UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
|
|
|
þ
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the fiscal year ended December 31, 2010
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)
|
|
|
Delaware
|
|
77-0192527
|
(State or other jurisdiction of
|
|
(I.R.S. Employer
|
incorporation or organization)
|
|
Identification Number)
|
|
|
|
3760 Rocky Mountain Avenue
|
|
|
Loveland, Colorado
|
|
80538
|
(Address of principal executive offices)
|
|
(Zip Code)
|
Registrants telephone number, including area code:
(970) 493-7272
Securities registered pursuant to Section 12(b) of the Act:
|
|
|
Public Common Stock, $.01 par value
|
|
The Nasdaq Stock Market LLC
|
(Title of Class)
|
|
(Name of Each Exchange on Which Registered)
|
Securities registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes
o
No
þ
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
þ
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
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during
the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes
o
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 registrants knowledge, in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this Form 10-K.
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a
smaller reporting company as defined in Rule 12b-2 of the Exchange Act.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large accelerated filer
o
|
|
Accelerated filer
o
|
|
Non-accelerated filer
o
(Do not check if a small reporting company)
|
|
Smaller Reporting Company
þ
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
o
No
þ
The aggregate market value of voting common stock held by non-affiliates of the Registrant was approximately $31,299,307 as of June
30, 2010 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.
5,234,100
shares of the Registrants Common Stock, $.01 par value, were outstanding at
March 17, 2011.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10 (as to
directors), 11, 12, 13 and 14 of Part III incorporate by reference information from the
Registrants Proxy
Statement to be filed with the Securities and Exchange Commission in connection with the
solicitation of proxies for the
Registrants 2011 Annual Meeting of Stockholders.
TABLE OF CONTENTS
HESKA, ALLERCEPT, AVERT,
E.R.D.-HEALTHSCREEN, E-SCREEN, FELINE ULTRANASAL, HEMATRUE, SOLO STEP, THYROMED, VET/OX and
VITALPATH are registered trademarks and CBC-DIFF, G2 DIGITAL and VET/IV are trademarks of Heska
Corporation. TRI-HEART is a
registered trademark of Schering-Plough Animal Health Corporation (SPAH) in the United States and
is a registered trademark of Heska Corporation in other countries.
ACCUTREND is a registered trademark of Roche Diagnostics GmbH LLC.
DRI-CHEM is a registered trademark of FUJIFILM Corporation. SPOTCHEM is a trademark of
Arkray, Inc.
This Form 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, Managements
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 2011 definitive proxy statement on Schedule 14A, as
of the date of the Schedule 14A.
Internet Site
Our Internet address is www.heska.com. Because we believe it provides useful information in a
cost-effective manner to interested investors, via a link on our website our annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports
filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are
publicly available free of charge and we believe are available as soon as reasonably practical
after we electronically file such material with, or furnish it to, the Securities Exchange
Commission. Information contained on our website is not a part of this annual report on Form 10-K.
PART I
We develop, manufacture, market, sell and support veterinary products. Our core focus is on
the canine and feline companion animal health markets where we strive to provide high value
products.
Our business is composed of two reportable segments, Core Companion Animal Health and Other
Vaccines, Pharmaceuticals and Products. The Core Companion Animal Health segment (CCA) includes
diagnostic instruments and supplies as well as single use diagnostic and other tests, vaccines and
pharmaceuticals, primarily for canine and feline use. These products are sold directly to
veterinarians by us as well as through distribution relationships. The Other Vaccines,
Pharmaceuticals and Products segment (OVP) includes private label vaccine and pharmaceutical
production, primarily for cattle but also for other animals including small mammals and fish. All
OVP products are sold by third parties under third party labels. Please refer to Note 10 to our
audited consolidated financial statements filed herewith for financial information about each of
our segments.
-1-
Our principal executive offices are located at 3760 Rocky Mountain Avenue, Loveland, Colorado
80538, our telephone number is (970) 493-7272 and our internet address is www.heska.com. We
originally incorporated in California in 1988, and we subsequently incorporated in Delaware in
1997.
Background
We were founded as Paravax, Inc. in 1988 and conducted research on vaccines to prevent
infections by parasites. We changed our name to Heska Corporation in 1995, completed our initial
public offering in 1997 and continued to be a research and development-focused company, devoting
substantial resources to the research and development of innovative products for the companion
animal health market. In 2001 and 2002, we took steps to lower our expense base, largely in
internal research and development but also in other areas, and to rationalize and further focus our
business. We have continued to concentrate our efforts on operating improvements, such as
enhancing the effectiveness of our sales and marketing efforts and pursuing cost efficiencies, and
seeking new product opportunities with third parties. In 2008, we underwent a restructuring
primarily to reduce our operating costs.
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:
|
|
|
Blood Chemistry.
The DRI-CHEM 4000 Veterinary Chemistry Analyzer (the DRI-CHEM
4000) is a robust system that uses dry slide technology for blood chemistry and
electrolyte analysis and has the ability to run 22 tests at a time with a single blood
sample. Test slides are available as both pre-packaged panels as well as individual
slides. The instrument has an additional feature allowing simple, fully automated
sample dilution and results calculations. We are supplied this instrument and
affiliated test slides and supplies under a contractual agreement with FUJIFILM
Corporation (FUJIFILM). The DRI-CHEM 7000 Veterinary Chemistry Analyzer (the
DRI-CHEM 7000), which we began to ship in December 2009, is a line extension of our
chemistry offering with higher throughput, multiple patient staging and a STAT
feature which provides emergency sample flexibility in critical cases. The DRI-CHEM
7000 utilizes the same test slides as the DRI-CHEM 4000 and is manufactured by
FUJIFILM. In addition, we continue to service and support our previous chemistry
instrument for which we are supplied affiliated test strips and supplies under a
contractual agreement with Arkray Global Business, Inc. (Arkray).
|
|
|
|
|
Hematology.
The HEMATRUE Veterinary Hematology Analyzer 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. In addition, we continue to
service and support our previous hematology instrument, the HESKA CBC-DIFF Veterinary
Hematology System. We are supplied new instruments and affiliated reagents and
supplies of these products under a contractual agreement with Boule Medical AB
(Boule).
|
-2-
|
|
|
Blood Gases.
We have historically sold handheld instruments to fulfill our
customers needs in this area. In 2009, our supplier of these instruments
and affiliated cartridges and supplies informed us that they were cancelling our
contractual agreement as of November 1, 2009 and that
they would no longer supply us with these products after that date. In 2009, we signed
an OEM contractual agreement with Roche Diagnostics Corporation (Roche) to supply us
with the VitalPath Blood Gas and Electrolyte Analyzer (VitalPath) and affiliated
consumables. VitalPath delivers accurate results for blood gases, electrolytes,
hematocrit and 27 additional calculated parameters in 50 seconds. We began to ship and
install VitalPath units at customer locations in May 2010.
|
|
|
|
|
Lactate.
The Accutrend Plus Lactate analyzer is a handheld, portable analyzer used to
measure lactate. We are supplied this instrument and affiliated consumables for
veterinary use under a contractual agreement with Roche. We announced the launch of
this instrument in the first quarter of 2011.
|
|
|
|
|
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 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).
Veterinary Diagnostic Laboratory Products and Services
Allergy Diagnostic Products and Services.
Allergy is common in companion animals, and it has
been estimated to affect approximately 10% to 15% of dogs. Clinical symptoms of allergy are
variable, but are often manifested as persistent and serious skin disease in dogs and cats.
Clinical management of allergic disease is problematic, as there are a large number of allergens
that may give rise to these conditions. 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.
-3-
Our ALLERCEPT Definitive Allergen Panels provide the most accurate determination of which we
are aware of the specific allergens to which an animal, such as a dog, cat or horse, is reacting.
The panels use a highly specific recombinant version of the natural IgE receptor to test the serum
of potentially allergic animals for IgE directed against a panel of known allergens. A typical
test panel consists primarily of various pollen, grass, mold, insect and mite allergens. The test
results serve as the basis for prescription ALLERCEPT Allergy Treatment Sets, discussed later in
this document.
We sell kits to conduct blood testing using our ALLERCEPT Definitive Allergen Panels to
third-party veterinary diagnostic laboratories outside of the United States. We also sell products
to screen for the presence of allergen-specific IgE to these customers 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. Animals
testing positive for allergen-specific IgE using these screening tests are candidates for further
evaluation using our ALLERCEPT Definitive Allergen Panels.
We have veterinary diagnostic laboratories in Loveland, Colorado and Fribourg, Switzerland
which both offer blood testing using our ALLERCEPT Definitive Allergen Panels.
Other Products and Services.
We sell E.R.D. Reagent Packs used to detect microalbuminuria,
the most sensitive indicator of renal damage, to VCA Antech, Inc. for use in its veterinary
diagnostic laboratories.
Our Loveland veterinary diagnostic laboratory currently also offers testing using our canine
and feline heartworm, renal damage, immune status and flea bite allergy assays as well as other
diagnostic services including polymerase chain reaction, or PCR, based tests for certain infectious
diseases. Our Loveland diagnostic laboratory is currently staffed by medical technologists
experienced in animal disease and several additional technical staff. We intend to continue to use
our Loveland veterinary diagnostic laboratory both as a stand-alone service center for our
customers and as an adjunct to our product development efforts.
Pharmaceuticals and Supplements
Heartworm Prevention
. We have an agreement with Schering-Plough Animal Health Corporation
(SPAH), a unit of Merck & Co., Inc., granting SPAH the distribution and marketing rights in the
United States for TRI-HEART Plus Chewable Tablets, our canine heartworm prevention product.
TRI-HEART Plus Chewable Tablets (ivermectin/pyrantel) are indicated for use as a monthly preventive
treatment of canine heartworm infection and for treatment and control of ascarid and hookworm
infections. We manufacture TRI-HEART Plus Chewable Tablets at our Des Moines, Iowa production
facility.
Nutritional Supplements
. We sell a novel fatty acid supplement, HESKA F.A. Granules. The
source of the fatty acids in this product, flaxseed oil, leads to high omega-3:omega-6 ratios of
fatty acids. Diets high in omega-3 fatty acids are believed to lead to lower levels of
inflammatory mediators. The HESKA F.A. Granules include vitamins and are formulated in a palatable
flavor base that makes the product convenient and easy to administer.
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.
-4-
Vaccines and other Biologicals
Allergy Treatment
. Veterinarians who use our ALLERCEPT Definitive Allergen Panels often
purchase ALLERCEPT Allergy Treatment Sets for those animals with positive test results. These
prescription immunotherapy treatment sets are formulated specifically for each allergic animal and
contain only the allergens to which the animal has significant levels of IgE antibodies. The
prescription formulations are administered in a series of injections, with doses increasing over
several months, to ameliorate the allergic condition of the animal. Immunotherapy is generally
continued for an extended time. We offer canine, feline and equine immunotherapy treatment
products.
Feline Respiratory Disease
. The use of injectable vaccines in cats has become controversial
due to the frequency of injection site-associated side effects. The most serious of these side
effects are injection site sarcomas, tumors which, if untreated, are nearly always fatal. While
there is one competitive non-injectable two-way vaccine, all other competitive products are
injectable formulations.
We sell the FELINE ULTRANASAL FVRCP Vaccine, a three-way modified live vaccine combination to
prevent disease caused by the three most common respiratory viruses of cats: calicivirus,
rhinotracheitis virus and panleukopenia virus. Our two-way modified live vaccine combination,
FELINE ULTRANASAL FVRC, prevents disease caused by calicivirus and rhinotracheitis. These vaccines
are administered without needle injection by dropping the liquid preparation into the nostrils of
cats. Our vaccines avoid injection site side effects, and we believe they are very efficacious.
Other Vaccines, Pharmaceuticals and Products Segment
We have developed our own line of bovine vaccines that are licensed by the United States
Department of Agriculture (USDA). We have a long-term agreement with a distributor, Agri
Laboratories, Ltd., (AgriLabs), for the marketing and sale of certain of these vaccines which are
sold primarily under the Titanium
Ò
and MasterGuard
Ò
brands registered trademarks of
AgriLabs. AgriLabs has non-exclusive rights to sell these bovine vaccines in the United States,
Africa and Mexico into December 2015. 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. Our offerings range from
providing complete turnkey services which include research, licensing, production, labeling and
packaging of products to providing any one of these services as needed by our customers as well as
validation support and distribution services.
