditor), together with all actual out-of-pocket costs and expenses incurred in
conducting any such audit or inspection, such audits shall be conducted, at the
least, on a quarterly basis.
(c)
Letter of Credit Fees.
Each Borrower agrees to pay the Lender a fee with respect to each Letter of
Credit issued for such Borrower’s account, if any, accruing on a daily basis
and computed at the annual rate of two and one-half percent (2.5%) of the
aggregate amount that may then be drawn on all outstanding Letters of Credit
issued for such Borrower’s account, assuming compliance with all conditions for
drawing thereunder (the “Aggregate Face Amount”), from and including the date
of issuance of such Letter of Credit until such date as such Letter of Credit
shall terminate by its terms or be returned to the Lender, due and payable
monthly in arrears on the first day of each month and on the Termination Date;
provided, however that during Default Periods, in
21
the Lender’s sole discretion and without waiving any
of its other rights and remedies, such fee shall increase to five and one-half
percent (5.5%) of the Aggregate Face Amount. The foregoing fee shall be in
addition to any and all fees, commissions and charges imposed by Lender with
respect to or in connection with such Letter of Credit.
(d)
Letter of Credit Administrative
Fees.
Each Borrower shall pay all administrative fees
charged by the Lender in connection with the honoring of drafts under any
Letter of Credit issued for such Borrower’s account, amendments thereto,
transfers thereof and all other activity with respect to the Letters of Credit
at the then-current rates published by the Lender for such services rendered on
behalf of customers of the Lender generally.
(e)
Foreign Receivables
Eligibility Program Fee
.
The Borrowers agree to pay to the Lender during the
Foreign Accounts Eligibility Period, a monthly fee in an amount equal to
one-twelfth of two-and-one-half percent (2.50%) of the FREP Sublimit, due and
payable monthly in advance on the first day of the month.
(f)
Amendment Fee.
The
Borrowers shall pay the Lender as of the date hereof a fully earned, non-refundable
fee in the amount of $10,000 in consideration of the Lender’s execution and
delivery of this Agreement.
Section
2.10
Computation of Interest
and Fees; When Interest Due and Payable
. Interest accruing on the
outstanding principal balance of the Advances and fees hereunder outstanding
from time to time shall be computed on the basis of actual number of days
elapsed in a year of 360 days. Interest shall be payable in arrears on the
first day of each month and on the Termination Date.
Section
2.11
Capital Adequacy
. If any Related Lender determines at any time
that its Return has been reduced as a result of any Rule Change, such Related
Lender may require any Borrower to pay it the amount necessary to restore its
Return to what it would have been had there been no Rule Change. For purposes
of this Section 2.11:
(a) “Capital Adequacy Rule” means any
law, rule, regulation, guideline, directive, requirement or request regarding
capital adequacy, or the interpretation or administration thereof by any
governmental or regulatory authority, central bank or comparable agency,
whether or not having the force of law, that applies to any Related
Lender. Such rules include rules
requiring financial institutions to maintain total capital in amounts based
upon percentages of outstanding loans, binding loan commitments and letters of
credit.
(b) “L/C Rule” means any law, rule,
regulation, guideline, directive, requirement or request regarding letters of
credit, or the interpretation or administration thereof by any governmental or
regulatory authority, central bank or comparable agency, whether or not having
the force of law, that applies to any Related Lender. Such rules include rules imposing taxes,
duties or other similar charges, or mandating reserves, special deposits or
similar requirements against assets of, deposits with or for the account of, or
credit extended by any Related Lender, on letters of credit.
22
(c) “Related Lender” includes (but is not
limited to) the Lender, any parent corporation of the Lender and any assignee of any interest of the
Lender hereunder and any participant in the loans made hereunder.
(d) “Return” for any period, means the
return as determined by a Related Lender on the Advances and Letters of Credit
based upon its total capital requirements and a reasonable attribution formula
that takes account of the Capital Adequacy Rules and the L/C Rules then in
effect, costs of issuing or maintaining any Letter of Credit and amounts
received or receivable under this Agreement or the Notes with respect to any
Advance or Letter of Credit. Return may
be calculated for each calendar quarter and for the shorter period between the
end of a calendar quarter and the date of termination of whole of this
Agreement.
(e) “Rule Change” means any change in any
Capital Adequacy Rule or L/C Rule occurring after the date of this Agreement,
but the term does not include any changes in applicable requirements that at
the Closing Date are scheduled to take place under the existing capital
Adequacy Rules or L/C Rules or any increases in the capital that any Related
Lender is required to maintain to the extent that the increases are required
due to a regulatory authority’s assessment of the financial condition of such
Related Lender.
The Lender will promptly
notify the Borrowers of any event of which it has knowledge, occurring after
the date hereof, which will entitle the Lender to compensation pursuant to this
Section 2.11. Certificates of any
Related Lender sent to any Borrower from time to time claiming compensation under
this Section 2.11, stating the reason therefor and setting forth in reasonable
detail the calculation of the additional amount or amounts to be paid to the
Related Lender hereunder to restore its Return shall be conclusive absent
manifest error. In determining such
amounts, the Related Lender may use any reasonable averaging and attribution
methods.
Section
2.12
Voluntary Prepayment;
Reduction of the Maximum Line; Termination of the Credit Facility by the
Borrowers
. Except as otherwise provided herein, each Borrower may prepay
the Revolving Advances made to it in whole at any time or from time to time in
part. Diamond may prepay the Equipment Advances (other than in accordance with
Section 2.4) or prepay the Term Loan B Advances (other than in accordance with
Section 2.6), or the Borrowers may terminate the Credit Facility or reduce the
Maximum Line at any time if it (i) gives the Lender at least 30 days’
prior written notice and (ii) pays the Lender the prepayment, termination
or line reduction fees in accordance with Section 2.13. Any prepayment of the
Equipment Advances (other than in accordance with Section 2.4), any prepayment
of the Term Loan B Advances (other than in accordance with Section 2.6), or
reduction in the Maximum Line must be in an amount not less than $250,000 or an
integral multiple thereof. If the
Borrowers reduce the Maximum Line to zero, all Obligations shall be immediately
due and payable. Any partial prepayments
of the Equipment Note (other than in accordance with Section 2.4), and any
partial prepayments of the Term Loan B Note (other than in accordance with
Section 2.6), shall be applied to principal payments due and owing in inverse
order of their maturities. Upon termination of the Credit Facility and payment
and performance of all Obligations, the Lender shall release or terminate the
Security Interest and the Security Documents to which the Borrowers are
entitled by law.
23
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 the Borrowers reduce 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 another division of the Lender, (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.
Section
2.14
Mandatory Prepayment
. Without notice or demand, if the outstanding
principal balance of the Revolving Advances made to a Borrower shall at any
time exceed such Borrower’s Borrowing Base, such Borrower shall immediately
(or, to the extent such condition is a result of a Discretionary Reduction,
within 5 Business Days) prepay the Revolving Advances to the extent necessary
to eliminate such excess. Any payment received by the Lender under
Section 2.12 may be applied to the Obligations, in such order and in such
amounts as the Lender, in its discretion, may from time to time determine;
provided that any prepayment under Section 2.12 which a Borrower designates as
a payment of the Revolving Advances, shall be applied to such Borrower’s
Revolving Advances; provided, further, that any prepayment under Section 2.12
which a Borrower designates as a partial prepayment of the Equipment Note or
the Term Loan B Note, shall be applied to principal installments of the
Equipment Note or the Term Loan B Note respectively, in inverse order of
maturity.
Section
2.15
Payment
. All payments to the Lender shall be made in
immediately available funds and shall be applied to the Obligations upon
receipt by the Lender. The Lender may hold all payments not constituting
immediately available funds for three (3) days before applying them to the
Obligations. Notwithstanding anything in Section 2.2, each Borrower hereby
authorizes the Lender, in its discretion at any time or from time to time
without such Borrower’s request and even if the conditions set forth in Section
4.2 would not be satisfied, to make a Revolving Advance in an amount equal to
the portion of the Obligations from time to time due and payable.
Section
2.16
Payment on Non-Banking
Days
. Whenever any payment to be made hereunder shall be stated to be due
on a day which is not a Banking Day, such payment may be made on the next
succeeding Banking Day, and such extension of time shall in such case be
24
included in the
computation of interest on the Advances or the fees hereunder, as the case may
be.
Section
2.17
Liability Records
.
The Lender may maintain from time to time, at its discretion, liability records
as to the Obligations. All entries made on any such record shall be presumed
correct until a Borrower establishes the contrary. Upon the Lender’s demand,
each Borrower will admit and certify in writing the exact principal balance of
the Obligations that such Borrower then asserts to be outstanding. Any billing
statement or accounting rendered by the Lender shall be conclusive and fully
binding on the Borrowers unless the Borrowers give the Lender specific written
notice of exception within 30 days after receipt.
Section
2.18
Issuance of Letters of
Credit
.
(a) Upon any Borrower’s Request the
Lender shall issue, from time to time until the Termination Date, one or more
documentary or standby letters of credit (each, a “Letter of Credit”) for such
Borrower’s account, provided that:
(i) The Lender shall have no obligation
to issue any Letter of Credit for the benefit of a Borrower if (A) a Default
Period exists, or (B) the face amount of the Letter of Credit to be issued
would exceed the lesser of:
(1) $1,000,000 less the Aggregate L/C
Amount, or
(2) such Borrower’s Availability.
Each Letter of Credit, if any, shall be issued
pursuant to a separate L/C Application entered by the applicable Borrower and
the Lender, completed in a manner satisfactory to the Lender. The terms and conditions set forth in each
such L/C Application shall supplement the terms and conditions hereof, but if
the terms of any such L/C Application and the terms of this Agreement are
inconsistent, the terms hereof shall control.
(b) No Letter of Credit shall be issued
with an expiry date later than the Maturity Date.
(c) Any request for the issuance of a
Letter of Credit under this Section 2.18 shall be deemed to be a representation
by the requesting Borrower that the statements set forth in Section 4.2 hereof
are correct as of the time of the request.
Section
2.19
Payment of Amounts Drawn
Under Letters of Credit
. Each
Borrower agrees to pay to the Lender any and all amounts required to be paid
under the applicable L/C Application, when and as required to be paid thereby,
and the amounts designated below, when and as designated:
(a) Each Borrower hereby agrees to pay
the Lender on the day a draft is honored under any Letter of Credit a sum equal
to all amounts drawn under such Letter of Credit plus any and all reasonable
charges and expenses that the Lender may pay or incur relative to such draw,
plus interest on all such amounts, charges and expenses as set forth
25
below (all such amounts are hereinafter referred to as
the “Obligation of Reimbursement”).
(b) Each Borrower hereby agrees to pay the
Lender on demand interest on all amounts, charges and expenses payable by such
Borrower to the Lender under this Section 2.19, accrued from the date any
such draft, charge or expense is paid by the Lender until payment in full by
such Borrower at the Revolving Floating Rate.
If a Borrower fails to pay to the Lender promptly the
amount of its Obligation of Reimbursement in accordance with the terms hereof
and the L/C Application pursuant to which such Letter of Credit was issued, the
Lender is hereby irrevocably authorized and directed, in its sole discretion,
to make a Revolving Advance in an amount sufficient to discharge the Obligation
of Reimbursement, including all interest accrued thereon but unpaid at the time
of such Revolving Advance, and such Revolving Advance shall be evidenced by the
Revolving Note and shall bear interest as provided in Section 2.8 hereof.
Section
2.20
Special Account
. If
this Credit Facility is terminated for any reason whatsoever, while any Letter
of Credit is outstanding for any Borrower’s account, such Borrower shall
thereupon pay the Lender in immediately available funds for deposit in the
Special Account an amount equal to the maximum aggregate amount available to be
drawn under all Letters of Credit then outstanding for such Borrower’s account,
assuming compliance with all conditions for drawing thereunder. The Special Account shall be maintained for
the Lender by any financial institution acceptable to the Lender. Any interest earned on amounts deposited in
the Special Account shall be credited to the Special Account. Amounts on deposit in the Special Account may
be applied by the Lender at any time or from time to time to such Borrower’s
Obligation of Reimbursement or any other Obligations, in the Lender’s sole
discretion, and shall not be subject to withdrawal by any Borrower so long as
the Lender maintains a security interest therein. The Lender agrees to transfer any balance in
the Special Account to such Borrower at such time as the Lender is required to
release its security interest in the Special Account under applicable law.
Section
2.21
Obligations Absolute
. The obligations of each Borrower arising
under Section 2.18 shall be absolute, unconditional and irrevocable, and shall
be paid strictly in accordance with the terms of this Agreement, under all
circumstances whatsoever, including (without limitation) the following
circumstances:
(a) any lack of validity or
enforceability of any Letter of Credit or any other agreement or instrument
relating to any Letter of Credit (collectively the “Related Documents”);
(b) any amendment or waiver of or any
consent to departure from all or any of the Related Documents;
(c) the existence of any claim, setoff,
defense or other right which any Borrower may have at any time, against any
beneficiary or any transferee of any Letter of Credit (or any persons or
entities for whom any such beneficiary or any such transferee
26
may be acting), or other person or entity, whether in
connection with this Agreement, the transactions contemplated herein or in the
Related Documents or any unrelated transactions;
(d) any statement or any other document
presented under any Letter of Credit proving to be forged, fraudulent, invalid
or insufficient in any respect or any statement therein being untrue or
inaccurate in any respect whatsoever;
(e) payment by or on behalf of the Lender
under any Letter of Credit against presentation of a draft or certificate which
does not strictly comply with the terms of such Letter of Credit; or
(f) any other circumstance or happening
whatsoever, whether or not similar to any of the foregoing.
ARTICLE III
Security Interest; Occupancy; Setoff
Section
3.1
Grant of Security
Interest
. Each Borrower hereby pledges, assigns and grants to the Lender a
security interest (collectively referred to as the “Security Interest”) in the
Collateral, as security for the payment and performance of the Obligations.
Upon request by the Lender, each Borrower will grant the Lender a security
interest in all commercial tort claims it may have against any Person.
Section
3.2
Notification of Account
Debtors and Other Obligors
. The Lender may during any Default Period notify
any account debtor or other person obligated to pay the amount due that such
right to payment has been assigned or transferred to the Lender for security
and shall be paid directly to the Lender. Each Borrower will join in giving
such notice if the Lender so requests. At any time after any Borrower or the
Lender gives such notice to an account debtor or other obligor, the Lender may,
but need not, in the Lender’s name or in any Borrower’s name, (a) demand,
sue for, collect or receive any money or property at any time payable or
receivable on account of, or securing, any such right to payment, or grant any
extension to, make any compromise or settlement with or otherwise agree to
waive, modify, amend or change the obligations (including collateral
obligations) of any such account debtor or other obligor; and (b) as each
Borrower’s agent and attorney-in-fact, notify the United States Postal Service
to change the address for delivery of such Borrower’s mail to any address
designated by the Lender, otherwise intercept such Borrower’s mail, and
receive, open and dispose of such Borrower’s mail, applying all Collateral as
permitted under this Agreement and holding all other mail for such Borrower’s
account or forwarding such mail to such Borrower’s last known address.
Section
3.3
Assignment of Insurance
. As additional security for the payment and
performance of the Obligations, each Borrower hereby assigns to the Lender any
and all monies (including, without limitation, proceeds of insurance and
refunds of unearned premiums) due or to become due under, and all other rights
of such Borrower with respect to, any and all policies of insurance now or at
any time hereafter covering the Collateral, to the extent such rights may be
assigned in accordance with such policies, or any evidence thereof or any
business records or
27
valuable papers
pertaining thereto, and such Borrower hereby directs the issuer of any such
policy to pay all such monies directly to the Lender. At any time, after and during the continuance
of an Event of Default, the Lender may (but need not), in the Lender’s name or
in any Borrower’s name, execute and deliver proof of claim, receive all such
monies, endorse checks and other instruments representing payment of such
monies, and adjust, litigate, compromise or release any claim against the
issuer of any such policy.
Section
3.4
Occupancy
(a) Each Borrower hereby irrevocably grants
to the Lender the right to take exclusive possession of the Premises at any
time during a Default Period.
(b) The Lender may use the Premises only
to hold, process, manufacture, sell, use, store, liquidate, realize upon or
otherwise dispose of goods that are Collateral and for other purposes that the
Lender may in good faith deem to be related or incidental purposes.
(c) The Lender’s right to hold the
Premises shall cease and terminate upon the earlier of (i) payment in full
and discharge of all Obligations and termination of the Commitment, and
(ii) final sale or disposition of all goods constituting Collateral and
delivery of all such goods to purchasers.
(d) The Lender shall not be obligated to
pay or account for any rent or other compensation for the possession, occupancy
or use of any of the Premises; provided, however, that if the Lender does pay
or account for any rent or other compensation for the possession, occupancy or
use of any of the Premises, the Borrowers shall reimburse the Lender promptly
for the full amount thereof. In addition, the Borrowers will pay, or reimburse
the Lender for, all taxes, fees, duties, imposts, charges and expenses at any
time incurred by or imposed upon the Lender by reason of the execution,
delivery, existence, recordation, performance or enforcement of this Agreement
or the provisions of this Section 3.4.
Section
3.5
License
. Each
Borrower hereby grants to the Lender a non-exclusive, worldwide and
royalty-free license to use or otherwise exploit all trademarks, franchises,
trade names, copyrights and patents of such Borrower for the purpose of
selling, leasing or otherwise disposing of any or all Collateral during any
Default Period. Notwithstanding the foregoing, such grant shall not constitute
an assignment of any Intellectual Property License to the extent granting such
a license is prohibited by or would constitute a default under any such
Intellectual Property License (but only to the extent such prohibition is
enforceable under applicable law).
Section
3.6
Financing Statement
.
The Borrowers authorize the Lender to file from time to time where permitted by
law, such financing statements against collateral described as ‘all personal
property’ or describing specific items of collateral including commercial tort
claims as the Lender deems necessary or useful to perfect the Security
Interest. A carbon, photographic or other reproduction of this Agreement or of
any financing statements signed by the Borrower is sufficient as a financing
statement and may be filed as a financing statement in any state to
28
perfect the security
interests granted hereby. For this purpose, the following information is set
forth:
Name
and address of Debtors:
Heska
Corporation
3760 Rocky Mountain Avenue
Loveland, Colorado 80538
Organizational Identification No. 2733906
Diamond
Animal Health, Inc.
2538 43rd Street SE
Des Moines, Iowa 50317
Organizational Identification No. 170088
Name
and address of Secured Party:
Wells
Fargo Bank, National Association
MAC C7300-210
1740 Broadway
Denver, Colorado 80274
Section
3.7
Setoff
. Each
Borrower agrees that the Lender may at any time or from time to time during any
Default Period, at its sole discretion and without demand and without notice to
anyone, setoff any liability owed to such Borrower by the Lender, whether or
not due, against any Obligation, whether or not due. In addition, whether or
not a Default Period exists, each other Person holding a participating interest
in any Obligations shall have the right to appropriate or setoff any deposit or
other liability then owed by such Person to such Borrower, whether or not due,
and apply the same to the payment of said participating interest, as fully as
if such Person had lent directly to such Borrower the amount of such
participating interest.