Marketing, Sales and Customer Support
We estimate that there are approximately 53,000 veterinarians in the United States whose
practices are devoted principally to small animal medicine. Those veterinarians practice in
approximately 24,000 clinics in the United States. In 2010, our products were sold to
approximately 12,800 such clinics in the United States. Veterinarians may obtain our products
directly from us or indirectly through others. 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 an outside field organization, a telephone sales force, independent
third-party distributors, as well as through trade shows and print advertising and through other
distribution relationships, such as SPAH in the case of our heartworm preventive. Our outside
field organization currently consists of 36 individuals in various parts of the United States. Our
inside sales force consists of 24 persons.
-5-
We have a staff dedicated to customer and product support in our Core Companion Animal Health
segment including veterinarians, technical support specialists and service technicians.
Individuals from our product development group may also be used as a resource in responding to
certain product inquiries.
Internationally, we market our Core Companion Animal Health products to veterinarians
primarily through third-party veterinary diagnostic laboratories, independent third-party
distributors and Novartis Agro K.K., Tokyo (Novartis Japan). These entities typically provide
customer support. Novartis Japan exclusively markets and distributes SOLO STEP CH in Japan.
All OVP products are marketed and sold by third parties under third party labels.
We grant third parties rights to our intellectual property as well as our products, with our
compensation often taking the form of royalties and/or milestone payments.
Manufacturing
The majority of our 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 chemistry instruments and
affiliated supplies are manufactured under contract with FUJIFILM, and test strips and supplies
affiliated with our previous chemistry instrument are manufactured under contract with Arkray.
Our hematology instruments and affiliated supplies are manufactured under contract with Boule. Our
heartworm point-of-care diagnostic tests are manufactured under a contract with Quidel. We
manufacture and supply Quidel with certain critical raw materials and perform the final packaging
operations for these products. 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 segments customers purchase products in both finished and bulk
format, and we perform all phases of manufacturing, including growth of the active bacterial and
viral agents, sterile filling, lyophilization and packaging at this facility. We manufacture our
various allergy diagnostic products at our Des Moines facility, our Loveland facility and our
Fribourg facility. We believe the raw materials for products we manufacture are available from
several sources.
Product Development
We are committed to providing innovative products to address latent health needs of companion
animals. We may obtain such products from external sources, external collaboration or internal
research and development.
-6-
We are committed to identifying external product opportunities and creating business and
technical collaborations that lead to high value veterinary products. We believe that our active
participation in scientific networks and our reputation for investing in research enhances our
ability to acquire external product opportunities. We have collaborated, and intend to continue to
do so, with a number of companies and universities. Examples of such collaborations include:
|
|
|
Quidel for the development of SOLO STEP CH Cassettes, SOLO STEP CH Batch Test Strips
and SOLO STEP FH Cassettes;
|
|
|
|
|
Boule for the development of veterinary applications for the HEMATRUE Veterinary
Hematology Analyzer and associated reagents; and
|
|
|
|
|
FUJIFILM for the development of veterinary applications for the DRI-CHEM 7000
Veterinary Chemistry Analyzer and associated slides and supplies.
|
Internal research and development is managed on a case-by-case basis. We employ individuals
with microbiology, immunology, genetics, biochemistry, molecular biology, parasitology as well as
veterinary expertise and will form multidisciplinary product-associated teams as appropriate. We
incurred expenses of $2.0 million, $1.7 million and $1.6 million in the years ended December 31,
2008, 2009 and 2010, 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 are primarily protected through trade secret protection of, for
example, our manufacturing processes in this area.
We actively seek patent protection both in the United States and abroad. Our issued and
pending patent portfolios primarily relate to heartworm control, flea control, allergy, infectious
disease vaccines, diagnostic and detection tests, immunomodulators, instrumentation, nutrition,
pain control and vaccine delivery technologies. As of December 31, 2010, we owned, co-owned or had
rights to 193 issued U.S. patents and 10 pending U.S. patent applications expiring at various dates
from February 2011 to August 2024. 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, 2010 included 127 issued patents and 24 pending applications in various foreign
countries expiring at various dates from November 2012 to July 2023.
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 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. Although we believe our first
quarter revenue results will tend to be stronger than any other
quarter, we do not anticipate a large seasonal effect
on our consolidated financial results.
-7-
Government Regulation
Although the majority of our revenue is from the sale of unregulated items, many of our
products or products that we may develop are, or may be, subject to extensive regulation by
governmental authorities in the United States, including the USDA and the FDA, and by similar
agencies in other countries. These regulations govern, among other things, the development,
testing, manufacturing, labeling, storage, pre-market approval, advertising, promotion, sale and
distribution of our products. Satisfaction of these requirements can take several years to achieve
and the time needed to satisfy them may vary substantially, based on the type, complexity and
novelty of the product. Any product that we develop must receive all
relevant regulatory approval or clearances, if required, before it may be marketed in a
particular country. The following summarizes the major U.S. government agencies that regulate
animal health products:
|
|
|
USDA
. Vaccines and certain single use, point-of-care diagnostics are considered
veterinary biologics and are therefore regulated by the Center for Veterinary
Biologics, or CVB, of the USDA. Industry data indicate that it takes approximately
four years and in excess of $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 typically 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 and/or reports.
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.
-8-
We have pursued regulatory approval outside the United States based on market demographics of
foreign countries. For marketing outside the United States, we are subject to foreign regulatory
requirements governing regulatory licensing and approval for many of our products. Licensing and
approval by comparable regulatory authorities of foreign countries must be obtained before we can
market products in those countries. Product licensing approval processes and requirements vary
from country to country and the time required for such approvals may differ substantially from that
required in the United States. We cannot be certain that approval of any of our products in one
country will result in approvals in any other country. To date, we or our distributors have sought
regulatory approval for certain of our products in Canada, which
is governed by the Canadian Food Inspection Agency, or CFIA; in Japan, which is governed by
the Japanese Ministry of Agriculture, Forestry and Fisheries, or MAFF; in Australia, which is
governed by the Australian Department of Agriculture, Fisheries and Forestry, or ADAFF; South
Africa, which is governed by the Republic of South Africa Department of Agriculture, or RSADA; and
in certain other 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
|
FELINE ULTRANASAL FVRC Vaccine
|
|
United States
|
|
Yes
|
|
USDA
|
|
Licensed
|
|
|
Canada
|
|
Yes
|
|
CFIA
|
|
Licensed
|
|
|
South Africa
|
|
Yes
|
|
RSADA
|
|
Licensed
|
|
|
|
|
|
|
|
|
|
FELINE ULTRANASAL FVRCP Vaccine
|
|
United States
|
|
Yes
|
|
USDA
|
|
Licensed
|
|
|
Canada
|
|
Yes
|
|
CFIA
|
|
Licensed
|
|
|
South Africa
|
|
Yes
|
|
RSADA
|
|
Licensed
|
|
|
|
|
|
|
|
|
|
SOLO STEP CH
|
|
United States
|
|
Yes
|
|
USDA
|
|
Licensed
|
|
|
EU
|
|
No-in most countries
|
|
|
|
|
|
|
Canada
|
|
Yes
|
|
CFIA
|
|
Licensed
|
|
|
Japan
|
|
Yes
|
|
MAFF
|
|
Licensed
|
|
|
Australia
|
|
Yes
|
|
ADAFF
|
|
Licensed
|
|
|
|
|
|
|
|
|
|
SOLO STEP CH Batch Test Strips
|
|
United States
|
|
Yes
|
|
USDA
|
|
Licensed
|
|
|
Canada
|
|
Yes
|
|
CFIA
|
|
Licensed
|
|
|
|
|
|
|
|
|
|
SOLO STEP FH
|
|
United States
|
|
Yes
|
|
USDA
|
|
Licensed
|
|
|
Australia
|
|
Yes
|
|
ADAFF
|
|
Licensed
|
|
|
|
|
|
|
|
|
|
TRI-HEART Plus Heartworm Preventive
|
|
United States
|
|
Yes
|
|
FDA
|
|
Licensed
|
|
|
Japan
|
|
Yes
|
|
MAFF
|
|
Licensed
|
|
|
South Korea
|
|
Yes
|
|
NVRQS
|
|
Licensed
|
Competition
Our market 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 Laboratories, Inc. (IDEXX), Abaxis, Inc. (Abaxis) and Synbiotics Corporation
(Synbiotics), a company acquired by Pfizer Inc. (Pfizer) in January 2011. 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 segments customers. Companies with a significant presence
in the animal health market such as Bayer AG, CEVA Santé Animale, Merck & Co., Inc., Merial
Limited (a company owned by sanofi-aventis), Novartis AG, Pfizer,
Vétoquinol S.A. and Virbac S.A.
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.
-9-
Environmental Regulation
In connection with our product development activities and manufacturing of our biological,
pharmaceutical and diagnostic and detection products, we are subject to federal, state and local
laws, rules, regulations and policies governing the use, generation, manufacture, storage, handling
and disposal of certain materials, biological specimens and wastes. Although we believe that we
have complied with these laws, regulations and policies in all material respects and have not been
required to take any significant action to correct any noncompliance, we may be required to incur
significant costs to comply with environmental and 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, 2010, we and our subsidiaries employed 276 people, of whom 132 were focused
in production and technical and logistical services, including instrumentation service, 92 in
sales, marketing and customer support, 44 in general administrative services, such as accounting,
and 8 in product development. We believe that our ability to attract and retain skilled personnel
is critical to our success. None of our employees is covered by a collective bargaining agreement,
and we believe our employee relations are good.
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 Commissions 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 Corporation, that file electronically
with the Securities and Exchange Commission.
Executive Officers of the Registrant
Our executive officers and their ages as of March 18, 2011 are as follows:
|
|
|
|
|
|
|
Name
|
|
Age
|
|
|
Position
|
Robert B. Grieve, Ph.D.
|
|
59
|
|
|
Chairman of the Board and Chief Executive Officer
|
Michael J. McGinley, Ph.D.
|
|
50
|
|
|
President and Chief Operating Officer
|
Jason A. Napolitano
|
|
42
|
|
|
Executive Vice President, Chief Financial
Officer and Secretary
|
Michael A. Bent
|
|
56
|
|
|
Vice President, Principal Accounting Officer
and Controller
|
Nancy Wisnewski, Ph.D.
|
|
48
|
|
|
Vice President, Product Development and
Technical Customer Service
|
-10-
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.
Michael J. McGinley, Ph.D.
was appointed President and Chief Operating Officer effective
January 1, 2009. He previously served as Vice President, Global Operations from April through
December 2008, Vice President, Operations and Technical Affairs and General Manager, Heska Des
Moines from January 2002 to April 2008 and in other positions beginning in June 1997. Prior to
joining Heska, Dr. McGinley held positions with Bayer Animal Health and Fort Dodge Laboratories.
He holds Doctorate and M.S. degrees in Immunobiology from Iowa State University and successfully
completed the Advanced Management Program at the Harvard Business School in 2008.
Jason A. Napolitano
was appointed Executive Vice President and Chief Financial Officer in May
2002. He was appointed our Secretary in February 2009. 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.
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.
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 Heskas Research and
Development organization between 1993 and 2001. She holds a Doctorate in Parasitology/Biochemistry
from the University of Notre Dame and a B.S. in Biology from Lafayette College.
-11-
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 some of these
factors and the possible impact of these factors on future results of operations. The risks and
uncertainties described below are not the only ones we face. Additional risks or uncertainties not
presently known to us or that we deem to be currently immaterial also may impair our business
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.
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 Schering-Plough Animal Health Corporation (SPAH) which
grants SPAH exclusive distribution and marketing rights in the U.S. for our canine heartworm
preventive product, TRI-HEART Plus Chewable Tablets. Novartis Japan markets and distributes our
SOLO STEP CH heartworm test in Japan under an
exclusive arrangement. AgriLabs has the non-exclusive right to sell
certain of our bovine vaccines in the United States, Africa and Mexico and currently generates all
of our sales of those vaccines in those territories. One or more of these marketing partners may not devote sufficient resources
to marketing our products. For example, on March 9, 2009, Merck & Co., Inc. (Old Merck) and
Schering-Plough Corporation (SGP) announced plans to merge. SGP was the parent company of SPAH.
Old Merck and sanofi-aventis (Sanofi) each owned 50% of Merial Limited (Merial), a company which
sells a canine heartworm preventive (the Existing Product) competitive with ours. On July 30,
2009, Old Merck and Sanofi announced that they had entered into an agreement under which Old Merck was to
sell its interest in Merial to Sanofi and that Sanofi was to receive a call option exercisable
after the merger of Old Merck and SGP to essentially combine Merial with the animal health business of
SGP (SAH), including SPAH, in a new joint venture company (Newco) equally owned by Sanofi and
the company created from the merger of Old Merck and SGP. Old Merck subsequently completed its merger with
SGP and the surviving parent entity was renamed Merck & Co., Inc. (Merck). On March 9, 2010, Sanofi announced that it had exercised its option to combine Merial with
SAH. In a February 9, 2011 press release, Sanofi stated the closing of the transaction to create
Newco is expected in the first half of 2011 and is subject to execution of the final agreement,
antitrust review in the U.S., Europe and other countries and other customary closing conditions.
In its Annual Report on Form 10-K for the year ended December 31, 2010 filed with the
Securities and Exchange Commission (SEC) on February 28, 2011, Merck stated that the closing of the transaction
to create Newco is expected in the third quarter of 2011, is subject to the execution of final agreements,
regulatory review in the United States, Europe and other countries and other customary closing conditions, and that its agreement with Sanofi
provides if the transaction has not been completed by March 30, 2011 either party may
terminate the proposed joint venture without paying a break-up fee or other penalty.
Revenue from Merck entities, including SPAH, represented 13% of our 2010 revenue.
If Merck, SGP,
SAH, SPAH, Newco or any related entity is required to divest or cease operations related to our
heartworm preventive in order to complete a merger or other combination, our sales could decline
significantly and our business could be damaged. Similarly, if SPAH personnel are distracted or
experience turmoil as a result of the merger between Merial and SAH, a future combination between
SPAH and any other entity or for other reasons, our sales could decline significantly.
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. For example, we
believe a unit of SAH has obtained FDA approval for a canine heartworm preventive product with
additional claims compared with our TRI-HEART Plus Chewable Tablets. Should Merck, SGP, SAH, SPAH
and/or Newco decide to emphasize sales and marketing efforts of this product and/or the Existing
Product rather than our TRI-HEART Plus Chewable Tablets or cancel our agreement regarding canine
heartworm preventive distribution and marketing, our sales could decline significantly. 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 maintain our current market share or commercialize
our products and our sales will decline accordingly.
-12-
We may be unable to successfully market and sell our products.
We may not successfully develop and maintain marketing and/or sales capabilities, and we may
not be able to make arrangements with third parties to perform these activities on satisfactory
terms. If our marketing and sales strategy is unsuccessful, our ability to sell our products will
be negatively impacted and our revenues will decrease. The loss of distribution rights for
products or failure to gain access to new products may cause damage to our reputation and adversely
affect our business and future prospects.
We believe the recent worldwide economic weakness has had a negative effect on our business,
and this may continue in the future. This is particularly notable in the sale of new instruments,
which is a capital expenditure many, if not most, veterinarians may choose to defer in times of
perceived economic weakness. Even if the overall economy begins to grow in the future, there may
be a lag before veterinarians display confidence such growth will continue and return to historical
capital expenditure purchasing patterns. As the vast majority of cash flow to veterinarians
ultimately is funded by pet owners without private insurance or government support, our business
may be more susceptible to severe economic downturns than other health care businesses which rely
less on individual consumers.
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
all our Core Companion Animal Health products 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 and market most of our Core Companion Animal Health products in the United
States to veterinarians through an outside field organization of approximately 36 individuals, an
inside sales force of approximately 24 individuals, independent third-party distributors, as well
as through trade shows and print advertising. To be successful in these endeavors, we will have to
effectively market our products and continue to develop and train our direct sales force as well as
the sales personnel of our independent third-party distributors. In January 2010, we gave notice
of contract termination to most domestic independent third-party distributors who carried our full
product line. Sales to distributors whose underlying contracts have been canceled since the
beginning of 2009 represented 1% of our 2010 revenue. We intend to compete with these distributors
primarily through direct sales efforts going forward. There can be no assurance we will be
successful in competing with these or other distributors, that these distributors will not damage
our business, and/or that we will not lose sales and experience damage to our financial results as
a result of the termination of these agreements. 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, which may hinder our ability to sell and
market our products if these distributors are increasingly successful.
The loss of significant customers could harm our operating results.
Revenue from Merck entities, including SPAH, represented approximately 13% of our total
revenue for the twelve months ended December 31, 2010 and 11% of our revenue for the twelve months
ended December 31, 2009. Sales to no other single customer accounted for more than 10% of our
consolidated revenue for the twelve months ended December 31, 2010 and 2009. No single customer
accounted for more than 10% of our consolidated accounts receivable at December 31, 2010 and 2009.
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.
-13-
We operate in a highly competitive industry, which could render our products obsolete or
substantially limit the volume of products that we sell. This would limit our ability to compete
and maintain sustained profitability.
The market in which we compete is intensely competitive. Our competitors include independent
animal health companies and major pharmaceutical companies that have animal health divisions. We
also compete with independent, third-party distributors, including distributors who sell products
under their own private labels. In the point-of-care diagnostic testing market, our major
competitors include IDEXX, Abaxis and Synbiotics, a company acquired by Pfizer in January 2011.
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 segments customers. Competitors may
have facilities with similar capabilities to our OVP segment, which they may operate and sell at a
lower unit price to customers than our OVP segment does, which could cause us to lose customers.
Companies with a significant presence in the companion animal health market, such as Bayer AG, CEVA
Santé Animale, Eli Lilly and Company, Merck, Merial (a company owned by Sanofi), Novartis AG,
Pfizer, Vétoquinol S.A. and Virbac S.A. may be marketing or developing products that compete with
our products or would compete with them if developed. These and other competitors and potential
competitors may have substantially greater financial, technical, research and other resources and
larger, more established marketing, sales and service organizations than we do. Our competitors
may offer broader product lines and have greater name recognition than we do. For example, if
Pfizer is successful in integrating Synbiotics and devotes its significant commercial and financial
resources to growing Synbiotics market share, our sales could suffer significantly. Our
competitors may also develop or market technologies or products that are more effective or
commercially attractive than our current or future products or that would render our technologies
and products obsolete. Further, additional competition could come from new entrants to the animal
health care market. Moreover, we may not have the financial resources, technical expertise or
marketing, sales or support capabilities to compete successfully. We believe that one of our
largest competitors, IDEXX, in effect prohibits its distributors from selling competitive products,
including our diagnostic instruments and heartworm diagnostic tests. Another of our competitors,
Abaxis, recently launched a stand-alone canine heartworm diagnostic test competitive with ours and
a heartworm diagnostic test conducted as part of a chemistry profile on its chemistry analyzer.
If we fail to compete successfully, our ability to achieve sustained profitability will be
limited and sustained profitability, or profitability at all, may not be possible.
We rely substantially on third-party suppliers. The loss of products or delays in product
availability from one or more third-party suppliers 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 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.
-14-
The loss of access to products from one or more suppliers could have a significant, negative
impact on our business. For example, the largest of our suppliers (the Canceling Supplier) in
2009 provided us with their proprietary handheld diagnostic instruments and affiliated proprietary
cartridges and supplies (the Canceled Products). On May 1, 2009, the Canceling Supplier informed
us that they were canceling our
contractual agreement as of November 1, 2009. Under our agreement with the Canceling
Supplier, our rights became non-exclusive upon receipt of such notice. We subsequently learned
through a Form 8-K filing with the SEC that Abaxis, one of our major competitors, had signed an agreement with the Canceling Supplier
to distribute certain Canceled Products into the animal health market and that such rights were to
be exclusive outside of Japan on November 1, 2009. Approximately 15% of our 2009 revenue was
related to the proprietary products manufactured by the Canceling Supplier. We no longer have
access to the Canceled Products to sell to our installed base of customers and experienced a
significant decline in revenue and gross margin in 2010 as compared to 2009 related to Canceled
Products as a result. There can be no assurance we will be able to find an acceptable alternative
product to the Canceled Products, that any such product could compete effectively against the
Canceled Products, directly or in a niche, or that any such product will be available in a timely
or economic manner. Less than 1% of our 2010 revenue was from the Canceled Products.
Other major suppliers who sell us proprietary products which are responsible for more than 5%
of our LTM revenue are Arkray Global Business, Inc. (Arkray), Boule Medical AB, FUJIFILM
Corporation and Quidel Corporation. None of these suppliers sold us proprietary products which
were responsible for more than 20% of 2010 revenue, although the proprietary products of two were
each responsible for more than 15% of 2010 revenue and the proprietary products of one other was
responsible for more than 10% of 2010 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 other than for
lactate, 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
will be able to maintain supply of our major product offerings in the near future, there can be no
assurance that our suppliers will meet their obligations under any agreements we may have in place
with them or that we will be able to compel them to do so. Risks of relying on suppliers include:
|
|
|
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. The Canceling Supplier eliminating our access
to the Canceled Products is an example of such a situation. Even if we were able to
find an alternate supply for a product to which we lost rights, we would likely face
increased competition from the product whose rights we lost being marketed by a third
party or the former supplier and it may take us additional time and expense to gain the
necessary approvals and launch an alternative product.
|
|
|
|
|
Changes in economics.
An underlying change in the economics with a supplier, such
as a large price increase or new requirement of large minimum purchase amounts, could
have a significant, adverse affect on our business, particularly if we are unable to
identify and implement an alternative source of supply in a timely manner.
|
|
|
|
|
Loss of exclusivity.
In the case of our veterinary diagnostic instruments, if we
are entitled to non-exclusive access to consumable supplies for a defined period upon
expiration of exclusive rights, we may face increased competition from a third party
with similar non-exclusive access or our former supplier, which could cause us to lose
customers and/or significantly decrease our margins and could significantly affect our
financial results. For example, a third-party has gained access to chemistry
instrument test strips and supplies for our previous chemistry instrument which are
manufactured by Arkray, has increased competition for these products with our customers
and such competition may cause us to lose customers and/or significantly decrease our
margins in the future. In addition, current agreements, or agreements we may negotiate
in the future, with
suppliers may require us to meet minimum annual sales levels to maintain our position as
the exclusive distributor of these products. We may not meet these minimum sales levels
and maintain exclusivity over the distribution and sale of these products. If we are
not the exclusive distributor of these products, competition may increase significantly,
reducing our revenues and/or decreasing our margins.
|
-15-
|
|
|
High switching costs.
In our diagnostic instrument products we could face
significant competition and lose all or some of the consumable revenues from the
installed base of those instruments if we were to switch to a competitive instrument.
If we need to change to other commercial manufacturing contractors for certain of our
regulated products, additional regulatory licenses or approvals must be obtained for
these contractors prior to our use. This would require new testing and compliance
inspections prior to sale thus resulting in potential delays. Any new manufacturer
would have to be educated in, or develop substantially equivalent processes necessary
for the production of our products. We likely would have to train our sales force,
distribution network employees and customer support organization on the new product and
spend significant funds marketing the new product to our customer base.
|
|
|
|
|
Inability to meet minimum obligations.
Current agreements, or agreements we may
negotiate in the future, may commit us to certain minimum purchase or other spending
obligations. It is possible we will not be able to create the market demand to meet
such obligations, which could create a drain on our financial resources and liquidity.
Some such agreements may require minimum purchases and/or sales to maintain product
rights and we may be significantly harmed if we are unable to meet such requirements
and lose product rights.
|
|
|
|
|
The involuntary or voluntary discontinuation of a product line.
Unless we are able
to find an alternate supply of a similar product in this or similar circumstances with
any product, we would not be able to continue to offer our customers the same breadth
of products and our sales would likely suffer. Even if we are able to identify an
alternate supply, it may take us additional time and expense to gain the necessary
approvals and launch an alternative product, especially if the product is discontinued
unexpectedly. An example of such a situation arose in 2006 when Dolphin Medical Inc.