Section
3.8
Security Interest in
Special Account
. Each Borrower
hereby pledges, and grants to the Lender a security interest in, all funds held
in the Special Account from time to time and all proceeds thereof, as security
for the payment of all Obligations.
ARTICLE IV
Conditions of Lending
Section
4.1
Conditions Precedent to
Effectiveness
. This Agreement shall be effective upon the Lender’s receipt
of all of the following, each properly executed by the appropriate party and in
form and substance satisfactory to the Lender:
(a) This Agreement.
(b) A certificate of each Borrower’s
Chief Financial Officer certifying that no action of any Borrower’s directors
is necessary to authorize execution of this Agreement.
29
(c) Such other documents as the Lender in
its sole discretion may require.
Section
4.2
Conditions Precedent to
All Advances and Letters of Credit
.
The Lender’s obligation to make each Advance or to issue each Letter of
Credit shall be subject to the further conditions precedent that:
(a) the representations and warranties
contained in Article V hereof are correct on and as of such date of such
Advance as though made on and as of such date, except to the extent that such
representations and warranties relate solely to an earlier date; and
(b) no event has occurred and is
continuing, or would result from such Advance or the issuance of such Letter of
Credit, as the case may be, which constitutes a Default or an Event of Default.
ARTICLE V
Representations and Warranties
Each Borrower represents
and warrants to the Lender as follows:
Section
5.1
Corporate Existence and
Power; Name; Chief Executive Office; Inventory and Equipment Locations; Tax
Identification Number
. Diamond is a corporation, duly organized, validly
existing and in good standing under the laws of the State of Iowa, Heska is a
corporation, duly organized, validly existing and in good standing under the
laws of the State of Delaware. Each
Borrower is duly licensed or qualified to transact business in all jurisdictions
where the character of the property owned or leased or the nature of the
business transacted by it makes such licensing or qualification necessary. No
dissolution or termination of any
Borrower has occurred, and no notice of dissolution or articles of
termination have been filed with respect to any Borrower. Each Borrower has all
requisite corporate power and authority, to conduct its business, to own its
properties and to execute and deliver, and to perform all of its obligations
under the Loan Documents. Since 1994,
each Borrower has done business solely under the names set forth in Schedule
5.1 hereto. Each Borrower’s chief executive office and principal place of
business is located at the address set forth under the name of such Borrower in
Schedule 5.1 hereto, and all of such Borrower’s records relating to its
business or the Collateral are kept at that location. All Inventory and Equipment is located at
that location or at one of the other locations set forth in Schedule 5.1
hereto. Each Borrower’s tax identification number is correctly set forth in
Section 3.6 hereto.
Section
5.2
Authorization of
Borrowing; No Conflict as to Law or Agreements
. The execution, delivery and
performance by each Borrower of the Loan Documents and the borrowings from time
to time hereunder have been duly authorized by all necessary corporate action
and do not and will not (i) require any consent or approval of such
Borrower’s Owners; (ii) require any authorization, consent or approval by,
or registration, declaration or filing with, or notice to, any governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, or any third party, except such authorization, consent, approval,
registration, declaration, filing or notice as has been obtained, accomplished
or given
30
prior to the date hereof;
(iii) violate any provision of any law, rule or regulation (including,
without limitation, Regulation X of the Board of Governors of the Federal
Reserve System) or of any order, writ, injunction or decree presently in effect
having applicability to such Borrower or of such Borrower’s articles of
incorporation and bylaws; (iv) result in a breach of or constitute a
default under any indenture or loan or credit agreement or any other material
agreement, lease or instrument to which such Borrower is a party or by which it
or its properties may be bound or affected; or (v) result in, or require,
the creation or imposition of any mortgage, deed of trust, pledge, lien,
security interest or other charge or encumbrance of any nature (other than the Security
Interest) upon or with respect to any of the properties now owned or hereafter
acquired by such Borrower.
Section
5.3
Legal Agreements
.
(a) Immediately prior to execution of
this Agreement, the Former Credit Agreement constituted the legal, valid and
binding obligations of each Borrower, enforceable against each Borrower in
accordance with its terms, subject to general principles of equity and the
effects of bankruptcy and insolvency laws applicable to creditors generally. No Borrower has any claim, defense or offset
to enforcement of the Former Credit Agreement.
(b) This Agreement constitutes and, upon
due execution by each Borrower, the other Loan Documents will constitute the
legal, valid and binding obligations of each Borrower, enforceable against such
Borrower in accordance with their respective terms, subject to general
principles of equity and the effects of bankruptcy and insolvency laws
applicable to creditors generally.
Section
5.4
Subsidiaries
. No
Borrower has any Subsidiaries except as set forth in Schedule 5.4.
Section
5.5
Financial Condition; No
Adverse Change
. Heska has heretofore furnished to the Lender its
consolidated and consolidating financial statements and those statements fairly
present the Borrowers’ financial condition on the dates thereof and the results
of its operations and cash flows for the periods then ended and were prepared
in accordance with generally accepted accounting principles (except for the
absence of footnotes and subject to normal year-end adjustments with respect to
unaudited financial statements). Since the date of the most recent financial
statements, to the date hereof, there has been no material adverse change in
any Borrower’s business, properties or condition (financial or otherwise).
Section
5.6
Litigation
. Except
as set forth in Schedule 5.6 hereto, there are no actions, suits or proceedings
pending or, to any Borrower’s knowledge, threatened against or affecting any
Borrower or the properties of any Borrower before any court or governmental
department, commission, board, bureau, agency or instrumentality, domestic or
foreign, which, if determined adversely to such Borrower, would have a material
adverse effect on the financial condition, properties or operations of such
Borrower.
Section
5.7
Regulation U
.
No Borrower is engaged in the business of extending credit for the purpose of
purchasing or carrying margin stock (within the meaning of Regulation U of
31
the Board of Governors of
the Federal Reserve System), and no part of the proceeds of any Advance will be
used to purchase or carry any margin stock or to extend credit to others for
the purpose of purchasing or carrying any margin stock.
Section
5.8
Taxes
. Each
Borrower and its Affiliates have paid or caused to be paid to the proper
authorities when due all federal, state and local taxes required to be withheld
by each of them (other than (a) any such tax whose amount, applicability or
validity is being contested in good faith by appropriate proceedings and for
which proper reserves have been made, or (b) any such taxes in an aggregate
amount among all Borrowers less than $25,000 at any given time). Each Borrower
and its Affiliates have filed all federal, state and local tax returns which to
the knowledge of the officers of such Borrower or any Affiliate, as the case
may be, are required to be filed, and each Borrower and its Affiliates have
paid or caused to be paid to the respective taxing authorities all taxes as
shown on said returns or on any assessment received by any of them to the
extent such taxes have become due (other than (a) any such tax whose amount,
applicability or validity is being contested in good faith by appropriate
proceedings and for which proper reserves have been made, or (b) any such taxes
in an aggregate amount among all Borrowers less than $25,000 at any given
time).
Section
5.9
Titles and Liens
.
Each Borrower has good and absolute title to all Collateral described in the
collateral reports provided to the Lender and all other Collateral, properties
and assets (other than assets identified as being subject to capital leases)
reflected in the latest financial statements referred to in Section 5.5
and all proceeds thereof, free and clear of all mortgages, security interests,
liens, adverse claims and encumbrances, except for Permitted Liens. No
financing statement naming any Borrower as debtor is on file in any office
except to perfect only Permitted Liens.
Section
5.10
Plans
. Except as
disclosed to the Lender in writing prior to the date hereof, no Borrower nor
any Affiliates of any Borrower maintains or has maintained any Plan. To the
best of its knowledge, no Borrower nor any Affiliate of any Borrower has
received any notice or has any knowledge to the effect that it is not in full
compliance with any of the requirements of ERISA, except as set forth on
Schedule 5.10. No Reportable Event or other fact or circumstance which may have
an adverse effect on the Plan’s tax qualified status exists in connection with
any Plan. No Borrower nor any Affiliate of any Borrower has:
(a) Any accumulated funding deficiency
within the meaning of ERISA; or
(b) Any liability or knows of any fact or
circumstances which could result in any liability to the Pension Benefit
Guaranty Corporation, the Internal Revenue Service, the Department of Labor or
any participant in connection with any Plan (other than accrued benefits which
or which may become payable to participants or beneficiaries of any such Plan).
Section
5.11
Default
. Each
Borrower is in compliance with all provisions of all agreements, instruments,
decrees and orders to which it is a party or by which it or its property is
bound or affected, the breach or default of which could have a material adverse
effect on any Borrower’s financial condition, properties or operations.
32
Section
5.12
Environmental Matters
.
(a)
Definitions
. As used in this
Agreement, the following terms shall have the following meanings:
(i) “Environmental Law” means any
federal, state, local or other governmental statute, regulation, law or
ordinance dealing with the protection of human health and the environment.
(ii) “Hazardous Substances” means
pollutants, contaminants, hazardous substances, hazardous wastes, petroleum and
fractions thereof, and all other chemicals, wastes, substances and materials
listed in, regulated by or identified in any Environmental Law.
(b) To each Borrower’s best knowledge,
except as previously disclosed to Lender, there are not present in, on or under
the Premises any Hazardous Substances in such form or quantity as to create any
liability or obligation for any Borrower or for the Lender under common law of
any jurisdiction or under any Environmental Law, and no Hazardous Substances
have ever been stored, buried, spilled, leaked, discharged, emitted or released
in, on or under the Premises in such a way as to create any such liability.
(c) Except as set forth in Schedule 5.12,
to each Borrower’s best knowledge, no Borrower has disposed of Hazardous
Substances in such a manner as to create any liability under any Environmental
Law.
(d) Except as previously disclosed to
Lender, there are not and there never have been any requests, claims, notices,
investigations, demands, administrative proceedings, hearings or litigation,
relating in any way to the Premises or any Borrower, alleging liability under,
violation of, or noncompliance with any Environmental Law or any license,
permit or other authorization issued pursuant thereto, which could create
liability to any Borrower in excess of $25,000. To each Borrower’s best
knowledge, no such matter is threatened or impending.
(e) To each Borrower’s best knowledge,
except as previously disclosed to Lender, each Borrower’s businesses are and
have in the past always been conducted in accordance with all Environmental
Laws and all licenses, permits and other authorizations required pursuant to
any Environmental Law and necessary for the lawful and efficient operation of
such businesses are in the Borrowers’ possession and are in full force and
effect. Except as set forth in Schedule 5.12, to each Borrower’s best knowledge,
there is no threat that any permit required under any Environmental Law will be
withdrawn, terminated, limited or materially changed.
(f) To each Borrower’s best knowledge,
except as previously disclosed to Lender, the Premises are not and never have
been listed on the National Priorities List, the Comprehensive Environmental
Response, Compensation and Liability Information System or any similar federal,
state or local list, schedule, log, inventory or database.
33
(g) Except as set forth in Schedule 5.12,
each Borrower has delivered to Lender all environmental assessments, audits,
reports, permits, licenses and other documents describing or relating in any
way to the Premises or such Borrower’s businesses to the extent in such
Borrower’s possession or control.
Section
5.13
Submissions to Lender
. All financial and other information provided
to the Lender by or on behalf of each Borrower in connection with such Borrower’s
request for the credit facilities contemplated hereby were true and correct in
all material respects as of the date given and, as to projections, valuations
or proforma financial statements, presented, at the time given, a good faith
opinion as to such projections, valuations and proforma condition and results.
It is recognized by the Lender that projections and forecasts provided by or on
behalf of the Borrowers, although reflecting the Borrowers’ good faith
projections or forecasts based on methods and data which the Borrowers believe
to be reasonable and accurate, are not to be viewed as facts and that actual
results during the periods covered by any such projections and forecasts may
(and are likely to) differ from the projected or forecasted results.
Notwithstanding the foregoing, it is recognized by the Borrowers that the
Lender will rely on, among other things, the Borrowers’ projections in setting
financial covenants set forth in Articles VI and VII hereof, and nothing in
this Section 5.13 shall be construed as a waiver of the Lender’s right to rely
on such covenants or to exercise its remedies in case of a breach of such
covenants.
Section
5.14
Financing Statements
.
Each Borrower has provided to the Lender signed financing statements sufficient
when filed to perfect the Security Interest and the other security interests
created by the Security Documents. When
such financing statements are filed in the offices noted therein, the Lender
will have a valid and perfected security interest in all Collateral and all
other collateral described in the Security Documents which is capable of being
perfected by filing financing statements. None of the Collateral or other
collateral covered by the Security Documents is or will become a fixture on
real estate, unless a sufficient fixture filing is in effect with respect
thereto.
Section
5.15
Rights to Payment
. To the best of each Borrower’s knowledge,
except as disclosed to Lender, each right to payment and each instrument,
document, chattel paper and other agreement constituting or evidencing
Collateral or other collateral covered by the Security Documents is (or, in the
case of all future Collateral or such other collateral, will be when arising or
issued) the valid, genuine and legally enforceable obligation, subject to no
defense, setoff or counterclaim, of the account debtor or other obligor named
therein or in such Borrower’s records pertaining thereto as being obligated to
pay such obligation.
Section
5.16
Financial Solvency
.
Both before and after giving effect to all of the transactions contemplated in
the Loan Documents, no Borrower, and no Affiliate of any Borrower:
(a) was or will be insolvent, as that
term is used and defined in Section 101(32) of the United States Bankruptcy
Code and Section 2 of the Uniform Fraudulent Transfer Act;
34
(b) has unreasonably small capital or is
engaged or about to engage in a business or a transaction for which any
remaining assets of such Borrower or such Affiliate are unreasonably small;
(c) by executing, delivering or
performing its obligations under the Loan Documents or other documents to which
it is a party or by taking any action with respect thereto, intends to, nor
believes that it will, incur debts beyond its ability to pay them as they
mature;
(d) by executing, delivering or
performing its obligations under the Loan Documents or other documents to which
it is a party or by taking any action with respect thereto, intends to hinder,
delay or defraud either its present or future creditors; and
(e) at this time contemplates filing a
petition in bankruptcy or for an arrangement or reorganization or similar
proceeding under any law of any jurisdiction, or, to the best knowledge of any
Borrower, is the subject of any actual, pending or threatened bankruptcy,
insolvency or similar proceedings under any law of any jurisdiction.
ARTICLE VI
Borrower’s Affirmative Covenants
So long as the
Obligations shall remain unpaid, or the Credit Facility shall remain
outstanding, each Borrower will comply with the following requirements, unless
the Lender shall otherwise consent in writing:
Section
6.1
Reporting Requirements
.
Heska will deliver, or cause to be delivered, to the Lender each of the
following, which shall be in form and detail acceptable to the Lender:
(a) as soon as available, and in any
event within 90 days after the end of each fiscal year of Heska, Heska’s
audited financial statements with the unqualified opinion of independent
certified public accountants selected by Heska and acceptable to the Lender,
which annual financial statements shall include Heska’s balance sheet as at the
end of such fiscal year and the related statements of Heska’s income, retained
earnings and cash flows for the fiscal year then ended, prepared on a
consolidating and consolidated basis to include any Affiliates, all in
reasonable detail and prepared in accordance with GAAP, together with (i)
copies of all management letters prepared by such accountants and (ii) a
certificate of Heska’s chief financial officer stating that to the best of his
knowledge such financial statements have been prepared in accordance with GAAP
and whether or not such officer has knowledge of the occurrence of any Default
or Event of Default hereunder and, if so, stating in reasonable detail the
facts with respect thereto;
(b) within 5 business days of filing with
the United States Securities and Exchange Commission, a copy of each of Heska’s
annual or quarterly reports on forms 10K or 10Q;
(c) as soon as available and in any event
within 20 days after the end of each month (or, in the case of months that
coincide with the end of the Borrowers’ fiscal
35
quarter, within 30 days after the end of such month),
an unaudited/internal balance sheet and statement of income and retained
earnings of Heska as at the end of and for such month and for the year to date
period then ended, prepared on a consolidated and consolidating basis in
accordance with GAAP, subject to year-end audit adjustments; and accompanied by
a certificate of Heska’s chief financial officer or principal accounting
officer, substantially in the form of Exhibit B hereto, stating (i) that
to the best of his knowledge
such financial
statements have been prepared in accordance with GAAP and fairly represent each
Borrower’s financial condition and the results of its operations, subject to
year-end audit adjustments, (ii) whether or not such officer has knowledge
of the occurrence of any Default or Event of Default hereunder not theretofore
reported and remedied and, if so, stating in reasonable detail the facts with
respect thereto, and (iii) all relevant facts in reasonable detail to
evidence, and the computations as to, whether or not each Borrower is in
compliance with the requirements set forth in Sections 6.12, 6.13, 6.14, 6.15,
and 7.10;
(d) weekly, or more frequently if the
Lender so requires, sales journals,
collection reports, and credit memos of each Borrower;
(e) Monthly within 20 days after the end
of each month, agings of each Borrower’s accounts receivable and its accounts
payable, an inventory certification report, and a calculation of each Borrower’s
Accounts, Eligible Accounts, Inventory and Eligible Inventory as at the end of
such month or shorter time period;
(f) at least 30 days before the
beginning of each fiscal year of Heska, the projected balance sheets and income
statements for each month of such year, each in reasonable detail, representing
each Borrower’s good faith projections and certified by such Borrower’s chief
financial officer as being the most accurate projections available and
identical to the projections used by such Borrower for internal planning
purposes, together with such supporting schedules and information as the Lender
may in its discretion require;
(g) immediately after the commencement
thereof, notice in writing of all litigation and of all proceedings before any governmental
or regulatory agency affecting any Borrower of the type described in
Section 5.12 or which seek a monetary recovery against any Borrower in
excess of $50,000;
(h) as promptly as practicable (but in
any event not later than five business days) after an officer of any Borrower
obtains knowledge of the occurrence of any breach, default or event of default
under any Security Document or any event which constitutes a Default or Event
of Default hereunder, notice of such occurrence, together with a detailed
statement by a responsible officer of such Borrower of the steps being taken by
such Borrower to cure the effect of such breach, default or event;
(i) as soon as possible and in any event
within 30 days after any Borrower knows or has reason to know that any
Reportable Event with respect to any Plan has occurred, the statement of such
Borrower’s chief financial officer setting forth details as to such Reportable
Event and the action which such Borrower proposes to take with
36
respect thereto, together with a copy of the notice of
such Reportable Event to the Pension Benefit Guaranty Corporation;
(j) as soon as possible, and in any
event within 10 days after any Borrower fails to make any quarterly
contribution required with respect to any Plan under Section 412(m) of the
Internal Revenue Code of 1986, as amended, the statement of such Borrower’s
chief financial officer setting forth details as to such failure and the action
which such Borrower proposes to take with respect thereto, together with a copy
of any notice of such failure required to be provided to the Pension Benefit
Guaranty Corporation;
(k) promptly upon knowledge thereof,
notice of any loss of or material damage to any Collateral or other collateral
covered by the Security Documents or of any substantial adverse change in the
Collateral or such other collateral or the prospect of payment thereof, in each
case involving a loss, damage or change of $50,000 of more;
(l) promptly upon their distribution,
copies of all financial statements, reports and proxy statements which any
Borrower shall have sent to its stockholders;
(m) promptly after the sending or filing
thereof, copies of all regular and periodic reports which any Borrower shall
file with the Securities and Exchange Commission or any national securities
exchange;
(n) promptly upon filing, copies of the
state and federal tax returns and all schedules thereto of each Borrower;
(o) promptly upon knowledge thereof,
notice of any Borrower’s violation of any law, rule or regulation, the non-compliance
with which could materially and adversely affect any Borrower’s business or its
financial condition; and
(p) from time to time, with reasonable
promptness, any and all receivables schedules, collection reports, deposit
records, equipment schedules, copies of invoices to account debtors, shipment
documents and delivery receipts for goods sold, and such other material,
reports, records or information as the Lender may request.
(q) Promptly upon knowledge thereof, each
Borrower will deliver to the Lender notice of any commercial tort claims it may
bring against any person, including the name and address of each defendant, a
summary of the facts, an estimate of such Borrower’s damages, copies of any
complaint or demand letter submitted by such Borrower, and such other
information as the Lender may request.
Section
6.2
Books and Records;
Inspection and Examination
. Each Borrower will keep accurate books of
record and account for itself pertaining to the Collateral and pertaining to
such Borrower’s business and financial condition and such other matters as the
Lender may from time to time request in which true and complete entries will be
made in accordance with GAAP and, upon the Lender’s request, will permit any
officer, employee, attorney or accountant for the Lender to audit, review, make
extracts from or copy any and all corporate and financial books and records of
such Borrower at all times during ordinary business hours, to send and discuss
37
with account debtors and
other obligors requests for verification of amounts owed to such Borrower, and
to discuss such Borrower’s affairs with any of its Directors, officers,
employees or agents. Each Borrower will permit the Lender, or its employees,
accountants, attorneys or agents, to examine and inspect any Collateral, other
collateral covered by the Security Documents or any other property of such
Borrower at any time during ordinary business hours. The Borrowers hereby
irrevocably authorize all accountants and third parties to disclose and deliver
to the Lender, at the Borrowers’ expense, all financial information, books and
records, work papers, management reports and other information in their
possession regarding the Borrowers.
Section
6.3
Account Verification
.
The Lender may at any time and from time to time send or require any Borrower
to send requests for verification of accounts or notices of assignment to
account debtors and other obligors. The Lender may also at any time and from
time to time telephone account debtors and other obligors to verify accounts.
Section
6.4
Compliance with Laws
.
(a) Each Borrower will (i) comply
with the requirements of applicable laws and regulations, the non-compliance
with which would materially and adversely affect its business or its financial
condition and (ii) use and keep the Collateral, and require that others
use and keep the Collateral, only for lawful purposes, without violation of any
federal, state or local law, statute or ordinance.
(b) Without limiting the foregoing
undertakings, each Borrower specifically agrees that it will comply in all
material respects with all applicable Environmental Laws and obtain and comply
with all permits, licenses and similar approvals required by any Environmental
Laws, and will not generate, use, transport, treat, store or dispose of any
Hazardous Substances in such a manner as to create any material liability or
obligation under the common law of any jurisdiction or any Environmental Law.
Section
6.5
Payment of Taxes and
Other Claims; Payment of Past-Due Accounts
. Each Borrower will pay or
discharge, when due, (a) all taxes, assessments and governmental charges
levied or imposed upon it or upon its income or profits, upon any properties
belonging to it (including, without limitation, the Collateral) or upon or
against the creation, perfection or continuance of the Security Interest, prior
to the date on which penalties attach thereto, (b) all federal, state and
local taxes required to be withheld by it, and (c) all lawful claims for
labor, materials and supplies which, if unpaid, might by law become a lien or
charge upon any properties of such Borrower; provided, that no Borrower shall
be required to pay any such tax, assessment, charge or claim whose amount,
applicability or validity is being contested in good faith by appropriate
proceedings and for which proper reserves have been made. No Borrower shall have any Past Due Payables.
Section
6.6
Maintenance of
Properties
.
(a) Each Borrower will keep and maintain
the Collateral, the other collateral covered by the Security Documents and all
of its other properties necessary or useful in its business in good condition,
repair and working order (normal wear and tear excepted) and will from time to
time replace or repair any worn, defective or broken parts;
38
provided, however, that nothing in this
Section 6.6 shall prevent any Borrower from discontinuing the operation
and maintenance of any of its properties if such discontinuance is, in such
Borrower’s judgment, desirable in the conduct of such Borrower’s business and
not disadvantageous in any material respect to the Lender.
(b) Each Borrower will defend the
Collateral against all claims or demands of all persons (other than the Lender)
claiming the Collateral or any interest therein.
(c) Each Borrower will keep all
Collateral and other collateral covered by the Security Documents free and
clear of all security interests, liens and encumbrances except Permitted Liens.
Section
6.7
Insurance
. Each
Borrower will obtain and at all times maintain insurance with insurers believed
by such Borrower to be responsible and reputable, in such amounts and against
such risks as may from time to time be reasonably required by the Lender, but
in all events in such amounts and against such risks as is usually carried by
companies engaged in similar business and owning similar properties in the same
general areas in which such Borrower operates. Without limiting the generality
of the foregoing, each Borrower will at all times keep all tangible Collateral
insured against risks of fire (including so-called extended coverage), theft,
collision (for Collateral consisting of motor vehicles) and such other risks
and in such amounts as the Lender may reasonably request, with any loss payable
to the Lender to the extent of its interest, and all policies of such insurance
shall contain a lender’s loss payable endorsement for the Lender’s benefit
acceptable to the Lender. All policies of liability insurance required
hereunder shall name the Lender as an additional insured.
Section
6.8
Preservation of
Existence
. Each Borrower will preserve and maintain its existence and all
of its rights, privileges and franchises necessary or desirable in the normal
conduct of its business and shall conduct its business in an orderly, efficient
and regular manner.
Section
6.9
Delivery of
Instruments, etc
. Upon request by the Lender, each Borrower will promptly
deliver to the Lender in pledge all instruments, documents and chattel papers
constituting Collateral, duly endorsed or assigned by such Borrower.
Section 6.10
Collateral
Accounts
.
(a) If, notwithstanding the instructions
to debtors to make payments to the Lockbox, any Borrower receives any payments
on Receivables, such Borrower shall deposit such payments into such Borrower’s
Collateral Account. Until so deposited, such Borrower shall hold all such
payments in trust for and as the property of the Lender and shall not commingle
such payments with any of its other funds or property; provided, however, that
the foregoing shall not be construed to allow the Lender to withhold any such payments
after full payment and discharge of all Obligations.
(b) Amounts deposited in any Collateral
Account shall not bear interest and shall not be subject to withdrawal by any
Borrower, except after full payment and discharge of all Obligations; provided,
however, that if the Borrowers’ only outstanding Obligations are principal
owing under the Equipment Note and the Term Loan B Note,
39
and if no such principal amount is due, the Lender
agrees to remit such amounts to such Borrower’s demand deposit account
maintained with Wells Fargo Bank.
(c) All deposits in any Collateral
Account shall constitute proceeds of Collateral and shall not constitute
payment of the Obligations. The Lender shall from time to time within one
Banking Day, apply deposited funds in each Collateral Account to the payment of
the Obligations, in any order or manner of application satisfactory to the
Lender, by transferring such funds to the Lender’s general account.
(d) All items deposited in any Collateral
Account shall be subject to final payment. If any such item is returned
uncollected, the applicable Borrower will immediately pay the Lender, or, for
items deposited in a Collateral Account, the bank maintaining such account, the
amount of that item, or such bank at its discretion may charge any uncollected
item to any commercial account or other account belonging to the Borrower to
whom the item was payable.
Section
6.11
Performance by the
Lender
. If any Borrower at any time fails to perform or observe any of the
foregoing covenants contained in this Article VI or elsewhere herein, and
if such failure shall continue for a period of ten calendar days after the
Lender gives such Borrower written notice thereof (or in the case of the
agreements contained in Sections 6.5, 6.7 and 6.10, immediately upon the
occurrence of such failure, without notice or lapse of time), the Lender may,
but need not, perform or observe such covenant on behalf and in the name, place
and stead of such Borrower (or, at the Lender’s option, in the Lender’s name) and
may, but need not, take any and all other actions which the Lender may
reasonably deem necessary to cure or correct such failure (including, without
limitation, the payment of taxes, the satisfaction of security interests, liens
or encumbrances, the performance of obligations owed to account debtors or
other obligors, the procurement and maintenance of insurance, the execution of
assignments, security agreements and financing statements, and the endorsement
of instruments); and such Borrower shall thereupon pay to the Lender on demand
the amount of all monies expended and all costs and expenses (including
reasonable attorneys’ fees and legal expenses) incurred by the Lender in
connection with or as a result of the performance or observance of such agreements
or the taking of such action by the Lender, together with interest thereon from
the date expended or incurred at the Revolving Floating Rate. To facilitate the Lender’s performance or
observance of such covenants of the Borrowers, each Borrower hereby irrevocably
appoints the Lender, or the Lender’s delegate, acting alone, as such Borrower’s
attorney in fact (which appointment is coupled with an interest) with the right
(but not the duty) from time to time to create, prepare, complete, execute,
deliver, endorse or file in the name and on behalf of such Borrower any and all
instruments, documents, assignments, security agreements, financing statements,
applications for insurance and other agreements and writings required to be
obtained, executed, delivered or endorsed by such Borrower under this
Section 6.11.
Section
6.12
Minimum Capital
.
Heska will maintain, on a consolidated basis, as of each date listed below, its
Capital at an amount not less than the amount set forth opposite such date
(amounts in parentheses denote negative numbers):
40
[***] — 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
|
|
Minimum Capital
|
|
|
|
|
|
|
|
November 30,
2005
|
|
$
|
(150,000
|
)
|
|
December 31,
2005
|
|
$
|
800,000
|
|
|
January 1, 2006
|
|
$
|
1,835,000
|
|
|
February 28,
2006
|
|
$
|
1,275,000
|
|
|
March 31, 2006
|
|
$
|
1,385,000
|
|
|
April 30, 2006
|
|
$
|
1,010,000
|
|
|
May 31, 2006
|
|
$
|
350,000
|
|
|
June 30, 2006
|
|
$
|
725,000
|
|
|
July 31, 2006
|
|
$
|
475,000
|
|
|
August 31, 2006
|
|
$
|
50,000
|
|
|
September 30,
2006
|
|
$
|
1,200,000
|
|
|
October 31, 2006
|
|
$
|
1,300,000
|
|
|
November 30,
2006
|
|
$
|
1,150,000
|
|
|
December 31,
2006
|
|
$
|
1,950,000
|
|
|
January 31, 2007 and
the last day of each month thereafter
|
|
$
|
1,350,000
|
|
Amounts corresponding to dates after December 31, 2005
shall be adjusted upward or downward, respectively, on a dollar-for-dollar
basis, by the amount the Borrowers’ aggregate actual Capital on December 31,
2005 per the Borrowers’ audited financial statements exceeds or falls short of $3,243,000.
In addition to the
foregoing, if Heska makes [***] during the fiscal year ending December 31,
2006, as contemplated by Section 7.4(a)(ix), to the extent [***] is expensed in
accordance with GAAP, the Minimum Capital amounts listed above occurring [***]
shall be adjusted downward on a dollar-for-dollar basis by the amount of such
expense, not to exceed $1,000,000.
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):
41
[***] — Certain information on
this page have been omitted and filed separately with the Securities and
Exchange Commission. Confidential treatment has been requested with respect to
the omitted portions.
|
Period
|
|
Minimum Net Income
|
|
|
|
|
|
|
|
Twelve months
ending December 31, 2005
|
|
$
|
(2,600,000
|
)
|
|
Three months
ending March 31, 2006
|
|
$
|
(1,850,000
|
)
|
|
Six months
ending June 30, 2006
|
|
$
|
(2,000,000
|
)
|
|
Nine months
ending September 30, 2006
|
|
$
|
(1,500,000
|
)
|
|
Twelve months ending
December 31, 2006
|
|
$
|
(750,000
|
)
|
In addition to the
foregoing, if Heska makes [***] during the fiscal year ending December 31,
2006, as contemplated by Section 7.4(a)(ix), to the extent [***] is expensed in
accordance with GAAP, the Minimum Capital amounts listed above occurring [***]
shall be adjusted downward on a dollar-for-dollar basis by the amount of such
expense, not to exceed $1,000,000.
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 C, at an amount
greater than zero.
Section
6.16
New Covenants
. On or
before November 30, 2006, the Borrowers and the Lender shall agree on new covenant
levels for Sections 6.12, 6.13, 6.14, 7.4(a)(v) and 7.10 for periods after such
date. The new covenant levels will be based on (i) the Borrowers’ projections
for such periods and (ii) the year to date financial results of Heska, on a
consolidated basis, and such new covenant levels shall be no less stringent
than the present levels. An Event of Default shall occur if the new covenants
are not agreed to by the above date.
ARTICLE VII
Negative Covenants
So long as the
Obligations shall remain unpaid, or the Credit Facility shall remain
outstanding, each Borrower agrees that, without the Lender’s prior written
consent:
Section
7.1
Liens
. Such
Borrower will not create, incur or suffer to exist any mortgage, deed of trust,
pledge, lien, security interest, adverse claim, assignment or transfer
(collectively, “Liens”) upon or of any of its assets, now owned or hereafter
acquired, to secure any indebtedness;
excluding
,
however
, from
the operation of the foregoing, the following (collectively, “Permitted Liens”):
42
(a) in the case of any of such Borrower’s
property which is not Collateral or other collateral described in the Security
Documents, mortgages, deeds of trust, covenants, restrictions, rights,
easements and minor irregularities in title which do not materially interfere
with such Borrower’s business or operations as presently conducted;
(b) Liens in existence on the date hereof
and listed in Schedule 7.1 hereto;
(c) the Security Interest and Liens and
security interests created by the Security Documents;
(d) purchase money Liens given,
simultaneously with or within one hundred twenty (120) days after the
acquisition or construction of real property or tangible personal property
(including vendor’s rights under purchase contracts under an agreement whereby
title is retained for the purpose of securing the purchase price thereof and
lessors’ liens under capitalized lease obligations) or any Lien given to a
financial institution financing the acquisition or construction of the real
property or tangible personal property, on real property or tangible personal
property hereafter acquired or constructed and not heretofore owned by any
Borrower; provided, however, that in each such case such Lien (i) does not
exceed the amount paid for such acquisition or construction, and (ii) is
limited to such acquired or constructed real or tangible personal property;
(e) carriers’, mechanics’, materialmen’s,
suppliers’, and other like Liens and charges arising in the ordinary course of
business securing obligations that are not incurred in connection with the
obtaining of any advance or credit and which are not overdue, or are being
contested in good faith by appropriate proceedings;
(f) Liens arising in connection with
worker’s compensation, unemployment insurance and progress payments under
government contracts and liens securing the performance of bids, tenders,
leases, contracts (other than for the repayment of borrowed money), statutory
obligations, surety customs and appeal bonds and other obligations of like
nature, incurred, in each case, in the ordinary course of business;
(g) judgment liens in existence in an
amount not more than $100,000;
(h) zoning restrictions, easements,
licenses, encumbrances, reservations, provisions, covenants, conditions,
waivers, restrictions on the use of property or minor irregularities of title
(and with respect to leasehold interests, mortgages, obligations, liens and
other encumbrances incurred, created, assumed or permitted to exist and arising
by, through or under a landlord or owner of the leased property, with or
without consent of the lessee) as normally exist with respect to similar
properties which do not in the aggregate materially impair the use thereof in
the operation of any Borrower’s business;
(i) any preexisting Lien (whether or not
assumed) on any real property or tangible personal property hereafter acquired
by any Borrower; provided, however, that in each such case such Lien is limited
to such acquired real or tangible personal property;
provided
,
further
,
that proceeds from a Term Advance are
not
used to acquire such real
property or tangible personal property;
43
(j) extensions, renewals and
replacements of the Liens referred to in clause (b), (d) or (i) above;
provided
,
any such extension, renewal or replacement liens shall be limited to the
property or assets covered by the Lien extended, renewed or replaced;
(k) leases, subleases, licenses and
sublicenses
to third parties of patents,
patent applications, trademarks and copyrights, in each case in the ordinary
course of its business as currently conducted;
(l) Liens of brokers under brokerage
agreements entered into in the ordinary course of business as presently
conducted;
(m) Diamond’s grant of a security interest
in the Farm Mortgaged Property to secure existing indebtedness payable to Agri
Laboratories, Ltd. or to secure new indebtedness for borrowed money described
in Section 7.2(g), in each case on terms acceptable to the Lender in its
reasonable discretion; and
(n) Diamond’s grant of a security
interest in the Factory Mortgaged Property to secure new indebtedness for
borrowed money described in Section 7.2(h).
Section
7.2
Indebtedness
. Such
Borrower will not incur, create, assume or permit to exist any indebtedness or
liability on account of deposits or advances or any indebtedness for borrowed
money or letters of credit issued on such Borrower’s behalf, or any other
indebtedness or liability evidenced by notes, bonds, debentures or similar
obligations, except:
(a) indebtedness arising hereunder;
(b) indebtedness of such Borrower in
existence on the date hereof and listed in Schedule 7.2 hereto;
(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 January 31, 2006,
indebtedness to Heska Holding AG in an amount not to exceed $1,500,000, and
thereafter, zero.
(d) unsecured trade debt incurred, and
cash advances received from customers, in each case in the ordinary course of
business;
(e) indebtedness of any Person existing
at the time such Person is merged with or into such Borrower, to the extent the
Lender consents to such merger in accordance with Section 7.7, and provided
that such Debt is not incurred in connection with or in contemplation of such
merger;
(f) extensions, renewals and replacements
of the debt referred to in clause (b) or (c) above; provided that any such
extension, renewal or replacement shall be in an
44
[***] — 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.
amount not greater than, and on terms no less favorable to such
Borrower (other than interest rate increases) than, the amount extended,
renewed or replaced;
(g) Diamond’s incurrence of indebtedness
of not less than [***] nor more than [***] secured by the Farm Mortgaged
Property, 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; and upon receipt of proceeds of such
indebtedness, the Lender will release its security interest in the Farm
Mortgaged Property;
(h) Diamond’s incurrence of indebtedness
not less than [***] nor more than [***] secured by the Factory Mortgaged
Property 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 Diamond’s 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;
(i) other Debt in an amount not to
exceed $100,000; and
(j) capital leases to the extent the
entry into such leases does not cause a Default or Event of Default hereunder.