(a majority-owned subsidiary of OSI Systems, Inc.) discontinued production of our
VET/OX G2 DIGITAL Monitor as part of an agreement with Masimo Corporation to settle a
patent dispute.
|
|
|
|
|
Inconsistent or inadequate quality control.
We may not be able to control or
adequately monitor the quality of products we receive from our suppliers. Poor quality
items could damage our reputation with our customers.
|
|
|
|
|
Limited capacity or ability to scale capacity.
If market demand for our products
increases suddenly, our current suppliers might not be able to fulfill our commercial
needs, which would require us to seek new manufacturing arrangements and may result in
substantial delays in meeting market demand. If we consistently generate more demand
for a product than a given supplier is capable of handling, it could lead to large
backorders and potentially lost sales to competitive products that are readily
available. This could require us to seek or fund new sources of supply, which may be
difficult to find unless it is under terms that are less advantageous.
|
|
|
|
|
Regulatory risk.
Our manufacturing facility and those of some of our third-party
suppliers are subject to ongoing periodic unannounced inspection by regulatory
authorities, including the FDA, USDA and other federal, state and foreign 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.
|
-16-
|
|
|
Developmental delays.
We may experience delays in the scale-up quantities needed
for product development that could delay regulatory submissions and commercialization
of our products in development, causing us to miss key opportunities.
|
|
|
|
|
Limited intellectual property rights.
We typically do not have intellectual
property rights, or may have to share intellectual property rights, to the products
themselves and any improvements to the manufacturing processes or new manufacturing
processes for our products.
|
Potential problems with suppliers such as those discussed above could substantially decrease
sales, lead to higher costs, and/or damage our reputation with our customers due to factors such as
poor quality goods or delays in order fulfillment, resulting in our being unable to sell our
products effectively and substantially harm our business.
We may not be able to continue to achieve sustained profitability or increase profitability on
a quarterly or annual basis.
Prior to 2005, we incurred net losses on an annual basis since our inception in 1988 and, as
of December 31, 2010, we had an accumulated deficit of $171.8 million. We have achieved only one
quarter with income before income taxes greater than $1.5 million. Accordingly, relatively small
differences in our performance metrics may cause us to lose money in future periods. Our ability
to continue to be profitable in future periods will depend, in part, on our ability to increase
sales in our Core Companion Animal Health segment, including maintaining and growing our installed
base of instruments and related consumables, to maintain or increase gross margins and to limit the
increase in our operating expenses to a reasonable level as well as avoid or effectively manage any
unanticipated issues. We may not be able to generate, 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 future revenues depend on successful product development, commercialization and/or market
acceptance, any of which can be slower than we expect or may not occur.
The product development and regulatory approval process for many of our potential products is
extensive and may take substantially longer than we anticipate. Research projects may fail. New
products that we may be developing for the veterinary marketplace may not perform up to our
expectations. Because we have limited resources to devote to product development and
commercialization, any delay in the development of one product or reallocation of resources to
product development efforts that prove unsuccessful may delay or jeopardize the development of
other product candidates. If we fail to successfully develop new products and bring them to market
in a timely manner, our ability to generate additional revenue will decrease.
Even if we are successful in the development of a product or obtain rights to a product from a
third-party supplier, we may experience delays or shortfalls in commercialization and/or market
acceptance of the product. For example, veterinarians may be slow to adopt a product or there may
be delays in producing large volumes of a product. The former is particularly likely where there
is no comparable product available or historical use of such a product. For example, while we
believe our E.R.D.-HEALTHSCREEN urine tests for dogs and cats,
introduced in 2002 and 2003, respectively, represented 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.
-17-
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, cancelation or
expiration of such relationships, such as the recent decision by the Canceling Supplier
to cancel our contractual agreement as of November 1, 2009;
|
|
|
|
|
competition and pricing pressures from competitive products;
|
|
|
|
|
the introduction of new products by our competitors or by us;
|
|
|
|
|
large customers failing to purchase at historical levels;
|
|
|
|
|
fundamental shifts in market demand;
|
|
|
|
|
manufacturing delays;
|
|
|
|
|
shipment problems;
|
|
|
|
|
information technology problems, which may prevent us from conducting our business
effectively, or at all, and may also raise our costs;
|
|
|
|
|
regulatory and other delays in product development;
|
|
|
|
|
product recalls or other issues which may raise our costs;
|
|
|
|
|
changes in our reputation and/or market acceptance of our current or new products;
and
|
|
|
|
|
changes in the mix of products sold.
|
We have high operating expenses, including those related to personnel. Many of these expenses
are fixed in the short term and may increase over the course of the coming year. If any of the
factors listed above cause our revenues to decline, our operating results could be substantially
harmed.
Obtaining and maintaining regulatory approvals in order to market our products may
be costly and delay the marketing and sales of our products. Failure to meet all regulatory
requirements could cause significant losses from effected inventory and the loss of market share.
Many of the products we develop, market or manufacture may subject us to extensive regulation
by one or more of the USDA, the FDA, the EPA and foreign and other regulatory authorities. These
regulations govern, among other things, the development, testing, manufacturing, labeling, storage,
pre-market approval, advertising, promotion and sale of some of our products. Satisfaction of
these requirements can take several years and time needed to satisfy them may vary substantially,
based on the type, complexity and novelty of the product.
The decision by a regulatory authority to regulate a currently non-regulated product or product area could significantly impact our revenue and have a corresponding adverse impact on our financial performance and position while
we attempt to comply with the new regulation, if such compliance is possible at all.
The effect of government regulation may be to delay or to prevent marketing of our products
for a considerable period of time and to impose costly procedures upon our activities. We have
experienced in the past, and may experience in the future, difficulties that could delay or prevent
us from obtaining the regulatory approval or license necessary to introduce or market our products.
Such delays in approval may cause us to forego a significant portion of a new products sales in
its first year due to seasonality and advanced booking periods associated with certain products.
Regulatory approval of our products may also impose limitations on the indicated or intended uses
for which our products may be marketed. Difficulties in making established products to all
regulatory specifications may lead to significant losses related to effected inventory as well as
market share. For instance, in 2010 we discovered we had produced a significant level of cattle
vaccine product in our OVP segment which conformed to regulatory
-18-
specifications for safety, potency and efficacy but not purity. We did not ship any related cattle vaccine product in the three
months ended June 30, 2010 as we investigated and worked to resolve the situation. In compliance
with USDA regulations we destroyed any product which did not meet regulatory specifications, and
offered our customers replacement product for any product so destroyed. The net cost of destroyed
product, replacement product and related reserves was $1.4 million in 2010. There can be no
assurance that the ultimate cost will not exceed the level of the current reserve, that our efforts
at remediation to ensure this or similar problems will not recur in the future will be successful,
or that the USDA will not suspend our ability to produce these, similar or other products for an
extended time at some point in the future.
Among the conditions for certain regulatory approvals is the requirement that our facilities
and/or the facilities of our third-party manufacturers conform to current Good Manufacturing
Practices and other requirements. If any regulatory authority determines that our manufacturing
facilities or those of our third-party manufacturers do not conform to appropriate manufacturing
requirements, we or the manufacturers of our products may be subject to sanctions, including, but
not limited to, warning letters, manufacturing suspensions, product recalls or seizures,
injunctions, refusal to permit products to be imported into or exported out of the United States,
refusals of regulatory authorities to grant approval or to allow us to enter into government supply
contracts, withdrawals of previously approved marketing applications, civil fines and criminal
prosecutions. In addition, certain of our agreements may 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.
We have historically not consistently generated positive cash flow from operations, may need
additional capital and any required capital may not be available on reasonable terms or at all.
If our actual performance deviates from our operating plan, we may be required to raise
additional capital in the future. If necessary, we expect to raise these additional funds by the
sale of equity securities or the issuance of new term debt secured by the same assets as the term
loans which were fully repaid in 2010. There is no guarantee that additional capital will be
available from these sources on reasonable terms, if at all, and certain of these sources may
require approval by existing lenders. The public markets may be unreceptive to equity financings
and we may not be able to obtain additional private equity or debt financing. Any equity financing
would likely be dilutive to stockholders and additional debt financing, if available, may include
restrictive covenants and increased interest rates that would limit our currently planned
operations and strategies. Additionally, funds we expect to be available under our existing
revolving line of credit may not be available and other lenders could refuse to provide us with
additional debt financing. We believe the credit markets are particularly restrictive and
difficult to obtain funding in versus recent history. 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.
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. We may have to use
legal means to collect payment for goods shipped to third parties. For example, we are currently involved in arbitration with two of our former distributors to whom we gave notice of contract termination in January 2010 regarding matters including amounts past due, for which
we have recorded no specific reserves, and counterclaims made by both
former distributors. A legal dispute leading to an unfavorable ruling or
settlement could have significant material adverse consequences on our business.
-19-
We may become subject to additional patent infringement claims and litigation in the United
States or other countries or interference proceedings conducted in the United States Patent and
Trademark Office, or USPTO, to determine the priority of inventions. The defense and prosecution
of intellectual property suits, USPTO interference proceedings and related legal and administrative
proceedings are likely to be costly, time-consuming and distracting. As is typical in our
industry, from time to time we and our collaborators and
suppliers have received, and may in the future receive, notices from third parties claiming
infringement and invitations to take licenses under third-party patents. Any legal action against
us or our collaborators or suppliers may require us or our collaborators or suppliers to obtain one
or more licenses in order to market or manufacture affected products or services. However, we or
our collaborators or suppliers may not be able to obtain licenses for technology patented by others
on commercially reasonable terms, or at all, may not be able to develop alternative approaches if
unable to obtain licenses or current and future licenses may not be adequate, any of which could
substantially harm our business. An example of such a situation arose in 2006 when Dolphin Medical
Inc. (a majority-owned subsidiary of OSI Systems, Inc.) discontinued production of our VET/OX G2
DIGITAL Monitor as part of an agreement with Masimo Corporation to settle a patent dispute.
We may also need to pursue litigation to enforce any patents issued to us or our collaborative
partners, to protect trade secrets or know-how owned by us or our collaborative partners, or to
determine the enforceability, scope and validity of the proprietary rights of others. Any
litigation or interference proceeding will likely result in substantial expense to us and
significant diversion of the efforts of our technical and management personnel. Any adverse
determination in litigation or interference proceedings could subject us to significant liabilities
to third parties. Further, as a result of litigation or other proceedings, we may be required to
seek licenses from third parties which may not be available on commercially reasonable terms, if at
all.
We often depend on third parties for products we intend to introduce in the future. If our
current relationships and collaborations are not successful, we may not be able to introduce the
products we intend to in the future.
We are often dependent on third parties and collaborative partners to successfully and timely
perform research and development activities to successfully develop new products. For example, we
jointly developed point-of-care diagnostic products with Quidel Corporation. In other cases, we
have discussed Heska marketing in the veterinary market an instrument being developed by a third
party for use in the human health care market. In the future, one or more of these third parties
or collaborative partners may not complete research and development activities in a timely fashion,
or at all. Even if these third parties are successful in their research and development
activities, we may not be able to come to an economic agreement with them. If these third parties
or collaborative partners fail to complete research and development activities, fail to complete
them in a timely fashion, or if we are unable to negotiate economic agreements with such third
parties or collaborative partners, our ability to introduce new products will be impacted
negatively and our revenues may decline.
-20-
Our Public Common Stock has certain transfer restrictions which could reduce trading liquidity
from what it otherwise would have been and have other undesired affects. Our recently completed
1-for-10 reverse stock split could also reduce liquidity in our stock. In addition, our stock
price has historically experienced high volatility, and could do so in the future.