Section
7.3
Guaranties
. Such
Borrower will not assume, guarantee, endorse or otherwise become directly or
contingently liable in connection with any obligations of any other Person,
except:
(a) the endorsement of negotiable
instruments by such Borrower for deposit or collection or similar transactions
in the ordinary course of business;
(b) guaranties, endorsements and other
direct or contingent liabilities in connection with the obligations of other
Persons, in existence on the date hereof and listed in Schedule 7.2 hereto; and
(c) guaranties of the obligations of one
Borrower given by another Borrower.
Section
7.4
Investments and
Subsidiaries
.
(a) Such Borrower will not purchase or
hold beneficially any stock or other securities or evidences of indebtedness
of, make or permit to exist any loans or advances
45
to, or make any investment or acquire any interest
whatsoever in, any other Person, including specifically but without limitation
any partnership or joint venture, except:
(i) investments in direct obligations of
the United States of America or any agency or instrumentality thereof whose
obligations constitute full faith and credit obligations of the United States
of America having a maturity of one year or less, commercial paper issued by
U.S. corporations rated “A-1” or “A-2” by Standard & Poors
Corporation or “P-1” or “P-2” by Moody’s Investors Service or
certificates of deposit or bankers’ acceptances having a maturity of one year
or less issued by members of the Federal Reserve System having deposits in
excess of $100,000,000 (which certificates of deposit or bankers’ acceptances
are fully insured by the Federal Deposit Insurance Corporation);
(ii) advances or loans to such Borrower’s
officers and employees not exceeding at any one time an aggregate of $200,000;
(iii) advances in the form of progress
payments, prepaid rent not exceeding two months or security deposits;
(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, 2006, by Heska to any Subsidiary that is not a Borrower; provided, however,
that (A) both before and after such advance or contribution Heska’s Tangible
Net Worth must equal or exceed $100,000 and (B) all contributions and advances
made in reliance on this subsection (v) shall not exceed $700,000 in the
aggregate during the fiscal year ending December 31, 2006;
(vi) investments, including investments in
Subsidiaries, existing on the date hereof and listed in Schedule 7.4;
(vii) investments in the following items
arising in the ordinary course of business: (A) prepaid expenses and negotiable
instruments held for collection; (B) Accounts (and Investments obtained in
exchange or settlement of Accounts for which such Borrower has determined that
collection is not likely); and (C) lease, utility and worker’s compensation,
performance and other similar deposits;
(viii) unless a Default Period exists or would
exist immediately after or as a result of any such loan or advance, loans or
advances by any Subsidiary that is also a Borrower to Heska; provided, however,
that both before and after such loan or advance both Heska’s Tangible Net Worth
and such Subsidiary’s Tangible Net Worth must equal or exceed $100,000; and
46
(ix)
unless
(A) a Default Period exists or would exist immediately after or as a result of
any such purchase or investment, or (B) Heska, on a consolidated basis,
achieves Net Income of less than ($500,000) during the fiscal year ending
December 31, 2005, a purchase of intellectual property rights concerning
immunodiagnostic technology or an investment in an equity position in a company
in the immunodiagnostic industry, not to exceed $1,000,000, which purchase or
investment shall occur during the fiscal year ending December 31, 2006.
(b)
Such
Borrower will not create or permit to exist any Subsidiary; provided, however,
that so long as no Default Period exists, upon written request by such
Borrower, the Lender shall not withhold its consent to the creation of (i) any
domestic subsidiary provided such Borrower causes such subsidiary to deliver to
the Lender a guaranty, a security agreement, and UCC financing statements and
other documents requested by the Lender to create a first priority security
interest on behalf of the Lender, or to perfect such security interest, in all
assets of such subsidiary, or (ii) any foreign subsidiary.
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 Subsidiary’s 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 Heska’s 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.
Section 7.6
Sale
or Transfer of Assets; Suspension of Business Operations
. Such Borrower
will not sell, lease, assign, transfer or otherwise dispose of (i) the
stock of any Subsidiary, (ii) all or a substantial part of its assets, or
(iii) any Collateral or any interest therein (whether in one transaction
or in a series of transactions) to any other Person other than (A) sale of
Inventory in the ordinary course of business; (B) licenses and sublicenses to
third parties of patents, patent applications, trademarks and copyrights, in
each case in the ordinary course of its business as currently conducted; (C)
the sale of used equipment, provided that the aggregate amount of any such
sales of equipment shall not exceed $100,000 during any year, unless the
proceeds of such sales are delivered to the Lender for application against the
Obligations; (D) sales or other dispositions of Investments permitted by
Section 7.4; (E) sales of defaulted receivables to a collection agency in the
ordinary course of business; and (F) other sales of assets with book value of
not more than $100,000 during any fiscal year, for fair and reasonable
consideration, to the extent such sale could not reasonably be expected to have
a material adverse effect. Such Borrower
will not in any manner transfer any property without prior or present receipt
of full and adequate consideration.
47
Section 7.7
Consolidation
and Merger; Asset Acquisitions
. Such Borrower will not consolidate with or
merge into any Person, or permit any other Person to merge into it, or acquire
(in a transaction analogous in purpose or effect to a consolidation or merger)
all or substantially all the assets of any other Person; provided, however,
that the Lender will not unreasonably withhold its consent to any merger or
acquisition.
Section 7.8
Restrictions
on Nature of Business
. Such Borrower will not engage in any line of
business materially different from that presently engaged in by such Borrower
and/or lines of business reasonably related or supplementing thereto and will
not purchase, lease or otherwise acquire assets not related to its business.
Section 7.9
Accounting
.
Such Borrower will not adopt any material change in accounting principles other
than as required by GAAP, the SEC, or NASDAQ. Such Borrower will not adopt,
permit or consent to any change in its fiscal year.
Section 7.10
Capital
Expenditures
. The Borrowers, together with any Affiliates, will not incur
or contract to incur, in the aggregate, Capital Expenditures in the aggregate
during the fiscal year-to-date period ending on any date described below in
excess of the amount set forth opposite such period:
|
Date
|
|
Maximum Capital
Expenditures
|
|
|
November 30,
2005
|
|
$
|
1,250,000
|
|
|
December 31,
2005
|
|
$
|
1,250,000
|
|
|
January 1, 2006
|
|
$
|
500,000
|
|
|
February 28,
2006
|
|
$
|
500,000
|
|
|
March 31, 2006
|
|
$
|
500,000
|
|
|
April 30, 2006
|
|
$
|
750,000
|
|
|
May 31, 2006
|
|
$
|
750,000
|
|
|
June 30, 2006
|
|
$
|
750,000
|
|
|
July 31, 2006
|
|
$
|
1,000,000
|
|
|
August 31, 2006
|
|
$
|
1,000,000
|
|
|
September 30,
2006
|
|
$
|
1,200,000
|
|
|
October 31, 2006
|
|
$
|
1,200,000
|
|
|
November 30,
2006
|
|
$
|
1,200,000
|
|
|
December 31, 2006
|
|
$
|
1,200,000
|
|
Section 7.11
Discounts, etc
.
Such Borrower will not, following and during the continuance of an Event of
Default, if requested by the Lender, grant any discount, credit or allowance to
any customer of such Borrower or accept any return of goods sold, or modify,
amend, subordinate, cancel or terminate the obligation of any account debtor or
other obligor of such Borrower.
48
Section 7.12
Defined
Benefit Pension Plans
. Such Borrower will not adopt, create, assume or
become a party to any defined benefit pension plan, unless disclosed to the
Lender pursuant to Section 5.10.
Section 7.13
Other
Defaults
. Such Borrower will not permit any breach, default or event of
default to occur under any note, loan agreement, indenture, lease, mortgage,
contract for deed, security agreement or other contractual obligation binding
upon such Borrower if the effect of such breach, default or event of default is
to permit the lender thereof to accelerate the payment of $100,000 or more;
provided
,
however
, that such Borrower shall not be in breach hereunder so long as
such breach, default or event of default is being contested in good faith by
appropriate proceedings, for which proper reserves have been made, and the
Lender has been given written notice of such content.
Section 7.14
Place
of Business; Name
. Such Borrower will not transfer its chief executive
office or principal place of business, or move, relocate, close or sell any
business location. Such Borrower will not permit any tangible Collateral or any
records pertaining to the Collateral to be located in any state or area in
which, in the event of such location, a financing statement covering such
Collateral would be required to be, but has not in fact been, filed in order to
perfect the Security Interest. Such Borrower will not change its name. Upon
written request by any Borrower, after delivery by such Borrower of (a)
financing statements, financing statement amendments, and other documents
requested by the Lender for the purpose of perfecting or maintaining priority or
perfection of the Security Interest and the other security interests evidenced
by the Security Documents, and (b) searches and other proof requested by the
Lender to evidence such priority and perfection, the Lender shall grant its
consent to (x) a relocation of business locations or Collateral within the
United States or (y) a change of any Borrower’s name.
Section 7.15
Organizational
Documents
. Such Borrower will not become an S Corporation within the
meaning of the Internal Revenue Code of 1986, as amended.
Section 7.16
Financing
Statements
. No Borrower will amend any financing statements showing the
Lender as Secured Party or Assignee, or any other financing statements that are
filed in favor of the Lender, except as permitted by law. Any authorization by
the Lender to any Person to amend any such financing statements shall be in
writing.
ARTICLE
VIII
Events of
Default, Rights and Remedies
Section 8.1
Events
of Default
. “Event of Default”, wherever used herein, means any one of the
following events:
(a)
default
in the payment of the Obligations (other than the Obligations specified in
Section 8.1(b)) when they become due and payable;
(b)
default
in the payment of any fees, commissions, costs or expenses required to be paid
by any Borrower under this Agreement or any other Loan Document within 5
Business Days of the date they become due and payable;
49
(c)
default
in the performance, or breach, of the covenants contained in Section 6.4(a) or
Section 6.6(a) of this Agreement if such default remains unremedied 15 Business
Days after its occurrence; or default in the performance, or breach, of any
other covenant or agreement of any Borrower contained in this Agreement or any
other Loan Document;
(d)
Any
Borrower or any Guarantor shall be or become insolvent, or admit in writing its
or his inability to pay its or his debts as they mature, or make an assignment
for the benefit of creditors; or any Borrower or any Guarantor shall apply for
or consent to the appointment of any receiver, trustee, or similar officer for
it or him or for all or any substantial part of its or his property; or such
receiver, trustee or similar officer shall be appointed without the application
or consent of such Borrower or such Guarantor, as the case may be; or any
Borrower or any Guarantor shall institute (by petition, application, answer,
consent or otherwise) any bankruptcy, insolvency, reorganization, arrangement,
readjustment of debt, dissolution, liquidation or similar proceeding relating
to it or him under the laws of any jurisdiction; or any such proceeding shall
be instituted (by petition, application or otherwise) against any Borrower or
any such Guarantor; or any judgment, writ, warrant of attachment or execution
or similar process shall be issued or levied against a substantial part of the
property of any Borrower or any Guarantor;
(e)
A
petition shall be filed by or against any Borrower or any Guarantor under the
United States Bankruptcy Code naming such Borrower or such Guarantor as debtor;
(f)
Any
representation or warranty made by any Borrower in this Agreement, by any
Guarantor in any guaranty delivered to the Lender, or by any Borrower (or any
of its officers) or any Guarantor in any
agreement, certificate, instrument or financial statement or other statement
contemplated by or made or delivered pursuant to or in connection with this
Agreement or any such guaranty shall prove to have been incorrect in any
material respect when deemed to be effective;
(g)
The
rendering against any Borrower of a final judgment, decree or order for the
payment of money in excess of $100,000 and the continuance of such judgment,
decree or order unsatisfied and in effect for any period of 30 consecutive days
without a stay of execution;
(h)
A
default under any bond, debenture, note or other evidence of indebtedness of
any Borrower owed to any Person other than the Lender, or under any indenture
or other instrument under which any such evidence of indebtedness has been
issued or by which it is governed, or under any lease of any of the Premises, and
the expiration of the applicable period of grace, if any, specified in such
evidence of indebtedness, indenture, other instrument or lease, if the effect
of such default is to permit the lender thereof to accelerate the payment of indebtedness $100,000 or more;
(i)
Any
Reportable Event, which the Lender determines in good faith might constitute
grounds for the termination of any Plan or for the appointment by the
appropriate United States District Court of a trustee to administer any Plan,
shall have
50
occurred and be continuing 30 days after written notice to such
effect shall have been given to such Borrower by the Lender; or a trustee shall
have been appointed by an appropriate United States District Court to
administer any Plan; or the Pension Benefit Guaranty Corporation shall have
instituted proceedings to terminate any Plan or to appoint a trustee to
administer any Plan; or any Borrower shall have filed for a distress
termination of any Plan under Title IV of ERISA; or any Borrower shall have
failed to make any quarterly contribution required with respect to any Plan
under Section 412(m) of the Internal Revenue Code of 1986, as amended, which
the Lender determines in good faith may by itself, or in combination with any
such failures that the Lender may determine are likely to occur in the future,
result in the imposition of a lien on such Borrower’s assets in favor of the
Plan;
(j)
An
event of default shall occur under any Security Document or under any other
security agreement, mortgage, deed of trust, assignment or other instrument or
agreement securing any obligations of any Borrower hereunder or under any note;
(k)
Except
as permitted by Section 7.6 of this Agreement, any Borrower shall liquidate,
dissolve, terminate or suspend its business operations or otherwise fail to
operate its business in the ordinary course, or sell all or substantially all
of its assets, without the Lender’s prior written consent;
(l)
Any
Borrower shall fail to pay, withhold, collect or remit any tax or tax
deficiency when assessed or due (other than any tax deficiency which is being
contested in good faith and by proper proceedings and for which it shall have
set aside on its books adequate reserves therefor) or notice of any state or
federal tax liens shall be filed or issued (unless such lien is being contested
in good faith and by proper proceedings and for which it shall have set aside
on its books adequate reserves therefor);
(m)
Default
in the payment of any amount owed by any Borrower to the Lender, other than any
indebtedness arising hereunder;
(n)
Any
Guarantor shall repudiate, purport to revoke or fail to perform any such
Guarantor’s obligations under such Guarantor’s guaranty in favor of the Lender,
or any Guarantor shall cease to exist;
(o)
Any
event or circumstance with respect to any Borrower shall occur such that the
Lender shall believe in good faith that the prospect of payment of all or any
part of the Obligations or the performance by any Borrower under the Loan
Documents is impaired or any material adverse change in the business or
financial condition of any Borrower shall occur; or
(p)
Any
Borrower shall take or participate in any action which would be prohibited
under the provisions of any Subordination Agreement or make any payment on
Subordinated Indebtedness (as defined in any Subordination Agreement) that any
Person was not entitled to receive under the provisions of such Subordination
Agreement.
Section 8.2
Rights
and Remedies
. During any Default Period, the Lender may exercise any or all
of the following rights and remedies:
51
(a)
the
Lender may, by notice to the Borrowers, declare the Commitment to be
terminated, whereupon the same shall forthwith terminate;
(b)
the
Lender may, by notice to the Borrowers, declare the Obligations to be forthwith
due and payable, whereupon all Obligations shall become and be forthwith due
and payable, without presentment, notice of dishonor, protest or further notice
of any kind, all of which each Borrower hereby expressly waives;
(c)
the
Lender may refuse to fund any requested Advance made by any Borrower;
(d)
the
Lender may, without notice to any Borrower and without further action, apply
any and all money owing by the Lender to any Borrower to the payment of the
Obligations;
(e)
the
Lender may exercise and enforce any and all rights and remedies available upon
default to a secured party under the UCC, including, without limitation, the
right to take possession of Collateral, or any evidence thereof, proceeding
without judicial process or by judicial process (without a prior hearing or
notice thereof, which each Borrower hereby expressly waives) and the right to
sell, lease or otherwise dispose of any or all of the Collateral, and, in
connection therewith, each Borrower will on demand assemble the Collateral and
make it available to the Lender at a place to be designated by the Lender which
is reasonably convenient to both parties;
(f)
the
Lender may exercise and enforce its rights and remedies under the Loan
Documents; and
(g)
the
Lender may exercise any other rights and remedies available to it by law or
agreement.
Notwithstanding the
foregoing, upon the occurrence of an Event of Default described in subsections
(d) or (e) of Section 8.1, the Obligations shall be immediately due and
payable automatically without presentment, demand, protest or notice of any
kind.
Section 8.3
Certain
Notices
. If notice to any Borrower
of any intended disposition of Collateral or any other intended action is
required by law in a particular instance, such notice shall be deemed
commercially reasonable if given (in the manner specified in Section 9.5)
at least ten calendar days before the date of intended disposition or other
action.
ARTICLE IX
Miscellaneous
Section 9.1
Restatement
of Former Credit Agreement
. This Agreement is executed for the purpose of
amending and restating the Former Credit Agreement.
Section 9.2
Release
.
Each Borrower hereby absolutely and unconditionally releases and forever
discharges the Lender, the Participants and any and all parent corporations,
52
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 relating to the transactions
contemplated by this Agreement, whether arising in law or equity or upon
contract or tort or under any state or federal law or otherwise, which such
Borrower has had 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 Agreement, whether such
claims, demands and causes of action are matured or unmatured or known or unknown. For greater certainty, nothing herein shall
constitute a release by any Borrower of any Person for any such claim, demand
or cause of action arising after the date of this Agreement.
Section 9.3
No
Waiver; Cumulative Remedies
. No failure or delay by the Lender in
exercising any right, power or remedy under the Loan Documents shall operate as
a waiver thereof; nor shall any single or partial exercise of any such right,
power or remedy preclude any other or further exercise thereof or the exercise
of any other right, power or remedy under the Loan Documents. The remedies
provided in the Loan Documents are cumulative and not exclusive of any remedies
provided by law.
Section 9.4
Amendments,
Etc
. No amendment, modification, termination or waiver of any provision of
any Loan Document or consent to any departure by any Borrower therefrom or any
release of a Security Interest shall be effective unless the same shall be in
writing and signed by the Lender, and then such waiver or consent shall be
effective only in the specific instance and for the specific purpose for which
given. No notice to or demand on any Borrower in any case shall entitle such
Borrower to any other or further notice or demand in similar or other
circumstances.
Section 9.5
Addresses
for Notices, Etc
. Except as otherwise expressly provided herein, all
notices, requests, demands and other communications provided for under the Loan
Documents shall be in writing and shall be (a) personally delivered,
(b) sent by first class United States mail, (c) sent by overnight
courier of national reputation, or (d) transmitted by telecopy, in each
case addressed or telecopied to the party to whom notice is being given at its
address or telecopier number as set forth below:
If to the Borrowers:
Heska Corporation
3760 Rocky Mountain
Avenue
Loveland, Colorado 80538
Telecopier: 970-619-6003
Attention: Chief Financial Officer
53
Diamond Animal Health,
Inc.
c/o Heska Corporation
3760 Rocky Mountain
Avenue
Loveland, Colorado 80538
Telecopier: 970-619-6003
Attention: Chief Financial
Officer
If to the Lender:
Wells Fargo Bank,
National Association
MAC C7300-210
1740 Broadway
Denver, Colorado 80274
Telecopier: 303-863-4904
Attention: Tim Ulrich
or, as to each party, at
such other address or telecopier number as may hereafter be designated by such
party in a written notice to the other party complying as to delivery with the
terms of this Section. All such notices, requests, demands and other
communications shall be deemed to have been given on (a) the date received
if personally delivered, (b) when deposited in the mail if delivered by
mail, (c) the date sent if sent by overnight courier, or (d) the date
of transmission if delivered by telecopy, except that notices or requests to
the Lender pursuant to any of the provisions of Article II shall not be
effective until received by the Lender.
Section 9.6
Further
Documents
. Each Borrower will from time to time execute and deliver or
endorse any and all instruments, documents, conveyances, assignments, security
agreements, financing statements and other agreements and writings that the
Lender may reasonably request in order to secure, protect, perfect or enforce
the Security Interest or the Lender’s rights under the Loan Documents (but any
failure to request or assure that any Borrower executes, delivers or endorses
any such item shall not affect or impair the validity, sufficiency or
enforceability of the Loan Documents and the Security Interest, regardless of
whether any such item was or was not executed, delivered or endorsed in a
similar context or on a prior occasion). All requests under Section 9-210 of
the UCC (i) shall be made in a writing signed by a person authorized under
Section 2.2, (ii) shall be personally delivered, sent by registered or
certified mail, return receipt requested, or by overnight courier of national
reputation (iii) shall be deemed to be sent when received by the Lender and
(iv) shall otherwise comply with the requirements of Section 9-210. The
Borrowers request that the Lender respond to all such requests which on their
face appear to come from an authorized individual and releases the Lender from
any liability for so responding. The Borrowers shall pay Lender the maximum
amount allowed by law for responding to such requests.
Section 9.7
Collateral
.
This Agreement does not contemplate a sale of accounts, contract rights or
chattel paper, and, as provided by law, each Borrower is entitled to any
surplus and shall remain liable for any deficiency. The Lender’s duty of care
with respect to Collateral in its possession (as imposed by law) shall be
deemed fulfilled if it exercises reasonable care in physically keeping such
Collateral, or in the case of Collateral in the custody or possession of a
bailee or other third person, exercises reasonable care in the selection of the
bailee or other third
54
person, and the Lender
need not otherwise preserve, protect, insure or care for any Collateral. The
Lender shall not be obligated to preserve any rights any Borrower may have
against prior parties, to realize on the Collateral at all or in any particular
manner or order or to apply any cash proceeds of the Collateral in any
particular order of application.
Section 9.8
Costs
and Expenses
. Each Borrower, jointly and severally, agrees to pay on demand
all costs and expenses, including (without limitation) reasonable
attorneys’ fees, incurred by the Lender in connection with
the Obligations, this Agreement, the Loan Documents, and any other document or
agreement related hereto or thereto, and the transactions contemplated hereby,
including without limitation all such costs, expenses and fees incurred in
connection with the negotiation, preparation, execution, amendment,
administration, performance, collection and enforcement of the Obligations and
all such documents and agreements and the creation, perfection, protection,
satisfaction, foreclosure or enforcement of the Security Interest.
Section 9.9
Indemnity
.
In addition to the payment of expenses pursuant to Section 9.8, each Borrower,
jointly and severally, agrees to indemnify, defend and hold harmless the
Lender, and any of its participants, parent corporations, subsidiary
corporations, affiliated corporations, successor corporations, and all present
and future officers, directors, employees, attorneys and agents of the
foregoing (the “Indemnitees”) from and against any of the following
(collectively, “Indemnified Liabilities”):
(i)
any
and all transfer taxes, documentary taxes, assessments or charges made by any
governmental authority by reason of the execution and delivery of the Loan
Documents or the making of the Advances;
(ii)
any
claims, loss or damage to which any Indemnitee may be subjected if any
representation or warranty contained in Section 5.12 proves to be incorrect in
any respect or as a result of any violation of the covenant contained in
Section 6.4(b); and
(iii)
any and all other
liabilities, losses, damages, penalties, judgments, suits, claims, costs and
expenses of any kind or nature whatsoever (including, without limitation, the
reasonable fees and disbursements of counsel) in connection with the foregoing
and any other investigative, administrative or judicial proceedings, whether or
not such Indemnitee shall be designated a party thereto, which may be imposed
on, incurred by or asserted against any such Indemnitee, in any manner related
to or arising out of or in connection with the making of the Advances and the
Loan Documents or the use or intended use of the proceeds of the Advances;
provided that no Borrower
shall have any such obligation for any Indemnified Liabilities arising from any
act or omission by an Indemnitee which constitutes gross negligence or willful
misconduct. If any investigative,
judicial or administrative proceeding arising from any of the foregoing is
brought against any Indemnitee, upon such Indemnitee’s request, each Borrower,
or counsel designated by any such Borrower and satisfactory to the Indemnitee,
will resist and defend such action, suit or proceeding to the extent and in the
manner directed by the
55
Indemnitee, at such
Borrower’s sole costs and expense. Each Indemnitee will use its best efforts to
cooperate in the defense of any such action, suit or proceeding. If the
foregoing undertaking to indemnify, defend and hold harmless may be held to be
unenforceable because it violates any law or public policy, each Borrower shall
nevertheless make the maximum contribution to the payment and satisfaction of
each of the Indemnified Liabilities which is permissible under applicable law.
Each Borrower’s obligation under this Section 9.9 shall survive the termination
of this Agreement and the discharge of such Borrower’s other obligations
hereunder.
Section 9.10
Participants
.
The Lender and its participants, if any, are not partners or joint venturers,
and the Lender shall not have any liability or responsibility for any
obligation, act or omission of any of its participants. All rights and powers
specifically conferred upon the Lender may be transferred or delegated to any
of the Lender’s participants, successors or assigns.
Section 9.11
Execution
in Counterparts
. This Agreement and other Loan Documents may be executed in
any number of counterparts, each of which when so executed and delivered shall
be deemed to be an original and all of which counterparts, taken together, shall
constitute but one and the same instrument.
Section 9.12
Binding
Effect; Assignment; Complete Agreement; Exchanging Information
. The Loan
Documents shall be binding upon and inure to the benefit of the Borrowers and
the Lender and their respective successors and assigns, except that no Borrower
shall have the right to assign its rights thereunder or any interest therein
without the Lender’s prior written consent. This Agreement, together with the
Loan Documents, comprises the complete and integrated agreement of the parties
on the subject matter hereof and supersedes all prior agreements, written or
oral, on the subject matter hereof.
Without limiting the Lender’s right to share information regarding any
Borrower and its Affiliates with the Lender’s participants (except that the
Lender shall not share any information with a participant that is a competitor,
or an affiliate of a competitor, of any such Borrower, in the area of
researching, developing and manufacturing animal health products), accountants,
lawyers and other advisors, the Lender, WFC Holdings Corporation, and all
direct and indirect subsidiaries of WFC Holdings Corporation, may exchange any
and all information they may have in their possession regarding any Borrower
and its Affiliates, and each Borrower waives any right of confidentiality it
may have with respect to such exchange of such information. To the extent
permitted by law, each Borrower waives and will not assert against any assignee
any claims, defenses or set-offs which such Borrower could assert against the
Lender.
Section 9.13
Severability
of Provisions
. Any provision of this Agreement which is prohibited or
unenforceable shall be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof.
Section 9.14
Headings
.
Article and Section headings in this Agreement are included herein for
convenience of reference only and shall not constitute a part of this Agreement
for any other purpose.
Section 9.15
Governing Law;
Jurisdiction, Venue; Waiver of Jury Trial
. The Loan Documents shall be
governed by and construed in accordance with the substantive laws (other than
conflict laws) of the State of Colorado. The parties hereto hereby
(i) consent to the personal
56
jurisdiction of the state
and federal courts located in the State of Colorado in connection with any
controversy related to this Agreement; (ii) waive any argument that venue
in any such forum is not convenient, (iii) agree that any litigation
initiated by the Lender or any Borrower in connection with this Agreement or
the other Loan Documents shall be venued in either the District Court for the
City and County of Denver, Colorado, or the United States District Court,
District of Colorado; and (iv) agree that a final judgment in any such
suit, action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by law.
THE PARTIES WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR
PROCEEDING BASED ON OR PERTAINING TO THIS AGREEMENT.
Section 9.16
Retention
of Borrowers’ Records
. The Lender shall have no obligation to maintain any
electronic records or any documents, schedules, invoices, agings, or other
papers delivered to the Lender by the Borrowers or in connection with the Loan
Documents for more than four months after receipt by the Lender.
IN WITNESS
WHEREOF, the parties hereto have caused this Agreement to be executed by their
respective officers thereunto duly authorized as of the date first above
written.
|
WELLS FARGO BANK, NATIONAL ASSOCIATION
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HESKA CORPORATION
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By
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Tim Ulrich, Vice President
|
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By
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Jason Napolitano, Chief Financial Officer
|
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DIAMOND ANIMAL HEALTH, INC.
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By
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Jason Napolitano, Chief Financial Officer
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57
Table of Exhibits
and Schedules
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Exhibit A
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Premises
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Exhibit B
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Compliance Certificate
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Exhibit C
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Consolidating Balance Sheets
|
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___________________
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Schedule 5.1
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Trade Names, Chief Executive Office, Principal Place
of Business, and Locations of Collateral
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Schedule 5.4
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List of Subsidiaries
|
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Schedule 5.6
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Litigation
|
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Schedule 5.10
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Plans
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Schedule 5.12
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Environmental Matters
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Schedule 7.1
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Permitted Liens
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Schedule 7.2
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Permitted Indebtedness and Guaranties
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Schedule 7.4
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Investments
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Exhibit A to Third
Amended and Restated
Credit and Security
Agreement
Premises
The Premises
referred to in the Amended and Restated Credit and Security Agreement are
described as follows:
Heska Corporation
3760 Rocky Mountain
Avenue
Loveland, Colorado
80538
Diamond Animal Health,
Inc.
2538 43rd Street SE
Des Moines, Iowa
50317
440 170
th
Avenue
Carlisle, Iowa
[***] — Certain information in
this exhibit have been omitted and filed separately with the Securities and
Exchange Commission. Confidential
treatment has been requested with respect to the omitted portions.
Exhibit B to Third
Amended and Restated
Credit and Security
Agreement
Compliance
Certificate
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To:
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Wells Fargo Business
Credit
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Date:
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,
200
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Subject:
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Heska Corporation
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Financial Statements
|
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In accordance with our
Third Amended and Restated Credit and Security Agreement dated as of December
30, 2005 (the “Credit Agreement”), attached are the financial statements of
Heska Corporation (“Heska”) as of and for
,
20
(the “Reporting Date”) and the
year-to-date period then ended (the “Current Financials”). All terms used in
this certificate have the meanings given in the Credit Agreement.
I certify that, to the
best of my knowledge, the Current Financials have been prepared in accordance
with GAAP, subject to year-end audit adjustments, and fairly present the
Borrowers’ financial condition and the results of its operations as of the date
thereof.
Events of Default
.
(Check one):
o
The
undersigned does not have knowledge of the occurrence of a Default or Event of
Default under the Credit Agreement.
o
The undersigned has
knowledge of the occurrence of a Default or Event of Default under the Credit
Agreement and attached hereto is a statement of the facts with respect to
thereto.
I hereby certify
to the Lender as follows:
o
The
Reporting Date does not mark the end of one of the Borrowers’ fiscal quarters,
hence I am completing all paragraphs below except paragraph 4.
o
The
Reporting Date marks the end of one of the Borrowers’ fiscal quarters, hence I
am completing all paragraphs below .
Financial
Covenants
. I further hereby certify as follows:
1.
Accounts Payable
. Pursuant to Section 6.5 of the Credit
Agreement, as of the Reporting Date, Past Due Payables on a consolidated basis
was $
,
which
o
satisfies
o
does not satisfy the requirement that the Borrowers have no Past Due Payables.
2.
Spread
. Pursuant to Section
2.7 of the Credit Agreement, as of the Reporting Date, Heska’s
prior-fiscal-year Net Income was, on a consolidated basis, $
,
which determines a base Spread of
%
pursuant to the table below. Heska
o
has
o
has not raised at least $1,500,000 in Additional Capital as of the Reporting
Date, leading to an
o
increase
o
decrease from the base Spread of
%,
so that the applicable Spread is equal to
%.
|
Prior Fiscal Year Net Income
|
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Spread
|
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Less than $0
|
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2.75
|
%
|
|
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Greater
than or equal to $0
but less than $2,500,000
|
|
1.75
|
%
|
|
|
|
|
|
|
Greater than or equal to $2,500,000
|
|
0.75
|
%
|
3.
Minimum Capital
. Pursuant to
Section 6.12 of the Credit Agreement, as of the Reporting Date, Heska’s Capital
was, on a consolidated basis, $
,
which
o
satisfies
o
does not satisfy the requirement that such amount be not less than $
on the Reporting Date, as set forth in the table below and adjusted, if
applicable, in accordance with Section 6.12:
|
Date
|
|
Minimum Capital
|
|
|
November 30, 2005
|
|
$
|
(150,000
|
)
|
|
December 31, 2005
|
|
$
|
800,000
|
|
|
January 1, 2006
|
|
$
|
1,835,000
|
|
|
February 28, 2006
|
|
$
|
1,275,000
|
|
|
March 31, 2006
|
|
$
|
1,385,000
|
|
|
April 30, 2006
|
|
$
|
1,010,000
|
|
|
May 31, 2006
|
|
$
|
350,000
|
|
|
June 30, 2006
|
|
$
|
725,000
|
|
|
July 31, 2006
|
|
$
|
475,000
|
|
|
August 31, 2006
|
|
$
|
50,000
|
|
|
September 30, 2006
|
|
$
|
1,200,000
|
|
|
October 31, 2006
|
|
$
|
1,300,000
|
|
|
November 30, 2006
|
|
$
|
1,150,000
|
|
|
December 31, 2006
|
|
$
|
1,950,000
|
|
|
January 31, 2007 and
the last day of each month thereafter
|
|
$
|
1,350,000
|
|
4.
Minimum Net Income
. Pursuant to Section 6.13 of the Credit
Agreement, as of the Reporting Date, Heska’s Net Income was, on a consolidated
basis, $
,
which
o
satisfies
o
does not satisfy the requirement that such amount be no less than $
on the Reporting Date, as set forth in the table below and adjusted, if
applicable, in accordance with Section 6.13:
|
Period
|
|
Minimum Net Income
|
|
|
Twelve months ending December 31, 2005
|
|
$
|
(2,600,000)
|
|
|
Three months ending March 31, 2006
|
|
$
|
(1,850,000)
|
|
|
Six months ending June 30, 2006
|
|
$
|
(2,000,000)
|
|
|
Nine months ending September 30, 2006
|
|
$
|
(1,500,000)
|
|
|
Twelve months ending December 31, 2006
|
|
$
|
(750,000)
|
|
5.
Minimum Liquidity
. Pursuant to Section 6.14 of the Credit
Agreement, as of the Reporting Date, Heska’s Liquidity was, on a consolidated
basis,
$
,
which
o
satisfies
o
does not satisfy the requirement that such amount be no less than $1,500,000 on
the Reporting Date.
6.
Minimum Individual Book Net
Worth
. Pursuant to Section 6.15 of
the Credit Agreement, as of the Reporting Date, Heska’s Book Net Worth was $
and Diamond’s Book Net Worth was $
,
which
o
satisfies
o
does not satisfy the requirement that such amounts be no less than zero on the
Reporting Date.
7.
Maximum Contributions
. Pursuant to Section 7.4(a)(v) of the Credit
Agreement, as of the Reporting Date, Heska’s fiscal year-to-date aggregate
contributions to non-Borrower Subsidiaries was $
,
which
o
satisfies
o
does not satisfy the requirement that such
amounts be no more than $700,000 during any fiscal year.
8.
Capital Expenditures
. Pursuant to Section 7.10 of the Credit
Agreement, for the fiscal year-to-date period ending on the Reporting Date,
Heska’s Capital Expenditures were, in the aggregate and on a consolidated
basis, $
which
o
satisfies
o
does not satisfy the requirement that such amount be not more than $
during the period ending on the Reporting Date, as set forth in the table
below:
|
Date
|
|
Maximum Capital
Expenditures
|
|
|
November 30, 2005
|
|
$
|
1,250,000
|
|
|
December 31, 2005
|
|
$
|
1,250,000
|
|
|
January 1, 2006
|
|
$
|
500,000
|
|
|
February 28, 2006
|
|
$
|
500,000
|
|
|
March 31, 2006
|
|
$
|
500,000
|
|
|
April 30, 2006
|
|
$
|
750,000
|
|
|
May 31, 2006
|
|
$
|
750,000
|
|
|
June 30, 2006
|
|
$
|
750,000
|
|
|
July 31, 2006
|
|
$
|
1,000,000
|
|
|
August 31, 2006
|
|
$
|
1,000,000
|
|
|
September 30, 2006
|
|
$
|
1,200,000
|
|
|
October 31, 2006
|
|
$
|
1,200,000
|
|
|
November 30, 2006
|
|
$
|
1,200,000
|
|
|
December 31, 2006
|
|
$
|
1,200,000
|
|
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.
Exhibit C to Third Amended
and Restated
Credit and Security Agreement
Consolidating
Balance Sheets
Schedule 5.1 to Third
Amended and
Restated Credit and Security Agreement
Trade Names, Chief
Executive Office, Principal Place of Business,
and Locations of Collateral
Trade Names
Diamond Animal Health,
Inc.
Diamond
Diamond Animal Health
Diamond Scientific, Inc.
Heska
Heska Corp.
Heska Des Moines
Chief
Executive Office/Principal Place of Business
Heska Corporation
3760 Rocky Mountain
Avenue
Loveland, Colorado
80538
Diamond Animal Health,
Inc.
2538 43rd Street SE
Des Moines, Iowa
50317
Other
Inventory and Equipment Locations
440 170
th
Avenue
Carlisle, Iowa
Schedule 5.4 to Third
Amended and
Restated Credit and Security Agreement
Subsidiaries
Heska Corporation Subsidiaries:
Diamond Animal Health, Inc. (Iowa)
Heska Holding AG (Switzerland)
Sensor Devices, Inc.
(Wisconsin—inactive)
Diamond Animal Health, Inc.