On May 4, 2010, our shareholders approved an amendment (the Amendment) to our Restated
Certificate of Incorporation. The Amendment places restrictions on the transfer of our stock that
could adversely affect our ability to use our domestic net operating loss carryforward (NOL). In particular, the Amendment prevents
the transfer of shares without the approval of our Board of Directors if, as a consequence, an
individual, entity or groups of individuals or entities would become a 5-percent holder under
Section 382 of the Internal Revenue Code of 1986, as amended, and the related Treasury regulations,
and also prevents any existing 5-percent holder from increasing his or her ownership position in
the Company without the approval of our Board of Directors. This may cause certain individuals or
entities who may have otherwise been willing and able to bid on our stock to not do so, reducing
the class of potential acquirers and trading liquidity from what it otherwise might have been. The
Amendment could also have an adverse impact on the value of our stock if certain buyers who would
otherwise have purchased our stock, including buyers who may not be comfortable owning stock with
transfer restrictions, do not purchase our stock as a result of the Amendment. In addition,
because some corporate takeovers occur through the acquirers purchase, in the public market or
otherwise, of sufficient shares to give it control of a company, any provision that restricts the
transfer of shares can have the effect of preventing a takeover. The Amendment could discourage or
otherwise prevent accumulations of substantial blocks of shares in which our common stockholders
might receive a substantial premium above market value and might tend to insulate management and
the Board of Directors against the possibility of removal to a greater degree than had the
Amendment not passed.
We completed a 1-for-10 reverse stock split effective December 30, 2010. The liquidity of our
Public Common Stock could be adversely affected by the reduced number of shares resulting from the
reverse stock split. Our reverse stock split may have left certain stockholders with one or more
odd lots, which are stock holdings in fewer than 100 shares of Public Common Stock. These odd
lots may be more difficult to sell and may incur higher brokerage commissions when sold than shares
of our Public Common Stock in multiples of 100, reducing liquidity. Furthermore, due to the
increased price per share following our 1-for-10 reverse stock split, certain smaller investors may
be unwilling or unable to purchase shares of our Public Common Stock, also reducing liquidity.
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 twelve months ended December 31,
2010, our closing stock price has ranged from a low of $3.90 to a high of $9.70 when adjusted for our December 30, 2010 reverse stock split . 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;
|
|
|
|
|
changes in the outlook for our business, including any changes in our earnings
guidance;
|
|
|
|
|
our quarterly operating results, including as compared to our revenue, earnings or
other guidance and in comparison to historical results;
|
|
|
|
|
termination, cancellation or expiration of our third-party supplier relationships;
|
|
|
|
|
announcements of technological innovations or new products by our competitors or by
us;
|
|
|
|
|
litigation;
|
|
|
|
|
regulatory developments, including delays in product introductions;
|
|
|
|
|
developments or disputes concerning patents or proprietary rights;
|
|
|
|
|
availability of our revolving line of credit and compliance with debt covenants;
|
|
|
|
|
releases of reports by securities analysts;
|
|
|
|
|
economic and other external factors; and
|
|
|
|
|
general market conditions.
|
In the past, following periods of volatility in the market price of a companys securities,
securities class action litigation has often been instituted. If a securities class action suit is
filed against us, it is likely we would incur substantial legal fees and our managements attention
and resources would be diverted from operating our business in order to respond to the litigation.
-21-
If we are unable to maintain various financial and other covenants required by our credit
facility agreement we will be unable to borrow any funds under the agreement and fund our
operations.
Under
our credit and security agreement with Wells Fargo Bank, National
Association (Wells Fargo), we are
required to comply with various financial and non-financial covenants in order to borrow under the
agreement. The availability of borrowings under this agreement is essential to continue to fund
our operations. Among the financial covenants is a requirement to maintain minimum liquidity (cash
plus excess borrowing base) of $1.5 million. Additional requirements include covenants for minimum
capital monthly
and minimum net income quarterly. Although we believe we will be able to maintain compliance
with all these covenants and any covenants we may negotiate in the future, there can be no
assurance thereof. We have not always been able to maintain compliance with all covenants under
our credit and security agreement with Wells Fargo 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 and could cause all outstanding borrowings under
our credit and security agreement to become immediately due and payable, or impact our ability to
borrow under the agreement. In addition, Wells Fargo has discretion in setting the advance rates
which we may borrow against eligible assets. 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.
Our Public 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 Public 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. We completed a 1-for-10 reverse stock split effective
December 30, 2010 in order to resolve an ongoing minimum bid price deficiency. While we believe we
are currently in compliance with all Nasdaq requirements, there can be no assurance we will
continue to meet Nasdaq listing requirements including the minimum bid price, that Nasdaq will
interpret these requirements in the same manner we do if we believe we meet the requirements, or that
Nasdaq will not change such requirements or add new requirements to include requirements we do not meet 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 any stockholders ability
to sell our securities in the secondary market. This lack of liquidity would also likely make it
more difficult for us to raise capital in the future.
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 and expenses as a public company since its enactment. The general and administrative costs
of complying with Sarbanes-Oxley will depend on how it is interpreted over time. Of particular
concern are the level 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 anticipate, 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. Similarly, we
anticipate we will be required to comply with the SECs mandate to provide interactive data using
the eXtensible Business Reporting Language (XBRL) as an exhibit to certain SEC filings in 2011.
We anticipate compliance with this mandate will require a significant time investment, which may
preclude some of our employees from spending time on more productive matters. 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.
-22-
Changes to financial accounting standards may affect our results of operations, cause us to
change our business practices or have a negative impact on us if we fail to track such changes.
We prepare our financial statements in conformance with United States generally accepted
accounting principles, or GAAP. These accounting principles are established by and are subject to
interpretation by the SEC, the Financial Accounting Standards Board and others who interpret and
create accounting policies. A change in those policies can have a significant effect on our
reported results and may affect our reporting of transactions completed before a change is made
effective. Such changes may adversely affect our reported financial results, the way we conduct
our business or have a negative impact on us if we fail to track such changes. For example, we
have found the Financial Standards Accounting Boards (FASB) recent decision to codify the
accounting standards has made it more difficult to research complex accounting matters, increasing
the risk we will fail to account consistent with the FASB rules in the future.
We depend on key personnel for our future success. If we lose our key personnel or are unable
to attract and retain additional personnel, we may be unable to achieve our goals.
Our future success is substantially dependent on the efforts of our senior management and
other key personnel. The loss of the services of members of our senior management or other key
personnel may significantly delay or prevent the achievement of our business objectives. Although
we have an employment agreement with many of these individuals, all are at-will employees, which
means that either the employee or Heska may terminate employment at any time without prior notice.
If we lose the services of, or fail to recruit, key personnel, the growth of our business could be
substantially impaired. We do not maintain key person life insurance for any of our senior
management or key personnel.
We may face product returns and product liability litigation in excess of or not covered by
our insurance coverage or indemnities and/or warranties from our suppliers. If we become subject
to product liability claims resulting from defects in our products, we may fail to achieve market
acceptance of our products and our sales could substantially decline.
The testing, manufacturing and marketing of our current products as well as those currently
under development entail an inherent risk of product liability claims and associated adverse
publicity. Following the introduction of a product, adverse side effects may be discovered.
Adverse publicity regarding such effects could affect sales of our other products for an
indeterminate time period. To date, we have not experienced any material product liability claims,
but any claim arising in the future could substantially harm our business. Potential product
liability claims may exceed the amount of our insurance coverage or may be excluded from coverage
under the terms of the policy. We may not be able to continue to obtain adequate insurance at a
reasonable cost, if at all. In the event that we are held liable for a claim against which we are
not indemnified or for damages exceeding the $10 million limit of our insurance coverage or which
results in significant adverse publicity against us, we may lose revenue, be required to make
substantial payments which could exceed our financial capacity and/or lose or fail to achieve
market acceptance.
We may be held liable for the release of hazardous materials, which could result in extensive
clean up costs or otherwise harm our business.
Certain of our products and development programs produced at our Des Moines, Iowa facility
involve the controlled use of hazardous and biohazardous materials, including chemicals and
infectious disease agents. Although we believe that our safety procedures for handling and
disposing of such materials comply with the standards prescribed by applicable local, state and
federal regulations, we cannot eliminate the risk of accidental contamination or injury from these
materials. In the event of such an accident, we could be held liable for any fines, penalties,
remediation costs or other damages that result. Our liability for the release of hazardous
materials could exceed our resources, which could lead to a shutdown of our operations, significant
remediation costs and potential legal liability. In addition, we may incur substantial costs
to comply with environmental regulations if we choose to expand our manufacturing capacity.
-23-
|
|
|
Item 1B.
|
|
Unresolved Staff Comments.
|
Not applicable.
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 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 2015.
|
|
|
Item 3.
|
|
Legal Proceedings.
|
From
time to time, we may be involved in litigation related to claims
arising out of our operations. At December 31, 2010, we had no
material litigation pending.
|
|
|
Item 4.
|
|
Removed and Reserved.
|
-24-
PART II
|
|
|
Item 5.
|
|
Market for Registrants 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 sales prices for our common stock as reported by the
Nasdaq Capital Market, adjusted for our 1-for-10 reverse stock split effective December 30, 2010,
for the periods indicated below:
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
2009
|
|
|
|
|
|
|
|
|
First Quarter
|
|
$
|
3.90
|
|
|
$
|
1.70
|
|
Second Quarter
|
|
|
5.90
|
|
|
|
2.40
|
|
Third Quarter
|
|
|
5.80
|
|
|
|
3.20
|
|
Fourth Quarter
|
|
|
6.30
|
|
|
|
3.60
|
|
2010
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
8.20
|
|
|
|
5.20
|
|
Second Quarter
|
|
|
9.30
|
|
|
|
5.50
|
|
Third Quarter
|
|
|
6.80
|
|
|
|
4.10
|
|
Fourth Quarter
|
|
|
5.30
|
|
|
|
4.00
|
|
2011
|
|
|
|
|
|
|
|
|
First Quarter (through March 17)
|
|
|
7.22
|
|
|
|
4.65
|
|
As of March 17, 2011,
there were approximately 260 holders of record of our common stock
and approximately 3,700 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.
-25-
STOCK PRICE PERFORMANCE GRAPH
The following graph provides a comparison over the five-year period ended December 31, 2010 of
the cumulative total stockholder return from a $100 investment in the Companys 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
Managements 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.
We completed a 1-for-10 reverse stock split effective December 30, 2010. Except as otherwise
indicated, all related amounts reported below have been retroactively adjusted for the effect of
this reverse stock split.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2007
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(in thousands, except per share amounts)
|
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core companion animal health
|
|
$
|
62,968
|
|
|
$
|
67,279
|
|
|
$
|
68,140
|
|
|
$
|
66,449
|
|
|
$
|
55,655
|
|
Other vaccines, pharmaceuticals and products
|
|
|
12,092
|
|
|
|
15,056
|
|
|
|
13,513
|
|
|
|
9,229
|
|
|
|
9,796
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue, net
|
|
|
75,060
|
|
|
|
82,335
|
|
|
|
81,653
|
|
|
|
75,678
|
|
|
|
65,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
44,414
|
|
|
|
49,148
|
|
|
|
52,809
|
|
|
|
47,219
|
|
|
|
40,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
30,646
|
|
|
|
33,187
|
|
|
|
28,844
|
|
|
|
28,459
|
|
|
|
24,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
14,356
|
|
|
|
16,109
|
|
|
|
17,640
|
|
|
|
14,524
|
|
|
|
14,726
|
|
Research and development
|
|
|
3,483
|
|
|
|
2,679
|
|
|
|
1,951
|
|
|
|
1,718
|
|
|
|
1,597
|
|
General and administrative
|
|
|
9,887
|
|
|
|
8,925
|
|
|
|
8,917
|
|
|
|
8,173
|
|
|
|
8,111
|
|
Restructuring expenses
|
|
|
|
|
|
|
|
|
|
|
785
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
(155
|
)
|
|
|
(47
|
)
|
|
|
232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
27,571
|
|
|
|
27,666
|
|
|
|
29,525
|
|
|
|
24,415
|
|
|
|
24,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
3,075
|
|
|
|
5,521
|
|
|
|
(681
|
)
|
|
|
4,044
|
|
|
|
358
|
|
Interest and other expense, net
|
|
|
1,041
|
|
|
|
588
|
|
|
|
640
|
|
|
|
306
|
|
|
|
289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
2,034
|
|
|
|
4,933
|
|
|
|
(1,321
|
)
|
|
|
3,738
|
|
|
|
69
|
|
Income tax expense (benefit)
|
|
|
206
|
|
|
|
(29,875
|
)
|
|
|
(471
|
)
|
|
|
1,496
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
1,828
|
|
|
$
|
34,808
|
|
|
$
|
(850
|
)
|
|
$
|
2,242
|
|
|
$
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
0.36
|
|
|
$
|
6.81
|
|
|
$
|
(0.17
|
)
|
|
$
|
0.43
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
0.35
|
|
|
$
|
6.27
|
|
|
$
|
(0.17
|
)
|
|
$
|
0.43
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used for basic net income (loss)
per share
|
|
|
5,035
|
|
|
|
5,110
|
|
|
|
5,167
|
|
|
|
5,207
|
|
|
|
5,220
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used for diluted net income (loss)
per share
|
|
|
5,293
|
|
|
|
5,551
|
|
|
|
5,167
|
|
|
|
5,212
|
|
|
|
5,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,275
|
|
|
$
|
5,524
|
|
|
$
|
4,705
|
|
|
$
|
5,400
|
|
|
$
|
5,492
|
|
Total current assets
|
|
|
30,652
|
|
|
|
35,127
|
|
|
|
31,290
|
|
|
|
28,493
|
|
|
|
27,279
|
|
Total assets
|
|
|
38,495
|
|
|
|
75,591
|
|
|
|
70,438
|
|
|
|
64,134
|
|
|
|
63,048
|
|
Line of credit
|
|
|
8,022
|
|
|
|
12,614
|
|
|
|
11,042
|
|
|
|
4,201
|
|
|
|
3,079
|
|
Current portion of long-term debt and capital leases
|
|
|
1,275
|
|
|
|
776
|
|
|
|
770
|
|
|
|
381
|
|
|
|
|
|
Total current liabilities
|
|
|
21,980
|
|
|
|
25,195
|
|
|
|
22,228
|
|
|
|
14,107
|
|
|
|
12,660
|
|
Long-term debt and capital leases
|
|
|
1,927
|
|
|
|
1,151
|
|
|
|
381
|
|
|
|
|
|
|
|
|
|
Long-term deferred revenue and other
|
|
|
7,840
|
|
|
|
6,362
|
|
|
|
5,306
|
|
|
|
4,972
|
|
|
|
4,590
|
|
Total stockholders equity
|
|
|
6,748
|
|
|
|
42,883
|
|
|
|
42,523
|
|
|
|
45,055
|
|
|
|
45,798
|
|
-27-
|
|
|
Item 7.