Subsidiaries:
None
Heska Holding AG Subsidiaries:
Heska AG (Switzerland)
Schedule 5.6 to Third
Amended and
Restated Credit and Security Agreement
Litigation
Matters
On
September 9, 2005, United Vaccines, Inc. (“United”), a customer of Diamond,
filed a lawsuit in Wisconsin against Diamond and Heska alleging various claims,
including breach of contract and breach of warranty, and demanding compensatory
and punitive damages. On October 20,
2005, Diamond and Heska filed a motion to dismiss certain claims against
Diamond and all claims against Heska, as well as an answer to United’s claims,
affirmative defenses and counterclaims on behalf of Diamond. While Diamond and Heska intend to pursue the
matter vigorously and believe they are entitled to damages from United and that
United is not entitled to damages from Heska or Diamond, there can be no
assurance the ultimate resolution of this case will reflect Heska’s and Diamond’s
current beliefs.
Schedule 5.10 to Third
Amended and
Restated Credit and Security Agreement
Plans
Borrower now maintains or has maintained the following
employee pension benefit plans as defined in ERISA, 3(2), 29 U.S.C. 1002(2):
1.
The
Diamond Animal Health, Inc. Pension Plan for Collective Bargaining Unit
Employees.
This Defined Benefit Pension Plan is currently
frozen. No new participants may enter
the plan nor are any contribution liabilities accruing. The plan has a funding liability of $235,974
for
Termination
purposes, calculated as of
May 1, 1998; this liability is a result of the difference between the GATT
rates used to calculate contributions and the PBGC rates required to be used by
a terminating plan. Upon termination,
participants must receive the larger of the accrued benefit calculated using
GATT rates and using PBGC rates. Since
the PBGC rates have been consistently lower than the GATT rates, the Pension
Plan has a funding liability on termination.
The Plan can remain frozen until such time as the PBGC rates match the
GATT rates or Diamond chooses to contribute funds to make up the termination
funding liability. The termination
funding liability varies from year to year based upon fluctuations in
interest and mortality rates.
The Plan does not have a funding liability under the
provisions of Internal Revenue Code 412, and there are no reportable events.
2.
The
Diamond Animal Health, Inc. Saving Plan (the “Savings Plan”).
The Savings Plan is a profit sharing/401(k) plan. It was merged into the Heska Corporation
401(k) Plan (the “Heska Plan”) effective January 1, 1998. Diamond Animal Health, Inc. is the wholly
owned subsidiary of its parent, Heska Corporation. Diamond Animal Health, Inc. was acquired by
Heska Corporation in April, 1996. At the
time of the acquisition, both Heska and Diamond sponsored 401(k) plans. In accordance with the provisions of Treas.
Reg. 1.401(k)-1(d)(3), Heska Corporation determined that it would be in the
best interests of both Heska and Diamond to merge the Savings Plan into the
Heska Plan. Both plans have been
submitted to the Internal Revenue Service for a Determination that:
(1) the Savings
Plan was a tax-qualified plan as of the effective date of the merger; and
(2) the Heska
Plan remains a tax-qualified plan on and after the merger date.
3.
The
Heska Corporation 401(k) Plan (the “Heska Plan”)
The Heska Plan is a defined contribution plan that was
established under the provisions of Section 401(a) of the Internal Revenue Code
(“IRC”), which includes a qualified deferred arrangement as defined in Section
401(k) of the IRC, for the benefit of eligible employees of
Heska Corporation.
The Heska Plan is subject to the provisions of ERISA. Benefits under the plan are not guaranteed by
the Pension Benefit Guaranty Corporation.
On July 1, 2003, the Heska Plan changed custodians and record keepers
from Principal Life Insurance Company to Putnam Fiduciary Trust Company.
Schedule 5.12 to Third
Amended and
Restated Credit and Security Agreement
Environmental
Matters
Settlement Agreement
between Williams Pipe Line Company and Bayer Corporation
Schedule 7.1 to Third
Amended and
Restated Credit and Security Agreement
Permitted
Liens
|
Creditor
|
|
Collateral
|
|
Jurisdiction
|
|
Filing Date
|
|
Filing No.
|
None
[***] — 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.
Schedule 7.2 to Third Amended and
Restated Credit and Security Agreement
Permitted
Indebtedness and Guaranties
Indebtedness
Diamond Animal
Health, Inc.
|
Lender
|
|
Final Pmt Due
|
|
Type
|
|
Amt Due
|
|
Assets Secured
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bankers Leasing
|
|
11/2008
|
|
Cap
Lease
|
|
$
|
9,615
|
|
Copier
|
|
|
Bankers Leasing
|
|
4/2009
|
|
Cap
Lease
|
|
$
|
17,914
|
|
Copier
|
|
|
City of Des Moines
|
|
6/2006
|
|
LTD
|
|
$
|
40,310
|
|
Subordinated
|
|
|
[***]
|
|
5/2006
|
|
LTD
|
|
$
|
500,000
|
|
Subordinated
|
|
Guaranties
|
|
|
Amount and Description of
|
|
|
|
Primary Obligor
|
|
Obligation Guaranteed
|
|
Beneficiary of Guaranty
|
NONE.
Schedule 7.4 to Third Amended and
Restated Credit and Security Agreement
Investments
Diamond Animal Health,
Inc.
|
Stancorp Financial Group
Inc. (shares received in demutualization)(SFG)
|
|
1,008 shares
|
Investments in Subsidiaries
As of November 30, 2005
Heska Corporation had the following investments in subsidiaries:
|
Diamond Animal Health, Inc.
|
|
$
|
297,350
|
|
|
|
|
|
|
|
European
Subsidiaries
|
|
$
|
6,805,913
|
|
Exhibit 10.29
[***] — 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.
SUPPLY
AND LICENSE AGREEMENT
This
Agreement is entered into on 1 August 2003 (“Effective Date”), by and between
Heska Corporation, a Delaware corporation, having a principal place of business
at 1613 Prospect Parkway, Fort Collins, Colorado 80525 (“Heska”) and
Schering-Plough Animal Health Corporation, a Delaware corporation, having a
place of business at 1095 Morris Avenue, Union, New Jersey 07083-1982 (“Schering”).
WHEREAS, Heska is
engaged in the development, manufacture, marketing and sale of products for use
in animal health and has the capability of manufacturing such products for
third parties;
WHEREAS, Schering
is engaged in the business of developing, manufacturing, marketing and sale of
certain veterinary products;
WHEREAS, Schering
desires Heska to supply the Product (as defined below) for the exclusive
marketing and sales by Schering in the veterinary channel; and
WHEREAS, the
Parties (as defined below) anticipate the commercial launch of the Product in
September or October, 2003.
NOW, THEREFORE, in
consideration of the mutual covenants set forth in this Agreement, the Parties
hereby agree as follows:
1.
Definitions
1.1 “Adverse Event” shall mean: (a) any
unexpected or expected side effect, injury, toxicity or sensitivity reaction
associated with the clinical use, studies, investigations or tests of the
Product, whether or not attributable to the Product; (b) any unexpected side
effects, injury, toxicity, sensitivity reaction or any unexpected incidence or
severity thereof occurring in humans from exposure during the manufacture,
testing, or handling of any Product; or (c) any failure of the Product to
exhibit its expected pharmacological activities.
1.2 “Affiliate” shall mean: (a) a business entity
that owns, directly or indirectly, a controlling interest in a Party to this Agreement,
by stock ownership or otherwise; or (b) a business entity that is majority
owned by a Party to this Agreement, either directly or indirectly, by stock
ownership or otherwise; or (c) a business entity, the majority ownership of
which is directly or indirectly common to the majority ownership of a Party to
this Agreement. The term “control” as
used herein shall mean the direct or beneficial ownership of greater than fifty
percent (50%) of the voting share capital of such corporation or business entity.
1
[***] — Certain information on this page have been omitted and filed
separately with the Securities and Exchange Commission. Confidential treatment has been requested
with respect to the omitted portions.
1.3 “Calendar Year” shall mean, with respect to
the first Calendar Year, the period commencing on the Effective Date and ending
on December 31 of the same year. The
second and all subsequent Calendar Years shall commence on January 1 and end on
December 31 of each year thereafter. “Calendar
Quarter” shall mean each three (3) month period ending on the last day of
March, June, September and December.
1.4 “Effective Date” shall mean the date first
noted above.
1.5 “FDA”
shall mean the
United States Department of
Food and Drug Administration.
1.6 “Heska”
shall mean Heska Corporation and its Affiliates.
1.7 [***]
1.8 “Party or Parties” shall
mean Heska and/or Schering as the context indicates.
1.9 [***] set forth in Appendix D.
1.10 [***]
1.11 “Product” shall mean the chewable tablets for
dogs (ivermectin and pyrantel in proprietary, highly palatable tablet-based
formulation) under ANADA No. 200-338.
1.12 “Product
Quality Complaint” shall mean: (a) information that causes the Product or its
labeling to be mistaken for, or applied to, another article; (b) information
concerning any bacteriological contamination, or any significant chemical,
physical, or other change or deterioration in the Product, or any failure of
one of more distributed batches of the Product to meet the specifications set
forth in Appendix B; or (c) any other product quality complaint that is related
to the Product’s identity, strength, quality, or purity or that alleges a
product defect.
1.13 “Responsible
Person” shall mean the individual designated by Schering or Heska from time to
time, who has responsibility for ensuring compliance with (a) the Adverse Event
and Product Quality Complaint requirements, (b) requirements of 21 CFR §
510.300 and 21 CFR § 514.80, and (c) quality assurance requirements on behalf
of Schering and Heska for the Product.
1.14 “Schering” shall mean Schering-Plough Animal
Health Corporation and its Affiliates, if any.
2
[***] — Certain information on this page have been omitted and filed
separately with the Securities and Exchange Commission. Confidential treatment has been requested
with respect to the omitted portions.
1.15 “Territory” shall mean the United States, its
territories, commonwealths and possessions.
1.16 “Veterinarians” shall mean veterinarians,
veterinary clinics and veterinary hospitals that will provide the Product only
to their patients in a situation in which there is a doctor-patient
relationship between a veterinarian and the patient with respect to the
Product. Veterinarians also shall
include veterinary distributors and e-commerce outlets that sell the Product
under a prescription to veterinarians, veterinary clinics and veterinary
hospitals.
2.
Supply of Product
2.1
Supply.
(a) During the term of this Agreement,
Heska shall be the exclusive supplier of the Product to Schering solely for the
exclusive distribution and sale of the Product by Schering to Veterinarians in
the Territory. Schering shall have the
right to [***] with its sale of the Product in the Territory.
(b) [***]
(c) [***]
2.2
Forecasts.
At least thirty (30) days prior to each
Calendar Quarter, Schering shall provide Heska with a rolling forecast of the
quantity of the Product that will be needed by Schering for each of the next
twelve (12) months. Each forecast shall specify the estimated requirements for
the Product by month, with anticipated shipment dates specified for the first
four (4) months of each forecast. The
balance of the forecast shall represent reasonable estimates for planning
purposes and shall not obligate Schering to purchase or Heska to supply the
specified quantities.
2.3
Purchase Orders.
Schering shall submit to Heska a firm written
purchase order specifying the types, quantities and shipment date of the
Product that it desires to purchase at least one hundred and twenty (120) days
prior to the requested shipment date.
Heska will review each written purchase order within ten (10) business
days of receipt and issue either a written confirmation of acceptance or its
proposed modification in writing, including, without limitation, a modified
shipment date to accommodate Heska’s scheduling requirements. Should the modification be unacceptable,
Schering shall notify Heska in writing of its intent to cancel the purchase
order within ten (10) business days from the receipt of Heska’s proposed
modification. If Schering does not
provide Heska with a written notice (including, without limitation, electronic
mail) of its intent to cancel within the specified time period, the
modification shall be deemed accepted by Schering. Schering may not cancel purchase orders for
the Product that have been formally
3
[***] — Certain information on this page have been omitted and filed
separately with the Securities and Exchange Commission. Confidential treatment has been requested
with respect to the omitted portions.
accepted by Heska.
Notwithstanding the foregoing, Heska hereby represents that it shall, at all
times, use commercially reasonable efforts to diligently complete and ship (or
cause to be diligently completed and shipped) any such purchase orders of
Schering. In the event that Heska allows
an extended backorder of the Product for a period of more than sixty (60) days,
except in the case of a force majeure event as defined in Section 9.8 hereof,
Heska shall provide Schering with a discount of ten percent (10%) for such
purchase order. Should the backorder
extend to more than ninety (90) days, Heska shall provide Schering with a
discount of twenty percent (20%) for such purchase order. Notwithstanding the
foregoing, Product shipment dates for purchase orders with a 2003 shipment date
shall not be subject to the discounts set forth herein, although Heska shall
use commercially reasonable efforts to ship such Product under a schedule
mutually agreed to by the Parties.
2.4
Shipment and Delivery.
The Product shall be shipped in accordance
with Schering’s written instructions provided in each purchase order accepted
by Heska and to the location designated by Schering. With respect to all purchase orders, title to
the Product and the risk of loss, theft, destruction or damage to the Product
shall pass from Heska to Schering upon delivery of the Product to the common
carrier designated for shipment.
2.5
Acceptance and Rejections.
(a) Each shipment of the Product to
Schering shall be accompanied by a certificate of analysis. The certificate shall be issued in compliance
with the specifications set forth in Appendix B, a copy of which is attached
hereto and made a part hereof, which specifications shall be used for the
acceptance or rejection of the Product by Schering.
(b) Schering shall inform Heska in
writing of its rejection of any Product for visible defects within five (5)
business days after receipt of the Product and shall specify the basis for the
rejection. If the basis for the
rejection is mutually agreed to by the Parties, Schering may return the Product
at Heska’s expense for refund or credit, such choice of refund or credit to be
at the choice of Heska. Failure by
Schering to reject a shipment of the Product in accordance with this Section
2.5(b) shall be deemed to be an acceptance of the Product.
2.6
Minimum Purchase Sizes.
The minimum purchase size per purchase order
shall be as specified in Appendix A, a copy of which is attached hereto and
made a part hereof.
2.7 [***]
2.8
Recalls.
In the event:
(i) any government authority issues a request, directive or order that
the Product be recalled, or (ii) a court of competent jurisdiction
4
orders such a recall, or (iii) Heska or Schering
reasonably determines that the Product should be recalled because such Product
does not conform to the specifications identified in Appendix B hereof, the
Parties shall take all appropriate corrective action reasonably requested by
the other Party, by any government agency or by any court order, as the case
may be. In the event such recall results
from the fault of a Party, such Party shall pay all costs associated with the
recall. For purposes of this Agreement,
the expenses of a recall shall mean all reasonable expenses of notification and
destruction, all reasonable processing and transportation costs of both Parties
in the return of the recalled Product, and the cost of the replacement Product
if and when available.
2.9
Maintenance of Regulatory
Approval.
Heska shall be solely
responsible for all costs, filings, studies or other actions required to obtain
and maintain regulatory approval allowing for the sale and distribution of the
Product in the Territory during the period of time that Heska is the exclusive
supplier of Schering’s requirements for the Product. Schering shall provide reasonable,
non-financial assistance as requested by Heska for such purpose.
2.10
Labels.
Heska shall pay the cost of obtaining
approved labels for the Product and shall provide such labels with the Product
for sale and distribution by Schering.
The Parties hereby agree that any modification which reflects (a) a
change of the company name or logo from Heska to Schering, and/or (b) an
addition of the company name or logo of Schering, on or to the packaging or
labeling of the Product shall be made at no cost to Schering as long as
Schering shall provide Heska with the artwork for any such change or
addition. Should Schering wish to make
any other substantive changes to the labels provided by Heska, Schering shall
pay for all costs associated with obtaining regulatory approval of and
producing such modified labels.
2.11
No Modification or Analysis of
Product
. Unless otherwise agreed by
Heska in writing, Schering shall not:
(a) sell the Product other than in its original, unmodified, and unused
condition, (b) remove, obscure or modify any label supplied by Heska, (c)
add any label or mark to any Product without the prior written consent of
Heska, nor (d) promote any Product under any name or mark other than the
names and trademarks provided by Heska without the prior written consent of
Heska. Schering acknowledges that the
Product formulation is a trade secret and agrees not to analyze the Product,
nor have the Product analyzed, for purposes of identifying the Product
formulation. Notwithstanding the
foregoing, Schering shall have the right to have the Product analyzed by an
independent third party for purposes of complying with applicable laws, if and
whenever necessary, with the prior written consent of Heska, which consent
shall not be unreasonably withheld, provided that the independent third party
only discloses whether the Product complies with applicable laws and will not
disclose any confidential information pertaining to the identification of the
Product formulation.
2.12
Resale
. Nothing in this Agreement shall restrict
Schering’s right to determine the resale price of the Product to Veterinarians
in the Territory.
5
2.13
Sales Efforts.
Schering shall use commercially reasonable
efforts to develop and promote the sale and distribution of the Product to
Veterinarians in the Territory. Such
activities shall include incorporating the Product into Schering’s promotional
literature, provided that Schering shall furnish Heska with copies of all such
promotional materials. Schering
represents and warrants it shall not intentionally advertise or promote any
false or misleading information about the Product.
2.14
Customer Support
. Schering shall maintain throughout the
Territory customer service phone support to explain the labeled uses of the
Product.
2.15
Document and
Reserve Sample Retention
.
(a) All
documents, records and reports associated with the manufacture, holding,
storage, packaging or testing of the Product at Heska’s facility or on behalf
of Heska shall be retained by or on behalf of Heska for not less than five (5)
years from the date of manufacture, or as otherwise directed by Schering if
less than five (5) years. All such
documents, records and reports must be prepared and retained by Heska in
accordance with 21 C.F.R. § 211.180 and in such a manner that they are (i)
readily retrievable and (ii) stored in an environment suitable to prevent
damage or loss. Heska shall provide
copies of all such documents and reports to Schering as reasonably requested
and as set forth in Section 5.3 hereof.
(b) Heska
shall retain in accordance with 21 C.F.R. § 211.170 reserve samples of the
Product that are representative of each lot in each shipment of the Product.
2.16
Packaging Requirements
. Unless
otherwise specified by Schering, Heska shall package and pack the contents of
each purchase order in a manner that is: (a) in accordance with good commercial
practice, (b) acceptable to common carriers for shipment, and (c) adequate to
insure safe arrival of the goods at the named destination. Heska shall mark all
containers and packaging with the necessary lifting, handling and shipping
information. Each shipment shall be
accompanied by a packing slip, which shall include the applicable purchase order
number.
2.17
Adverse Events and Product Quality Complaints.
A.
Adverse
Event.