|
|
Managements 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 the close of business on March 18, 2011, and we undertake no duty and do
not intend to update this information.
Overview
We develop, manufacture, market, sell and support veterinary products. Our business is
comprised of two reportable segments, Core Companion Animal Health, which represented 85% of our
2010 revenue, and Other Vaccines, Pharmaceuticals and Products which represented 15% of our 2010
revenue.
The Core Companion Animal Health segment (CCA) includes diagnostic and other instruments and
supplies as well as single use diagnostic and other tests, pharmaceuticals and vaccines, primarily
for canine and feline use.
Diagnostic and other instruments and supplies represented approximately 42% of our 2010
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 29% of our 2010 revenue resulted from the sale of such consumables to an
installed base of instruments and approximately 13% of our revenue was from new hardware. A
loss of or disruption in supply of consumables we are selling to an installed base of instruments
could substantially harm our business. For example, the supplier of our handheld blood analysis
instruments informed us in May 2009 of the cancellation of our contractual agreement as of November
2009 and that they would not supply us with any related
instruments or consumables following cancellation. We had established a large installed base
of handheld blood analysis instruments and sales of instruments and affiliated consumables in this
area represented 15% of our 2009 revenue. Accordingly, we experienced a significant decline in
revenue and gross margin related to our handheld blood analysis instruments in 2010 as compared to
2009. All of our diagnostic instruments and supplies are furnished to us by third parties, who
typically own the product rights and sell 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 chemistry instruments, our hematology
instruments and our new blood gas instruments and their affiliated operating consumables. Revenue
from products in these three areas, including revenue from consumables, represented approximately
38% of our 2010 revenue.
Other CCA revenue, including single use diagnostic and other tests, pharmaceuticals and
vaccines as well as research and development, licensing and royalty revenue, represented
approximately 43% of our 2010 revenue. Since items in this area are single use by their nature,
our aim is to build customer satisfaction and loyalty for each product, generate repeat annual
sales from existing customers and expand our customer base in the future. Products in this area
are both supplied by third parties and provided by us. Major products in this area include our
heartworm diagnostic tests, our heartworm preventive, our allergy test kits, our allergy
immunotherapy and our allergy diagnostic tests. Combined revenue from heartworm-related products
and allergy-related products represented approximately 39% of our 2010 revenue.
-28-
We consider the CCA segment to be our core business and devote most of our management time and
other resources to improving the prospects for this segment. Maintaining a continuing, reliable
and economic supply of products we currently obtain from third parties is critical to our success
in this area. Virtually all of our sales and marketing expenses are in the Core Companion Animal
Health segment. The majority of our research and development spending is dedicated to this
segment, as well. We strive to provide high value products and advance the state of veterinary
medicine.
All our CCA 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. CCA products are sold directly by us as well as through
distribution relationships, such as our corporate agreement with SPAH, the sale of kits to conduct
blood testing to third-party veterinary diagnostic laboratories and independent third-party
distributors. Revenue from direct sales and distribution relationships represented approximately
68% and 32% of Core Companion Animal Health 2010 revenue, respectively. In January 2010, we gave
notice of contract termination to most domestic independent third-party distributors who carried
our full product line and, accordingly, the percent of our revenue from distribution relationships
declined in 2010 as compared to 2009.
We intend to increase profitability through a combination of revenue growth, gross margin
improvement and expense control. Accordingly, we closely monitor revenue growth trends in our CCA
segment. Revenue in this segment decreased by $10.8 million, or 16%, in 2010 as compared to 2009.
The largest factor in this decline was lower sales of consumables for our handheld blood analysis
instruments which declined by $9.3 million in 2010 as compared to 2009, primarily due to the loss
of supply discussed above. In addition, we believe poor economic conditions over the past year
have impacted our revenue growth as, for example, veterinarians have delayed or deferred capital
expenditures on new diagnostic instrumentation.
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 an
asset which will allow us to control our cost of goods on any vaccines and pharmaceuticals that we
may commercialize in the future. Virtually all our U.S. inventory is now stored at this facility
and most 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 CCA segment.
Our OVP segment includes private label vaccine and pharmaceutical production, primarily for
cattle but also for other animals such as small mammals. 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, non-exclusive 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 segments revenue. Our OVP segment also
produces vaccines and pharmaceuticals for other third parties.
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.
-29-
Revenue Recognition
We generate our revenue through the sale of products, as well as through 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
|
|
|
|
|
Collectability 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 revenue by the estimated cost of any rebates, allowances or
similar programs, which are used as promotional programs.
Recording revenue from the sale of products involves the use of estimates and management
judgment. We must make a determination at the time of sale whether the customer has the
ability to make payments in accordance with arrangements. While we do utilize past
payment history, and, to the extent available for new customers, public credit
information in making our assessment, the determination of whether collectability 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.
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.
-30-
Occasionally we enter into arrangements that include multiple elements. Such
arrangements may include the licensing of technology and manufacturing of product. In
these situations we must determine whether the various elements meet the criteria to be
accounted for as separate elements. If the elements cannot be separated, revenue is
recognized once revenue recognition criteria for the entire arrangement have been met or
over the period that the Companys obligations to the customer are fulfilled, as
appropriate. If the elements are determined to be separable, the revenue is allocated
to the separate elements based on relative fair value and recognized separately for each
element when the applicable revenue recognition criteria have been met. In accounting
for these multiple element arrangements, we must make determinations about whether
elements can be accounted for separately and make estimates regarding their relative
fair values.
Allowance for Doubtful Accounts
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 collectability risk based on such
factors, among others, as: (i) the aging of the accounts receivable balance; (ii) the
clients past payment experience; (iii) a deterioration in the clients financial
condition, evidenced by weak financial condition and/or continued poor operating
results, reduced credit ratings, and/or a bankruptcy filing. In addition to the
specific allowance, the Company maintains a general allowance for credit risk in its
accounts receivable which is not covered by a specific allowance. The general allowance
is established based on such factors, among others, as: (i) the total balance of the
outstanding accounts receivable, including considerations of the aging categories of
those accounts receivable; (ii) past history of uncollectable 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.
Deferred Tax Assets Valuation Allowance
Our
deferred tax assets, such as an NOL, are reduced
by an offsetting valuation allowance based on judgmental assessment of available
evidence if we are unable to conclude that it is more likely than not that some or all
of the related deferred tax assets will be realized. If we are able to conclude it is
more likely than not that we will realize a future benefit from a deferred tax asset, we
will reduce the related valuation allowance by an amount equal to the estimated quantity
of income taxes we would pay in cash if we were not to utilize the deferred tax asset in
the future. The first time this occurs in a given jurisdiction, it will result in a net
deferred tax asset on our balance sheet and an income tax benefit of equal magnitude in
our statement of operations 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 the related deferred tax asset. The
corresponding journal entry will be a reduction of our deferred tax asset. If there is
a change regarding our tax position in the future, we will make a corresponding
adjustment to the related valuation allowance.
-31-
Results of Operations
The following table summarizes our results of operations for the three most recent fiscal
years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(in thousands except per share amounts)
|
|
Consolidated Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Core companion animal health
|
|
$
|
68,140
|
|
|
$
|
66,449
|
|
|
$
|
55,655
|
|
Other vaccines, pharmaceuticals and products
|
|
|
13,513
|
|
|
|
9,229
|
|
|
|
9,796
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue, net
|
|
|
81,653
|
|
|
|
75,678
|
|
|
|
65,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
52,809
|
|
|
|
47,219
|
|
|
|
40,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
28,844
|
|
|
|
28,459
|
|
|
|
24,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
17,640
|
|
|
|
14,524
|
|
|
|
14,726
|
|
Research and development
|
|
|
1,951
|
|
|
|
1,718
|
|
|
|
1,597
|
|
General and administrative
|
|
|
8,917
|
|
|
|
8,173
|
|
|
|
8,111
|
|
Restructuring expenses
|
|
|
785
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
29,525
|
|
|
|
24,415
|
|
|
|
24,434
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(681
|
)
|
|
|
4,044
|
|
|
|
358
|
|
Interest and other expense, net
|
|
|
640
|
|
|
|
306
|
|
|
|
289
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(1,321
|
)
|
|
|
3,738
|
|
|
|
69
|
|
Income tax expense (benefit)
|
|
|
(471
|
)
|
|
|
1,496
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(850
|
)
|
|
$
|
2,242
|
|
|
$
|
18
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
(0.17
|
)
|
|
$
|
0.43
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
(0.17
|
)
|
|
$
|
0.43
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
Total revenue decreased 14% to $65.5 million in 2010 compared to $75.7 million in 2009. Total
revenue decreased 7% to $75.7 million in 2009 compared to $81.7 million in 2008.
CCA segment revenue decreased 16% to $55.7 million in 2010 compared to $66.4 million in 2009.
The largest factor in this decline was lower sales of consumables for our handheld blood analysis
instruments which declined by $9.3 million in 2010 compared to 2009, primarily due to the loss of
supply following cancellation of the underlying contract by our supplier. Other factors in the
decline were lower sales of our heartworm diagnostic tests internationally and lower sales of our
IV pumps. CCA segment revenue decreased by $1.7 million, or 3%, to $66.4 million in 2009 from
$68.1 million in 2008. The largest factor in this decline was lower sales of consumables for our
handheld blood analysis instruments which declined by $2.9 million in 2009 as compared to 2008,
primarily due to the loss of supply following cancellation of the underlying contract by our
supplier. Other factors in the decline were lower sales of our chemistry instruments and our
microalbumin laboratory packs. These declines were somewhat offset by increased sales of our
non-handheld related instrument consumables, international sales of our heartworm diagnostic tests
and sales of our heartworm preventive.
-32-
OVP segment revenue increased 6% to $9.8 million in 2010 compared to $9.2 million in 2009.