(a) Heska and Schering shall notify the
other Party in writing (including, without limitation, electronic mail) of any
Adverse Event that either Party becomes aware of from any source and in any
form relating to the Product within three (3) business days of receiving that
information by transmitting it to the Responsible Person at Schering or Heska,
as appropriate. All such information
shall be transmitted in English to the Responsible Person of each Party in accordance
with such instructions as the Responsible Person of each Party shall provide to
the other Party from time to time. Such
notice shall include the name, address, and
6
telephone number of the initial reporter making the complaint or report
of an Adverse Event, the Product involved, the nature of the Adverse Event, and
such other information as Schering and Heska may reasonably require.
(b) Heska and Schering shall provide all
reasonable and necessary information and assistance to Schering in connection
with the investigation of any Adverse Event, including, without limitation, (i)
completion by Heska or Schering, as appropriate, of Schering’s form entitled “Product
Experience Form”; (ii) Schering’s requests to Heska for additional information
relating to an Adverse Event; (iii) if applicable, Heska’s requests to Schering
to contact the initial reporter of an Adverse Event; and (iv) requests to
employ one or more health care professionals to contact the initial reporter of
an Adverse Event. Schering shall provide
Heska with the results of, and description of any action taken with respect to,
Schering’s investigation including all information required for completion of
FDA Form ED-1932 within ten (10) business days of the first notice of the
Adverse Event.
(c) Heska and Schering shall forward to
each other all information, including, but not limited to, initial and
follow-up reports, that becomes known to either Party from any source and in
any form relating to any Adverse Event on a monthly basis by transmitting such
information to the Responsible Person of the other Party. All such information shall be transmitted in
English to such Responsible Person in accordance with such instructions as such
Responsible Person shall provide to Heska and Schering from time to time.
(d) The requirements of Sections
2.17A(a)-(c) hereof shall apply whether or not such information (i) would be
reportable by Schering or Heska to a governmental entity under the applicable
legal and regulatory requirements relating to Adverse Events and (ii) relates
to any Adverse Event that has already been reported to one or more governmental
entities.
(e) Heska shall notify Schering of any
communication provided to or received from any governmental entity relating to
any Adverse Event or other safety issue for any Product, within three (3)
business day(s) of receiving such communication, by transmitting any written
communication documentation, and a written synopsis of any oral communication
to the Responsible Person at Schering as provided in Section 2.17A(a) hereof.
(f) Heska shall promptly transmit to the
Responsible Person at Schering, upon such Responsible Party’s request, any
summary safety documents prepared regarding the Product, including, but not
limited to, periodic reports required by 21 CFR
§
510.300 and 21 CFR § 514.80 within three (3)
business days of their completion.
(g) Disclosure by Heska or Schering of
records and information concerning any Adverse Event to the other Party under
Section 2.17 hereof shall continue as long as Schering continues to market the
Product.
7
(h) Schering and Heska shall meet, in a timely fashion and
from time to time as may be reasonably required, to implement the Adverse Event
reporting and consultation procedures prescribed in this Section 2.17.
(i) The Parties acknowledge the regulated nature of Heska’s
and Schering’s businesses and operations, and, therefore, covenant to negotiate
in good faith to make changes to this Section 2.17 as may be necessary or
appropriate to comply with changes in applicable law or regulations relating to
Adverse Event reporting, and to amend their policies and procedures to enable
each Party to comply with applicable laws and regulations and its reporting of
Adverse Event information.
(j) The holder of the registration for the Products shall
have the sole right to make or file any report, or otherwise make any
disclosure, with respect to any Adverse Event.
B.
Product
Quality Complaint
.
(a) Schering shall immediately upon
receipt, transmit to the Responsible Person at Heska, to the extent known by
Schering: (i) information that causes the Product or its labeling to be
mistaken for, or applied to, another article; (ii) information concerning any
bacteriological contamination, or any significant chemical, physical, or other
change or deterioration in the Product, or any failure of one or more
distributed batches of the Product to meet its specifications; or (iii) any
other product quality complaint that is related to the Products’ identity,
strength, quality or purity or alleges a product defect.
(b) Heska shall submit immediately to the
FDA and also transmit to the Responsible Person at Schering within three (3)
business days any reports of Product Quality Complaints as required under 21
CFR 510.300 and 21 CFR § 514.80.
(c) Heska and Schering shall, within ten
(10) calendar days of receipt, transmit to the Responsible Person of the other
Party any Product Quality Complaint not encompassed in Section 2.17B(a)-(b)
hereof.
(d) Schering reserves the right to
handle, process, and respond to all customer technical and Product Quality
Complaints related to the Product, including complaints related to the
ingredients or components of the Product.
Heska agrees to cooperate with Schering, at Schering’s request, to
enable Schering to investigate and respond to such complaints, but only to the
extent set forth in Section 2.17 hereof.
(e) Notwithstanding the foregoing,
Schering shall immediately notify Heska upon Schering’s receipt of a Product
Quality Complaint or any other complaints regarding the Product. Notification shall be given by telephone,
with a facsimile confirmation following within one (1) business day. Schering shall,
8
at Heska’s request,
assist Heska in investigating all such complaints. Schering shall be responsible for addressing
all complaints related to Schering’s marketing, distribution, order processing,
shipping and handling of the Product to its customers; Heska shall be
responsible for addressing all other complaints relating to the Product. Neither Party shall have the authority to
bind the other Party in the settlement of any complaints made by a third party.
C.
Written Procedures, Recordkeeping
and Audits.
(a) Schering and Heska shall develop and
maintain written procedures for the surveillance, receipt, evaluation, and
reporting of Adverse Event and Product Quality Complaint information for the
Products as required under 21 CFR § 510.300 and 21 CFR § 514.80.
(b) Schering and Heska shall maintain
complaint files regarding the finished Product, the ingredients or components
thereof, and the manufacturing processes either for the finished Product or
that may relate to the quality of the finished Product or its ingredients or
components.
(c) Each Party shall maintain records of
information concerning all Adverse Events for the Product for a period of at
least five (5) years. Each Party shall
maintain records of information concerning Product Quality Complaints for the
Product for a period of at least three (3) years. Each Party shall provide the other Party with
reasonable access to all information in the other Party’s possession or control
relating to Adverse Events and Product Quality Complaints within five (5)
business days of receiving the information;
provided
,
however
,
any access by Schering shall not include any information pertaining to the
identification of the Product formulation.
(d) Each Party shall allow access to its
facilities, systems, personnel, and records, in whatever form and in any
location (including locations owned and operated by a third-party), as
reasonably necessary to enable the other Party, and any third party designated
by the other Party, to evaluate and ensure compliance with this Section 2.17,
with 21 CFR § 510.300 and 21 CFR § 514.80, and with any other applicable legal
or regulatory requirements
provided
,
however
, any access by
Schering shall not include any information pertaining to the identification of
the Product formulation.
D.
Marketing Materials
. Schering
shall be responsible for filing advertising, mailing pieces, and any labeling
devised for the promotion of the Product at the time of dissemination or
publication or at other intervals as required by 21 CFR § 510.300 and 21 CFR §
514.80. Schering shall provide Heska
with copies of such filings and reports within five (5) business days.
9
[***] — 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.
3.
Trademarks
3.1 [***]
3.2
Trademark Warranty
. Heska warrants and represents that to the best
of its knowledge (a) the Trademark is not involved in any pending or threatened lawsuit in the
Territory, (b) Heska has not received any written notice of infringement of the
rights of others with respect to the Trademark, (c) no other firm, corporation,
association or person has the right to use the Trademark on the goods on which
they are now being used in identical form or in such near resemblance thereto
as to be likely, when applied to the goods of any such firm, corporation,
association or person to cause confusion with the Trademark, and (d) no third
party is claiming any ownership or right to use said Trademark.
3.3 [***]
3.4
Schering’s License and Use
. Heska grants to Schering, a non-exclusive
license (with right to sublicense) the right to use Heska’s name and logo in
connection with the promotion, distribution and sale of the Product in the
Territory during the term of this Agreement in accordance with applicable laws
and Heska’s policies regarding advertising and trademark usage as established
and amended by Heska from time-to-time.
Moreover, Schering shall include Heska’s name and logo in any
literature, promotional materials or advertising which Schering produces or
distributes concerning the Product. In
addition, Schering shall not use Heska’s name and logo other than with respect
to the direct promotion and sales of the Product.
3.5
Ownership of Trademarks
. Each Party acknowledges that subject to the
terms of this Agreement, the licensed trademarks, names and logos are and shall
remain the sole property of the respective Parties as identified herein and
agrees not to do anything inconsistent with that ownership or to contest the
ownership thereof. Each Party further
agrees that all use of the licensed trademarks, trade names and logos by it
shall inure to the benefit of, and be on behalf of, the Party owning such
trademarks, trade names and logos.
4.
Fees,
Prices and Payment
4.1
License Fee.
Schering agrees to pay Heska a one-time fee
of [***], which sum shall be non-refundable and non-creditable toward any
payments specified herein, due and payable upon FDA approval of the Product in
the Territory. Payment shall be made by
wire transfer to: Wells Fargo Bank, 633 Seventeenth Street, Denver, CO 80202
RTN#: 121000248, Acct# 4496-860776, Account Name: Heska Corporation - Lockbox Account.
10
[***] — 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.
4.2
Prices.
(a) Heska shall supply the Product to
Schering at the transfer prices set forth in Appendix A, a copy of which is
attached hereto and made a part hereof, through the first anniversary of the Effective
Date. Thereafter, Heska reserves the
right, upon at least one hundred and twenty (120) days’ written notice to
Schering, which notice shall be furnished to Schering prior to the beginning of
the next Calendar Year, to increase or decrease the price once per Calendar
Year to reflect any increase or decrease in raw material and/or direct labor
costs, provided any increase due to direct labor costs shall not be more than
the annual increase of the Consumer Price Index during the preceding year.
(b) Notwithstanding Section 4.2(a)
hereof, the current transfer prices of any of the three (3) sizes of the
Product shall be changed only upon the following conditions: (i) [***], or (ii)
[***]. Any reduction due to (i) or (ii)
hereof shall become [***] for purposes of determining future price reductions
or increases under this Section 4.2(b).
If either condition under
(i) or (ii) above occurs, Schering shall notify Heska in writing and provide
reasonable written documentation of such condition. If accepted by Heska, which acceptance shall
not be unreasonably withheld, then the current transfer prices of the affected
tablet size(s) of the Product shall be reduced by Heska [***], then the current
transfer price of the respective tablet size(s) of the Product shall increase
by such percentage up to, but no higher than, the respective transfer price(s)
set forth in Appendix A or as amended per Section 4.2(a).
(c) All prices are F.O.B. Heska and are
exclusive of any federal, state, county or municipal sales or use tax, excise,
customs charges, duties or similar charge, or any other tax assessment (other
than taxes assessed against Heska’s income), insurance, license fee (excluding
regulatory license fees), or other similar charge lawfully assessed or charged
on the sale or transportation of the Product, all of which shall be the
responsibility of Schering.
4.3
Payment.
Schering shall pay Heska within forty-five
(45) days of receipt of each invoice for the Product supplied by Heska. Any late payments of invoices or other
payments to be paid by Schering under this Agreement shall be subject to
interest at the annual prime rate plus two and a half percent (2.5%).
4.4
United States Dollars.
All fees, prices and payments shall be in
United States Dollars.
11
5.
Warranties,
Audits and Indemnification
5.1
Product Warranty.
(a) Heska warrants that the Product
supplied under this Agreement shall meet the specifications set forth in
Appendix B hereof. HESKA MAKES NO OTHER
WARRANTIES, EXPRESS OR IMPLIED, WITH RESPECT TO THE PRODUCT. ALL OTHER WARRANTIES, EXPRESS OR IMPLED,
INCLUDING, WITHOUT LIMITATION, THE IMPLIED WARRANTIES OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE ARE HEREBY DISCLAIMED.
(b) If the Parties determine that the
Product fails to meet the specifications set forth in Appendix B hereof and
such failure is not the fault of Schering, then Schering may return the
defective Product at Heska’s expense for a refund or credit, at Heska’s sole
option.
(c) Heska represents, warrants, and
covenants that the Product sold to Schering pursuant to this Agreement shall:
(i) be manufactured, packaged, and labeled in accordance with Good
Manufacturing Practices, any substantive equivalent of Good Manufacturing
Practices in the Territory, the specifications of Appendix B hereof, and the
terms of this Agreement; (ii) be free of all defects and deleterious materials;
(iii) not be adulterated or misbranded under the provisions of the Federal Food
and Drug Cosmetic Act, as amended by the FDA Modernization Act of 1997; (iv) be
manufactured, packaged, and tested to ensure that the Product meets the
specifications of Appendix B hereof for identity, potency, quality, purity, and
stability; (v) be manufactured in accordance with the quality control program
which Heska shall maintain during the term and any subsequent term of this
Agreement; (vi) bear a true and accurate expiration date as set forth in the
specifications of Appendix B hereof; and (vii) have, as of the date of receipt
of such Product at the facility of Schering, a remaining shelf life of not less
than three (3) months shorter than the total stated shelf life of such Product
as set forth in Section 5.1(c)(vi) above.
Heska shall use its best
efforts to extend the expiration date to a total stated shelf-life consistent
with the total stated shelf life of HEARTGARD
â
Plus
for dogs manufactured by Merial Limited, as determined by stability studies,
such studies to begin with the first three (3) lots of Product produced under
this Agreement. For purposes of this
Agreement, the term “Good Manufacturing Practices” shall mean all laws,
regulations, and other applicable quality standards for manufacture,
production, or other handling of the Product, as established under applicable
laws, including, without limitation, the current Good Manufacturing Practices
now or hereafter in effect and as amended from time to time by any governmental
authority in the Territory.
(d) Heska
shall notify Schering in writing in the event Heska changes or causes to be
changed any materials, equipment, or method of production or testing relating
to the Product;
provided
,
however
, that any such change shall
also comply
12
in all respects with Good
Manufacturing Practices, any substantive equivalent of Good Manufacturing
Practices in the Territory, the specifications set forth in Appendix B hereof,
and applicable laws.
5.2
No Conflicts.
Each Party warrants and represents that the
terms of this Agreement do not conflict with any contractual obligations,
express or implied, with any third party.
5.3
Audits.
Schering shall have access to Heska’s
offices, facilities (including Heska’s manufacturing site) and records at a
mutually agreeable time for the sole purpose of (a) inspecting any such
facility relating to or otherwise involved in the manufacture, packaging,
testing, storage, or inventory of the Product, (b) conducting a physical
inventory of Heska’s inventory of the Product, and (c) reviewing and auditing
Heska’s files and records with respect to the manufacture of the Product, to
ensure compliance with regulatory or government regulations. Such access shall be at most once per twelve
(12)-month period unless requested by Schering for reasonable cause. Such access shall in no way give Schering the
right to any of Heska’s confidential or proprietary information. In the event Schering reasonably determines,
based on such an inspection, that Heska’s facility has deficiencies with
respect to Good Manufacturing Practices, Heska agrees to consult with Schering
within ten (10) business days of written notification from Schering of such
deficiencies to determine whether any of such deficiencies is recognized as
such by the FDA and agrees to work with Schering to put in place and implement
a plan to correct such FDA-recognized deficiencies in a timely manner. Heska agrees to notify Schering, in writing,
within two (2) business days, of any governmental authority inspection,
inquiry, or notification related to the Product and shall keep Schering
informed of the progress of such inquiry or notification.
13
5.4
Indemnification.
(a)
Indemnification
by Schering
. Schering shall, at its
cost and expense, indemnify, defend, and forever hold harmless Heska, its
Affiliates, and its and their respective Agents from and against any claims,
suits, actions, proceedings, damages, losses, liability, costs, and expenses,
including reasonable attorneys’ fees (collectively, “Claim”) arising out of or
resulting from (i) Schering’s breach of its obligations, representations, or
warranties under this Agreement, or (ii) Schering’s negligence, errors, or
omissions. Heska shall, within three (3)
business days from the date of receipt of notice of any Claim, furnish to
Schering a copy of such notice and inform Schering of all facts relating to
such Claim.
(b)
Indemnification
by Heska
. Heska shall, at its cost and expense, indemnify, defend, and
forever hold harmless Schering, its Affiliates, and its and their respective
Agents from and against any Claim arising out of or resulting from (i) Heska’s
breach of its obligations, representations, or warranties under this Agreement,
or (ii) Heska’s negligence, errors, or omissions. Schering shall, within three (3) business
days from the date of receipt of notice of any Claim, furnish to Heska a copy
of such notice and inform Heska of all facts relating to such Claim.
(c)
Assistance
. Each Party shall provide all information in
its possession and reasonable assistance to the other Party as necessary to
enable the other Party to defend any such suit, claim, or demand.
(d)
Consequential Damages
. Neither Party shall be liable to the other
Party for any special or consequential damages, whether based upon lost
goodwill, lost resale profits, work stoppage, or impairment of other goods or
arising out of breach of warranty, breach of contract, strict liability, or
negligence.
5.5
Limits of Liability.
IN NO EVENT WILL EITHER
PARTY BE LIABLE FOR LOST PROFITS, OR ANY OTHER SPECIAL, PUNITIVE, INDIRECT,
CONSEQUENTIAL OR INCIDENTAL DAMAGES, HOWEVER CAUSED AND ON ANY THEORY OF
LIABILITY, ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY. THIS LIMITATION
SHALL APPLY EVEN IF A PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES, AND NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED
REMEDY.
5.6
Representations of Schering
. Schering hereby represents and warrants to
Heska that, as of the date of this Agreement, the following statements are and
shall be true and correct in all material respects:
(a)
Organization and Good Standing
. Schering:
(i) is a corporation duly organized, validly existing, and in good
standing under the laws of the State of Delaware; (ii) has the corporate power
and authority to conduct the business in
14
which it presently
is engaged, to enter into this Agreement, and to perform its obligations hereunder;
and (iii) is qualified to do business in, and is in good standing in, each
jurisdiction of the Territory where the nature of its business in such
jurisdiction requires it to be so qualified.
(b)
Authorization and Binding Effect
. All corporate action on the part of Schering
and its officers and directors necessary for the authorization, execution, and
delivery of this Agreement and for the performance of all of Schering’s
obligations hereunder has been taken, and this Agreement, when executed and delivered,
shall constitute a legal, valid and binding obligation of Schering enforceable
against Schering in accordance with its terms, except as enforceability may be
limited by bankruptcy, insolvency, and other laws affecting creditors’ rights
generally or by general equitable principles.
(c)
Execution, Delivery and
Performance
. The execution,
delivery, and performance by Schering of this Agreement do not: (i) violate or breach the certificate of
incorporation or bylaws of Schering; (ii) violate or conflict with any
applicable laws; (iii) violate, breach, cause a default under, or otherwise
give rise to a right of termination, cancellation, or acceleration with respect
to (presently, with the giving of notice or the passage of time), any
agreement, contract, or instrument to which Schering is a party or by which any
of its assets are bound; or (iv) result in creation or imposition of any lien,
pledge, mortgage, claim, charge, or encumbrance upon any assets of Schering.