Greater sales of bulk bovine and other biologicals were key factors in the increase. This was
somewhat offset by lower sales of cattle vaccines under our contract with AgriLabs. We had issues
producing cattle vaccines to appropriate specifications and, as a result, did not ship any related
cattle vaccine products in the three months ended June 30, 2010 and replaced certain cattle vaccine
inventory with new cattle vaccine inventory in the three months ended December 31, 2010. OVP
segment revenue decreased 32% to $9.2 million in 2009
compared to $13.5 million in 2008. The largest factor in this decline was loss of fish
vaccine revenue from AquaHealth, a unit of Novartis, a customer who had previously informed us that
they would be taking their production in-house and accordingly ordered no product from us in 2009.
Lower revenue under our contract with AgriLabs and lower sales of bulk bovine biologicals also
contributed to the year-over-year decline in this segment.
We expect 2011 total revenue to increase as compared with 2010.
Cost of Revenue
2010 Cost of revenue was $40.7 million, a decrease of 14% compared to $47.2 million in 2009.
Gross profit decreased 13% to $24.8 million in 2010 from $28.5 million in 2009. Gross Margin, i.e.
gross profit divided by total revenue, increased to 37.9% in 2010 from 37.6% in 2009. A key factor
in the increase was product mix, where the overall sales shift was toward higher margin products.
This was somewhat offset by approximately $1.4 million in costs for destroyed product,
replacement product and related reserves in our OVP segment regarding to
regulatory issues with certain of our cattle vaccines.
Cost of revenue totaled $47.2 million for the twelve months ended December 31, 2009, an 11%
decrease as compared to $52.8 million for the corresponding period in 2008. Gross profit decreased
1% to $28.5 million for 2009 as compared to $28.8 million in 2008. Gross Margin increased to 37.6%
for 2009 as compared to 35.3% in 2008. Lower reserves taken against inventory we expect to expire
prior to sale, primarily related to consumables for our chemistry instruments and our handheld
diagnostic instruments were a factor in the increase. Another factor in the increase was revenue
mix as a lower percentage of revenue in 2009 was related to our OVP segment, which tends to
generate lower Gross Margin than our CCA segment.
We expect Gross Margin to increase in 2011 as compared to 2010.
Operating Expenses
Selling and marketing expenses increased by 1% to $14.7 million in 2010 compared to $14.5
million in 2009. Spending related to the full launch of our new blood gas analyzer in 2010 was a
factor in the increase. Selling and marketing expenses decreased by 18% to $14.5 million in
2009 compared to $17.6 million in 2008. Key factors in the decline were lower expenses related to
product launches, decreased expenditures on market research and lower commissions.
Research and development expenses decreased by $121 thousand to $1.6 million in 2010 from $1.7
million in 2009. Research and development expenses decreased by $233 thousand to $1.7 million in
2009 from $2.0 million in 2008. A factor in the decline was lower spending on research and
development resources, such as laboratory supplies, in both cases.
-33-
General and administrative expenses were $8.1 million in 2010, a 1% decline as compared to
$8.2 million in 2009. A factor in the decline was no Management Incentive Plan (MIP) payouts
were earned in 2010 while there was an MIP payout earned in 2009. General and administrative
expenses were $8.2 million in 2009, an 8% decrease as compared to $8.9 million in 2008. A key
factor in the decline was savings resulting from our restructuring at the end of 2008.
In 2008, we recorded restructuring expenses of approximately $785 thousand, consisting of
approximately $621 thousand related primarily to personnel severance and other costs for certain
individuals affected by our restructuring in December 2008 and $164 thousand related to inventory
of discontinued products, including a monitoring product the manufacturer had informed us it no
longer intends to support. We recorded no restructuring expenses in 2010 or 2009.
Other operating expenses of approximately $232 thousand in 2008 relate to an asset impairment
charge related to certain rental instruments we owned. We recognized no corresponding asset
impairment charges in 2010 or 2009.
We expect 2011 operating expenses will be higher than in 2010.
Interest and Other Expense, Net
Interest and other expense, net was $289 thousand in 2010, as compared to $306 thousand in
2009 and $640 thousand in 2008. This line item can be broken into two components: net interest
expense and net foreign currency gains and losses. Net interest expense was $131 thousand in 2010,
as compared to $343 thousand in 2009 and $576 thousand in 2008. The
largest factor in the decrease in 2010 as compared to 2009 and in 2009 as compared to 2008 was lower loan balances and lower market
interest rates, somewhat offset by an increased interest rate spread negotiated with Wells Fargo in
December 2008. Net foreign currency losses were $158 thousand in 2010 and $82 thousand in 2008 and
net foreign currency gains were $37 thousand in 2009.
We expect interest and other expense, net to decrease in 2011 as compared to 2010 as we do not
anticipate net foreign currency losses to occur at the same level in 2011 as they did in 2010.
Income Tax Expense (Benefit)
In 2010, we had $61 thousand of current tax expense and $10 thousand in deferred tax benefit.
The largest component of 2010 current tax expense relates to the profitable operating performance
of our Swiss subsidiary. Domestically, the effect of permanent differences between tax and GAAP
accounting, such as incentive stock option amortization, at low profitability levels tends to raise
the implied tax rate and contributed to our unusually high 74% tax rate. In 2009, domestic
deferred income tax expense, a non-cash expense, represented $1.3 million of our $1.5 million tax
expense. In 2008, domestic deferred income tax benefits related to our loss before income taxes
was the primary reason we recorded a $471 thousand income tax benefit.
In 2011, we expect higher income tax expense as opposed to 2010 as we expect higher pre-tax
income in 2011 as compared to 2010.
Net Income (Loss)
Our 2010 net income was $18 thousand as compared to 2009 net income of $2.2 million and a net
loss of $850 thousand in 2008. Lower year-over-year revenue was the key factor in the decline in
net income between 2010 and 2009. Lower operating expenses were a key factor in the improvement in
2009 as compared to 2008.
-34-
We expect net income will be higher in 2011 than in 2010, primarily as a result of increased
revenue and increased Gross Margin, somewhat offset by increased operating expenses.
Liquidity, Capital Resources and Financial Condition
We have incurred net cumulative negative cash flow from operations since our inception in
1988. For the year ended December 31, 2010, we had net income of $18 thousand. In 2010, net cash
provided by operations was $1.9 million. At December 31, 2010, we had $5.5 million of cash and
cash equivalents, working capital of $14.6 million and $3.1 million of outstanding borrowings under
our revolving line of credit, discussed below.
Net cash flows from operating activities provided cash of $1.9 million as compared to
providing cash of $8.6 million in 2009. The largest factor in the change was a $3.8 million
decrease in cash provided from inventory as we did not lower our inventory level at year end 2010
compared to year end 2009 as much as in 2009 compared to 2008, and we had a greater non-cash transfer
of inventory to property and equipment in 2010 as compared to 2009. Other major factors in the
change were a $2.2 million decrease in cash provided by net income resulting from our operating
performance and a $1.3 million decrease in cash provided by deferred tax benefit resulting from our
lower level of profitability in 2010. This was somewhat offset by a $1.4 million decline in cash
used by deferred revenue and other, primarily relating to lower contractual prepayments near year
end and lower upfront payment amortization scheduled for 2010 versus 2009. Net cash flows from
operating activities provided cash of $8.6 million in 2009 as compared to providing cash of $1.7
million in 2008. The major factors in the improvement in 2009 as compared to 2008 were a $3.1
million increase in net income, a $2.5 million improvement in cash provided by inventory as we
lowered our inventory levels at year end 2009 compared to year end 2008, including relating to the
loss of supply of consumables for our handheld diagnostic instruments, a $2.0 million improvement
in cash provided by accounts payable primarily due to inventory paid for in 2008 and received in
2007 to a greater degree than for inventory paid for in 2009 and received in 2008, and a $1.8
million improvement in deferred tax expense primarily related to the utilization of our domestic
NOL. This was somewhat offset by a $1.3 million decline in cash provided by accounts receivable as
we lowered our accounts receivable balance to a greater degree from 2007 to 2008 than from 2008 to
2009, a $701 thousand decline in cash provided by depreciation and amortization with a key factor
being lower depreciation related to instrumentation demonstration units and $585 thousand decline
in cash provided by accrued liabilities and other items, of which restructuring expenses recognized
in 2008 but paid in cash in 2009 were a factor.
Net cash flows from investing activities used cash of $620 thousand in 2010 as compared to
using cash of $276 thousand in 2009 and using cash of $554 thousand in 2008. Purchases of property
and equipment increased $344 thousand in 2010 as compared to 2009, primarily due to greater
property and equipment purchases in our OVP segment. Purchases of property and equipment in 2009
decreased $278 thousand as compared to 2008, primarily due to lower purchases of property and
equipment in our OVP segment.
Net cash flows from financing activities used cash of $1.4 million in 2010, used cash of $7.6
million in 2009 and used cash of $2.0 million in 2008. In 2010, we used cash to reduce our
borrowings under our line of credit by $1.1 million and repay the remaining principal on term debt
of $381 thousand which was partially offset by proceeds from the issuance of common stock under our
Employee Stock Purchase Plan and upon option exercises. In 2009, we used cash to reduce our borrowings under our line of
credit by $6.8 million and repay principal on term debt of $770 thousand which was partially offset
by proceeds from the issuance of common stock under our Employee Stock Purchase Plan. In 2008 we
used cash to reduce our borrowings under our line of credit by $1.6 million and repay principal on
term debt of $776 thousand which was partially offset by proceeds from the issuance of common stock
upon option exercises and in our Employee Stock Purchase Plan totaling $372 thousand. We repaid
less and more debt under our revolving line of credit in 2010 as compared to 2009 and 2009 as
compared to 2008, respectively, primarily because we had greater cash provided by operating
activities in 2009 as compared to 2010 and 2008.
-35-
At December 31, 2010, we had a $15.0 million asset-based revolving line of credit with Wells
Fargo which has a maturity date of December 31, 2013. At December 31, 2010, $3.1 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,
2010, interest was charged at a stated rate of three month LIBOR plus 5.75% and was payable
monthly. Based on an amendment to our agreement with Wells Fargo signed in December 2010, interest
was charged at a stated rate of three month LIBOR plus 5.75% beginning on December 1, 2010 an
increase from three month LIBOR plus 4.00% prior to December 1 and we expect a decrease in
interest rate to three month LIBOR plus 4.75% beginning April 1, 2011 based on our 2010 financial
performance. We are required to comply with various financial and non-financial
covenants, and we have made various representations and warranties under our agreement with Wells Fargo. 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 to become immediately due and payable or impact our
ability to borrow under the agreement. We were in compliance with all financial covenants as of
December 31, 2010. At December 31, 2010, our remaining available borrowing capacity based upon
eligible accounts receivable and eligible inventory under our revolving line of credit was
approximately $5.9 million.
At December 31, 2010, we had deferred revenue and other long term liabilities, net of current
portion, of approximately $4.6 million. Included in this total is approximately $1.9 million of
deferred revenue related to up-front fees that have been received for certain product rights and
technology rights out-licensed. These deferred amounts are being recognized on a straight-line
basis over the remaining lives of the agreements, products, patents or technology.
Our primary short-term need for capital, which is subject to change, is to fund our
operations, which consist of continued sales and marketing, general and administrative and research
and development efforts, working capital associated with increased product sales and capital
expenditures relating to maintaining and developing our manufacturing operations. Our future
liquidity and capital requirements will depend on numerous factors, including the extent to which
our marketing and selling efforts, as well as those of third parties who market, sell and
distribute our products, are successful in increasing our revenue, competition, the extent to which
currently planned products and/or technologies under development are successfully developed,
launched and sold, any changes required by regulatory bodies to maintain our operations and other
factors.
Our financial plan for 2011 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 2011 and into 2012. However, our actual
results may differ from this plan, and we may be required to consider alternative strategies. We
may be required to raise additional capital in the future. If necessary, we expect to raise these
additional funds through the sale of equity securities or the issuance of new term debt secured by
the same assets as the term loans which were fully repaid in 2010. 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 hiring activities or marketing plans. These actions would likely extend the
then available cash and cash equivalents, and then available borrowings to some degree. See Risk
Factors in Item 1A of this Form 10-K for a discussion of some of the factors that affect our
capital raising alternatives.