(d)
Governmental and Other Consents
. Other than regulatory approval of the Product
by the FDA, no other consent, authorization, license, permit, registration or
approval of, or exemption or other action by, any entity is required in
connection with Schering’s execution and delivery of this Agreement or with the
performance by Schering of its obligations hereunder.
(e)
Inconsistent Obligations
. Schering has, as of the Effective Date, no
obligation or commitment, and will not, during the term of this Agreement,
assume or undertake any obligation or commitment, that is inconsistent with its
obligations under, or the terms and conditions of, this Agreement.
5.7
Representations of Heska
. Heska hereby represents and warrants to
Schering that, as of the date of this Agreement, the following statements are
and shall be true and correct in all material respects:
(a)
Organization and Good Standing
. Heska:
(i) is a corporation duly organized, validly existing, and in good
standing under the laws of the State of Delaware; (ii) has the corporate power and
authority to conduct the business in which it presently is engaged, to enter
into this Agreement, and to perform its obligations hereunder; and (iii) is
qualified to do business in, and is in good standing in, each jurisdiction of
the Territory where the nature of its business in such jurisdiction requires it
to be so qualified.
15
(b)
Authorization and Binding Effect
. All corporate action on the part of Heska and
its officers and directors necessary for the authorization, execution, and
delivery of this Agreement and for the performance of all of Heska’s
obligations hereunder has been taken, and this Agreement, when executed and
delivered, shall constitute a legal, valid and binding obligation of Heska
enforceable against Heska in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency, and other laws
affecting creditors’ rights generally or by general equitable principles.
(c)
Execution,
Delivery and Performance
. The
execution, delivery, and performance by Heska of this Agreement do not: (i) violate or breach the certificate of
incorporation or bylaws of Heska; (ii) violate or conflict with any applicable
laws; (iii) violate, breach, cause a default under, or otherwise give rise to a
right of termination, cancellation, or acceleration with respect to (presently,
with the giving of notice or the passage of time), any agreement, contract, or
instrument to which Heska is a party or by which any of its assets are bound;
or (iv) result in creation or imposition of any lien, pledge, mortgage, claim,
charge, or encumbrance upon any assets of Heska.
(d)
Governmental
and Other Consents
. Other than
regulatory approval of the Product by the FDA, no other consent, authorization,
license, permit, registration or approval of, or exemption or other action by,
any entity is required in connection with Heska’s execution and delivery of
this Agreement or with the performance by Heska of its obligations hereunder.
(e)
Inconsistent
Obligations
. Heska has, as of the
Effective Date, no obligation or commitment, and will not, during the term of
this Agreement, assume or undertake any obligation or commitment, that is
inconsistent with its obligations under, or the terms and conditions of, this
Agreement.
6.
Confidential Information
6.1
Term of Confidentiality.
All confidential and/or proprietary
information relating to this Agreement and/or the Product (“Confidential
Information”) furnished by one Party (the “Disclosing Party”) to the other
Party (the “Receiving Party”) during the term of this Agreement shall be kept
confidential by the Receiving Party, except as expressly authorized by this
Agreement, and shall not be disclosed to a third party, nor shall the Receiving
Party use such Confidential Information for any purpose other than the purposes
specifically authorized under this Agreement, during the term of this Agreement
and for a period of ten (10) years from the expiration or termination of this
Agreement. The Receiving Party may
disclose the same to its officers, agents, consultants and employees on a
need-to-know basis, provided that such officers, agents, consultants and
employees have signed appropriate confidentiality agreements.
6.2
Non-Confidential Information.
The obligations under Section 6.1 hereof
shall not apply to any information that:
16
[***] — 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.
(a) is or becomes a part of the public
domain through no fault of the Receiving Party;
(b) was otherwise in the Receiving Party’s
lawful possession prior to its disclosure as shown by its written records;
(c) is lawfully disclosed to the Receiving
Party by a third party purporting not to be in violation of an obligation of
confidentiality to the Disclosing Party; or
(d) is released from confidential status
by mutual agreement of the Parties.
6.3
Requests for Confidential
Information.
If the Receiving Party
is requested or required by subpoena, court order, applicable law or
governmental agency (including, but not limited to, the Securities and Exchange
Commission, regulatory agencies and the like), or similar process to disclose
any Confidential Information of the Disclosing Party, the Parties agree that
the Receiving Party shall provide the Disclosing Party with prompt written
notice of such request or requirement so that the Disclosing Party may seek an
appropriate protective order and/or waive the Receiving Party’s compliance with
the provisions of this Article 6.
6.4
Return of Confidential
Information.
All Confidential
Information received from the Disclosing Party or generated by the Receiving
Party and containing the Confidential Information of the Disclosing Party shall
be the property of the Disclosing Party, and the Receiving Party shall deliver
all such materials to the Disclosing Party upon the earlier of the termination
of this Agreement or the request of the Disclosing Party;
provided,
however,
the Receiving Party’s legal department may retain one (1) copy of Confidential
Information of the Disclosing Party for the sole purpose of identifying such
Confidential Information.
7.
Term
and Termination
7.1
Term.
[***]
7.2
Termination.
This Agreement may be terminated:
(a)
at
any time upon the mutual written consent of the Parties;
17
[***] — 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) by either Party for a material breach
of this Agreement by the other Party upon sixty (60) days’ prior written notice
to the breaching Party if during such sixty (60) day period, (i) substantial
steps to cure the default have not been undertaken by the breaching Party
within thirty (30) days of such notice, or (ii) the default has not been cured
to the reasonable satisfaction of the non-defaulting Party;
(c) by either Party after giving the
other Party sixty (60) days’ written notice if such other Party has entered
into or committed any act of liquidation, bankruptcy, insolvency, receivership,
or assignment for the benefit of creditors, to the extent such act is permitted
by law; or
(d) by Schering upon twelve (12) months’
prior written notice to Heska of its intent to terminate this Agreement at the
end of the succeeding Calendar Year and upon payment of all amounts due Heska
through the effective date of termination.
7.3
Payment upon Termination
. Schering shall receive a payment in the event
that the Agreement is terminated, at Schering’s option, for the following
reasons: (a) Heska’s inability to supply the Product due to force majeure or
any other reason under the control of Heska that prevents Heska from supplying
the Product for a period of longer than four (4) consecutive months; or (b)
[***]. Such payment will be due [***]
the termination date as set forth in this Section 7.3. The Parties hereby agree that the payment
schedule shall be as follows:
|
Year of Termination
|
|
|
Amount
Refunded to Schering
|
|
|
|
|
|
|
2003
|
|
|
[***]
|
|
2004
|
|
|
[***]
|
|
2005
|
|
|
[***]
|
|
2006
|
|
|
[***]
|
|
2007
|
|
|
[***]
|
|
2008
|
|
|
[***]
|
7.4
Effect of Termination.
Upon termination of this Agreement, neither
Party shall be released from any obligation that matured prior to the effective
date of such termination. Schering
shall, however, after the effective date of such termination, sell all Product
in its inventory within six (6) months.
8
. Dispute Resolution
The Parties agree to attempt in good faith to resolve
any dispute arising out of or relating to this Agreement promptly by
negotiation between representatives who have the
18
authority to
settle the controversy. Any Party may
give the other Party written notice of any dispute not resolved in the normal
course of business. Within fifteen (15)
days after delivery of the notice, the receiving Party shall submit to the
other a written response. The notice and
response shall include (a) a statement of each Party’s position and a summary
of arguments supporting that position, and (b) the name and title of the
representative who will represent that Party and any other person who will
accompany the representative. Within
thirty (30) days after delivery of the disputing Party’s notice, the
representatives of both parties shall meet at a mutually acceptable time and
place, and thereafter as often as they reasonably deem necessary to attempt to
resolve the dispute. All reasonable
requests for information made by one Party to the other will be honored.
All negotiations
pursuant to this Section are confidential and shall be treated as compromise
and settlement negotiations for purposes of applicable rules of evidence. If the dispute between the Parties is
resolved, such decision shall be binding upon the Parties. If the dispute has not been resolved by
negotiation within forty-five (45) days of the disputing Party’s notice, the
Parties shall endeavor to settle the dispute by mediation under the then
current CPR Model Mediation Procedure for Business Disputes. If the dispute between the Parties is
resolved by mediation, such decision shall be binding upon the Parties. Each Party will bear its own costs. The provisions of this Section shall not
apply if one Party refuses to negotiate the dispute in good faith or if more
prompt legal action is required to avoid material loss or damage.
9.
Miscellaneous
9.1
Relationship of Parties.
The relationship of Schering to Heska under
this Agreement is intended to be that of an independent contractor. Nothing
contained in this Agreement is intended or is to be construed so as to
constitute Schering and Heska as employer/employee or principal/agent, or the
employees or the agents of any Party hereto as employees or agents of the other
Party hereto. Neither Party has any
express or implied right or authority under this Agreement to assume or create
any obligations on behalf of or in the name of the other Party or to bind the
other Party to any contract, agreement, or undertaking with any third party,
other than the successors and permitted assigns of the respective Parties
hereto.
9.2
Assignments.
Neither Party shall have the right to transfer
or assign its interest in this Agreement without the prior written consent of
the other Party, which consent shall not be unreasonably withheld;
provided
,
however
, that either Party may make such transfer or assignment to an
Affiliate, or to an entity acquiring all or substantially all relevant assets
of a Party to which this Agreement pertains, including, but not limited to, the
transfer of assets in connection with a merger, acquisition or the like. No transfer or assignment will relieve the
transferor or assignor of any liability or obligations hereunder. This Agreement shall be binding upon and
inure to the benefit of the Parties hereto and their respective successors and
permitted assigns.
9.3
Publicity
. The Parties agree to mutually approve the
text of any press releases or any other public statements to be issued
announcing the execution of this Agreement or the transactions contemplated
hereby, which approval shall not be unreasonably withheld. The foregoing shall not be deemed to prevent
either Party from
19
[***] — 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.
making any public
disclosure which may be required of either Party or its Affiliates under the
applicable government securities laws.
9.4
Waiver.
No waiver by either Party of any default shall
be effective unless in writing nor shall any such waiver operate as a waiver of
any other default or of the same default on a future occasion.
9.5
Severability.
If one or more provisions of this Agreement
is held invalid, illegal or unenforceable, the remaining provisions shall not
in any way be affected or impaired. In
the event any provision is held invalid, illegal or unenforceable, the Parties
shall use reasonable efforts to substitute a valid, legal and enforceable
provision which, insofar as is practical, implements the purposes of such
provision.
9.6
Survival.
The provisions of Articles 4, 5, 6, 7, 8, and
9 shall survive the termination of this Agreement.
9.7
Notices.
Except as expressly provided in this
Agreement
,
all notices under this Agreement shall
be in writing and shall be deemed given upon receipt if sent by facsimile,
(except for the legal process in each case), certified or registered mail or
commercial courier (return receipt or confirmation of delivery requested), or
by personal delivery to the Party to receive such notices or other
communications called for by this Agreement at the following addresses for a
party as shall be specified by such Party by like notice:
|
|
If to Schering:
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|
|
|
|
|
Schering-Plough
Animal Health Corporation
|
|
|
1095 Morris
Avenue
|
|
|
Union, New
Jersey 07093-1982
|
|
|
Attention:
Director, Worldwide Business Development facsimile [***]
|
|
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|
|
If to Heska:
|
|
|
|
|
|
Heska
Corporation
|
|
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1613 Prospect
Parkway
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|
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Fort Collins, CO
80525
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|
|
Attention:
|
Chief
Executive Officer
|
|
|
Facsimile:
|
1.970.484.9505
|
|
|
Copy to:
|
Executive Vice
President, Intellectual Property
|
|
|
|
and Business Development
|
|
|
Facsimile:
|
1.970.491.9976.
|
9.8
Force majeure
. Either Party shall be excused from the
performance of its obligations hereunder, or such performance may be delayed,
by causes beyond its reasonable control, including, without limitation, acts of
God, war, riot, epidemic, fire, flood, insurrection, military authorities,
labor disputes, delay or inability to obtain supplies, labor, raw materials,
energy or failure of transportation or communication and
20
any other similar
contingency, provided that if such nonperformance continues for more than
ninety (90) days, the other Party may terminate the Agreement upon written
notice, except as specified in Section 7.3.
9.9
Governing Law
. This Agreement shall be governed by and
construed under the laws of the State of Delaware without reference to
conflicts of laws principles.
9.10
Entire Agreement.
This Agreement and the Appendices hereto
constitute the entire agreement and understanding of the Parties with regard to
the subject matter hereof and supercede all prior agreements and understanding,
written or oral, between the Parties. This
Agreement may only be altered, modified or amended in a writing signed by the
Parties.
9.11
Counterparts
. This Agreement may be executed in
counterparts, each of which is deemed to be an original, but all of which
together shall constitute one and the same instrument. Facsimile and photocopy signatures shall
carry the same force and effect, and shall bind the Parties hereto in the same
manner, as original signatures to this Agreement.
9.12
Construction.
(a) The language and terms of this
Agreement are to be understood in their ordinary sense (except where otherwise
defined herein) and are not to be interpreted in a technical manner so as to
unfairly deprive any Party of substantive rights.
(b) The text of this Agreement is the
product of negotiation among both Parties and is not to be construed as having
been prepared by one Party or the other.
(c) The headings used in this Agreement
are for convenience only and are not part of this Agreement.
9.13
Warranty of Authorized Signatories.
Each of the signatories to this Agreement
warrants and represents that he or she is competent and authorized to enter
into this Agreement on behalf of the Party for whom he or she purports to sign.
9.14
Insurance
.
(a) During the term of this Agreement and
for a period of five (5) years thereafter, Heska shall, at its own cost and
expense, (i) maintain, and shall cause any of its Affiliates to maintain,
general liability insurance, including coverage for product liability and
contractual liability, in an amount not less than Five Million Dollars
(U.S.$5,000,000) and (ii) furnish to Schering, upon request, a certificate of
insurance evidencing compliance with the requirements of this Section
9.14(a). Such certificate shall provide
that Schering shall be notified in writing of any cancellation or material
change in such insurance not less than thirty (30) days prior to the date of
such cancellation or change.
21
(b) Schering represents that all
insurance maintained by it or its Affiliates are consistent with industry
practice and subject to deductibles and self-insurance limits.
The Parties have caused this Agreement to be signed by their
duly authorized representatives.
|
SCHERING-PLOUGH ANIMAL
|
HESKA CORPORATION
|
|
HEALTH
CORPORATION
|
|
|
|
|
|
|
|
By:
|
/s/ Raul E. Kohan
|
|
By:
|
/s/ Carol
Talkington Verser
|
|
Name:
|
Raul E. Kohan
|
|
Name:
|
Carol Talkington
Verser, Ph.D.
|
|
Title:
|
President
|
|
Title:
|
Executive Vice
President
|
|
Date:
|
August 4, 2003
|
|
Date:
|
August 1, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
22
[***] —
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.
APPENDIX
A
PRICE,
MINIMUM PURCHASE SIZE, AND
ANNUAL
MINIMUM PURCHASE REQUIREMENT
1. Product transfer price:
|
Small tablets
|
|
[***] per packet of six (6) tablets
|
|
Medium tablets
|
|
[***] per packet of six (6) tablets
|
|
Large tablets
|
|
[***] per packet of six (6) tablets
|
2. Minimum Purchase Size:
|
Small tablets
|
|
[***] packets, equivalent to [***] Display Cases
|
|
Medium tablets
|
|
[***] packets, equivalent to [***] Display Cases
|
|
Large tablets
|
|
[***] packets, equivalent to [***] Display Cases
|
3. Annual Minimum Purchase Requirement per
Calendar Year:
|
Small tablets
|
|
[***] packets, equivalent to [***] Display Cases
|
|
Medium tablets
|
|
[***] packets, equivalent to [***] Display Cases
|
|
Large tablets
|
|
[***] packets, equivalent to [***] Display Cases
|
23
[***] —
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.
APPENDIX
B
PRODUCT
SPECIFICATIONS
A.
SMALL TABLETS
:
Labeled amount of
ivermectin, per tablet: 68 mcg
Labeled amount of pyrantel (as pyrantel
pamoate), per tablet: 57 mg
1. Appearance:
Round, brown convex tablet with no imprinting, approximately 0.56 inches in
diameter and 1.25 grams in weight
2. Identification:
Ivermectin: retention
times of reference standard and sample compare satisfactorily
Pyrantel: retention times of reference
standard and sample compare satisfactorily
3. Ivermectin
content (average): 90.0 to 115.0 % of labeled amount
4. Pyrantel
content (average): 90.0 to 110.0 % of labeled amount
5. Microbial limits:
Salmonella: none detected
Escherichia coli:
not more than 2.2 CFU per gram
6. pH: 4.0 to 6.0
7. [***]
B.
MEDIUM TABLETS
:
Labeled amount of
ivermectin, per tablet: 136 mcg
Labeled amount of
pyrantel (as pyrantel pamoate), per tablet: 114 mg
1. Appearance: Round,
brown convex tablet with no imprinting, approximately 0.75 inches in diameter
and 2.5 grams in weight
2. Identification:
Ivermectin: retention
times of reference standard and sample compare satisfactorily
Pyrantel:
retention times of reference standard and sample compare satisfactorily
3. Ivermectin
content (average): 90.0 to 115.0 % of labeled amount
24
[***] — 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.
4. Pyrantel content
(average): 90.0 to 110.0 % of labeled amount
5. Microbial limits:
Salmonella: none detected
Escherichia coli: not
more than 2.2 CFU per gram
6. pH: 4.0 to 6.0
7. [***]
C.
LARGE TABLETS
:
Labeled amount of ivermectin, per tablet: 272 mcg
Labeled amount of
pyrantel (as pyrantel pamoate), per tablet: 227 mg
1. Appearance:
Round, brown convex tablet with no imprinting, approximately 0.94 inches in
diameter and 5.0 grams in weight
2. Identification:
Ivermectin: retention times of reference standard and sample compare
satisfactorily
Pyrantel: retention times of reference
standard and sample compare satisfactorily
3. Ivermectin content
(average): 90.0 to 115.0 % of labeled amount
4. Pyrantel content
(average): 90.0 to 110.0 % of labeled amount
5. Microbial limits:
Salmonella: none detected
Escherichia coli: not
more than 2.2 CFU per gram
6. pH: 4.0 to 6.0
7. [***]
25
D. BLISTER CARDS AND DISPLAY CASE
:
1. Blister
Card: Preprinted, six (6) panels folded
into three (3) sections, with six (6) Blisters in circular configuration in
middle section, with one (1) tablet contained in each Blister.
2. Blister:
Barrier film: 7.5 mil PVC / 2 mil ACLAR laminate.
Push-through foil: Reynolds 701
3. Display Case:
Preprinted, containing fourteen (14) Blister Cards.
26
[***] — 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.
APPENDIX
C
[***]
27
[***] — 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.
APPENDIX
D
[***]
28