-36-
A summary of our contractual obligations at December 31, 2010 is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period (in thousands)
|
|
|
|
|
|
|
|
Less Than
|
|
|
1-3
|
|
|
4-5
|
|
|
After
|
|
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
Contractual Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Line of credit
|
|
$
|
3,079
|
|
|
$
|
3,079
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Operating leases
|
|
|
23,347
|
|
|
|
2,116
|
|
|
|
5,715
|
|
|
|
3,522
|
|
|
|
11,994
|
|
Unconditional purchase obligations
|
|
|
11,972
|
|
|
|
1,245
|
|
|
|
4,877
|
|
|
|
5,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual cash obligations
|
|
$
|
38,398
|
|
|
$
|
6,440
|
|
|
$
|
10,592
|
|
|
$
|
9,372
|
|
|
$
|
11,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2010, we had a net domestic operating loss carryforward, or NOL, of
approximately $160.7 million, a domestic alternative minimum tax credit carryforward of
approximately $257 thousand and a domestic research and development tax credit carryforward of
approximately $352 thousand for federal tax purposes. Our federal NOL is scheduled to expire as
follows: $15.1 million at the end of 2011, $32.1 million at the end of 2012, $107.5 million in 2018 through 2022, $5.5 million in 2024 and 2025 and $407 thousand in 2027 through 2029 and the balance in 2018 through 2025. The NOL and tax credit carryforwards are subject to alternative minimum tax
limitations and to examination by the tax authorities. In addition, we had a change of ownership
as defined under the provisions of Section 382 of the Internal Revenue Code of 1986, as amended (an
Ownership Change). We believe the latest Ownership Change occurred at the time of our initial
public offering in July 1997. We do not believe this Ownership Change will place a significant
restriction on our ability to utilize our NOLs in the future.
Recent Accounting Pronouncements
In June 2009, the FASB issued an amendment to the accounting and disclosure requirements for
transfers of financial assets. The guidance requires additional disclosures for transfers of
financial assets and changes the requirements for derecognizing financial assets. The guidance was
effective for fiscal years beginning after November 15, 2009. The implementation of this standard
did not have a material impact on our consolidated financial position and results of operations.
In October 2009, the FASB issued guidance on revenue recognition to require companies to
allocate revenue in multiple-element arrangements based on an elements estimated selling price if
vendor-specific or other third-party evidence of value is not available. This guidance is
effective beginning January 1, 2011 with earlier application permitted. The adoption of this
guidance will not have a material impact on our consolidated 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.
-37-
Interest Rate Risk
The interest payable on certain of our lines of credit and other borrowings is variable based
on Wells Fargo three month LIBOR and, therefore, is affected by changes in market interest rates.
At December 31, 2010, approximately $3.1 million was outstanding on these lines of credit and other
borrowings with a weighted average interest rate of 6.05%. We also had approximately $5.5 million
of cash and cash equivalents at December 31, 2010, the majority of which was invested in liquid
interest bearing accounts. We had no interest rate hedge transactions in place on December 31,
2010. 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 a decrease/increase in
annual interest expense of approximately $24 thousand based on our outstanding balances as of
December 31, 2010.
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, 2010.
We have a wholly-owned subsidiary in Switzerland which uses the Swiss Franc as its functional
currency. We purchase inventory in foreign currencies, primarily Euros and Japanese Yen, and sell
corresponding products in U.S. dollars. We also sell products in foreign currencies, primarily
Euros and Japanese Yen, where our inventory costs are largely in U.S. dollars. Based on our 2010 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 $371 thousand.
-38-
|
|
|
Item 8.
|
|
Financial Statements and Supplementary Data.
|
HESKA CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
-39-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Heska Corporation
Loveland, Colorado
We have audited the accompanying consolidated balance sheets of Heska Corporation and its
subsidiaries (the Company) as of December 31, 2009 and 2010, and the related statements of
operations, stockholders equity, and cash flows for each of the three years in the period ended
December 31, 2010. In connection with our audit of these consolidated financial statements, we also
have audited the financial statement schedule of valuation and qualifying accounts for the years
ended December 31, 2008, 2009 and 2010. The Companys management is responsible for these
financial statements and schedule. Our responsibility is to express an opinion on these financial
statements 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. 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
Companys internal control over financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and significant estimates made
by management, 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 consolidated financial position of Heska Corporation and its subsidiaries as
of December 31, 2009 and 2010, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2010 in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, the related consolidated
financial statement schedule of valuation and qualifying accounts, for the years ended December 31,
2008, 2009 and 2010, when considered in relation to the basic financial statements taken as a
whole, presents fairly, in all material respects, the information set forth therein.
Ehrhardt Keefe Steiner & Hottman PC
March 18, 2011
Denver, Colorado
-40-
HESKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
5,400
|
|
|
$
|
5,492
|
|
Accounts receivable, net of allowance for doubtful accounts of
$177 and $136, respectively
|
|
|
9,222
|
|
|
|
8,866
|
|
Inventories, net
|
|
|
12,018
|
|
|
|
11,901
|
|
Deferred tax asset, current
|
|
|
940
|
|
|
|
53
|
|
Other current assets
|
|
|
913
|
|
|
|
967
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
28,493
|
|
|
|
27,279
|
|
Property and equipment, net
|
|
|
6,349
|
|
|
|
5,486
|
|
Goodwill
|
|
|
905
|
|
|
|
999
|
|
Deferred tax asset, net of current portion
|
|
|
28,387
|
|
|
|
29,284
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
64,134
|
|
|
$
|
63,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
4,172
|
|
|
$
|
4,162
|
|
Accrued liabilities
|
|
|
2,249
|
|
|
|
3,087
|
|
Accrued compensation
|
|
|
1,440
|
|
|
|
521
|
|
Current portion of deferred revenue
|
|
|
1,664
|
|
|
|
1,811
|
|
Line of credit
|
|
|
4,201
|
|
|
|
3,079
|
|
Current portion of long-term debt
|
|
|
381
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
14,107
|
|
|
|
12,660
|
|
Deferred revenue, net of current portion, and other
|
|
|
4,972
|
|
|
|
4,590
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
19,079
|
|
|
|
17,250
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $.01 par value, 2,500,000 shares authorized; none issued or outstanding
|
|
|
|
|
|
|
|
|
Common stock, $.01 par value, 7,500,000 shares authorized; 5,215,911
and 0 shares issued and outstanding, respectively
|
|
|
52
|
|
|
|
|
|
Public common stock, $.01 par value, 0 and 7,500,000 shares authorized, respectively; 0 and
5,231,245 shares issued and outstanding, respectively
|
|
|
|
|
|
|
52
|
|
Additional paid-in capital
|
|
|
216,829
|
|
|
|
217,240
|
|
Accumulated other comprehensive income (loss)
|
|
|
(30
|
)
|
|
|
284
|
|
Accumulated deficit
|
|
|
(171,796
|
)
|
|
|
(171,778
|
)
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
45,055
|
|
|
|
45,798
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
64,134
|
|
|
$
|
63,048
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
-41-
HESKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Core companion animal health
|
|
$
|
68,140
|
|
|
$
|
66,449
|
|
|
$
|
55,655
|
|
Other vaccines, pharmaceuticals and products
|
|
|
13,513
|
|
|
|
9,229
|
|
|
|
9,796
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue, net
|
|
|
81,653
|
|
|
|
75,678
|
|
|
|
65,451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
|
52,809
|
|
|
|
47,219
|
|
|
|
40,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
28,844
|
|
|
|
28,459
|
|
|
|
24,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing
|
|
|
17,640
|
|
|
|
14,524
|
|
|
|
14,726
|
|
Research and development
|
|
|
1,951
|
|
|
|
1,718
|
|
|
|
1,597
|
|
General and administrative
|
|
|
8,917
|
|
|
|
8,173
|
|
|
|
8,111
|
|
Restructuring expenses
|
|
|
785
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
29,525
|
|
|
|
24,415
|
|
|
|
24,434
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
(681
|
)
|
|
|
4,044
|
|
|
|
358
|
|
Interest and other expense, net
|
|
|
640
|
|
|
|
306
|
|
|
|
289
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
(1,321
|
)
|
|
|
3,738
|
|
|
|
69
|
|
Income tax expense (benefit)
|
|
|
(471
|
)
|
|
|
1,496
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(850
|
)
|
|
$
|
2,242
|
|
|
$
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per share
|
|
$
|
(0.17
|
)
|
|
$
|
0.43
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per share
|
|
$
|
(0.17
|
)
|
|
$
|
0.43
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average outstanding shares used to compute basic
net income (loss) per share
|
|
|
5,167
|
|
|
|
5,207
|
|
|
|
5,220
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average outstanding shares used to compute diluted
net income (loss) per share
|
|
|
5,167
|
|
|
|
5,212
|
|
|
|
5,254
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
-42-
HESKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Other
|
|
|
|
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Stockholders
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Income (Loss)
|
|
|
Deficit
|
|
|
Equity
|
|
Balances, January 1, 2008
|
|
|
5,145
|
|
|
$
|
51
|
|
|
$
|
215,685
|
|
|
$
|
335
|
|
|
$
|
(173,188
|
)
|
|
$
|
42,883
|
|
Issuance of common stock related to options, ESPP
and other
|
|
|
56
|
|
|
|
1
|
|
|
|
416
|
|
|
|
|
|
|
|
|
|
|
|
417
|
|
Recognition of stock based compensation
|
|
|
|
|
|
|
|
|
|
|
362
|
|
|
|
|
|
|
|
|
|
|
|
362
|
|
Comprehensive net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(850
|
)
|
|
|
(850
|
)
|
Minimum pension liability adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(444
|
)
|
|
|
|
|
|
|
(444
|
)
|
Unrealized (loss) on available for sale investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
(9
|
)
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
164
|
|
|
|
|
|
|
|
164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive net (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,139
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2008
|
|
|
5,201
|
|
|
|
52
|
|
|
|
216,463
|
|
|
|
46
|
|
|
|
(174,038
|
)
|
|
|
42,523
|
|
Issuance of common stock related to options, ESPP
and other
|
|
|
15
|
|
|
|
|
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
53
|
|
Recognition of stock based compensation
|
|
|
|
|
|
|
|
|
|
|
313
|
|
|
|
|
|
|
|
|
|
|
|
313
|
|
Comprehensive net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,242
|
|
|
|
2,242
|
|
Minimum pension liability adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(132
|
)
|
|
|
|
|
|
|
(132
|
)
|
Unrealized (loss) on available for sale investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
(1
|
)
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
|
|
|
|
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2009
|
|
|
5,216
|
|
|
|
52
|
|
|
|
216,829
|
|
|
|
(30
|
)
|
|
|
(171,796
|
)
|
|
|
45,055
|
|
Issuance of common stock related to options, ESPP
and other
|
|
|
15
|
|
|
|
|
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
|
75
|
|
Recognition of stock based compensation
|
|
|
|
|
|
|
|
|
|
|
336
|
|
|
|
|
|
|
|
|
|
|
|
336
|
|
Comprehensive net income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
18
|
|
Minimum pension liability adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
|
|
|
|
|
|
|
|
22
|
|
Unrealized gain on available for sale investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
4
|
|
Foreign currency translation adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
288
|
|
|
|
|
|
|
|
288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
332
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2010
|
|
|
5,231
|
|
|
$
|
52
|
|
|
$
|
217,240
|
|
|
$
|
284
|
|
|
$
|
(171,778
|
)
|
|
$
|
45,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
-43-
HESKA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
(850
|
)
|
|
$
|
2,242
|
|
|
$
|
18
|
|
Adjustments to reconcile net income (loss) to cash provided by
(used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
3,266
|
|
|
|
2,565
|
|
|
|
2,298
|
|
Deferred tax (benefit) expense
|
|
|
(536
|
)
|
|
|
1,291
|
|
|
|
(10
|
)
|
Stock based compensation
|
|
|
362
|
|
|
|
313
|
|
|
|
336
|
|
Unrealized (gain) loss on foreign currency translation
|
|
|
80
|
|
|
|
126
|
|
|
|
(12
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
1,550
|
|
|
|
292
|
|
|
|
356
|
|
Inventories
|
|
|
599
|
|
|
|
3,103
|
|
|
|
(699
|
)
|
Other current assets
|
|
|
(77
|
)
|
|
|
40
|
|
|
|
(44
|
)
|
Other long-term assets
|
|
|
57
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
|
(1,749
|
)
|
|
|
268
|
|
|
|
(10
|
)
|
Accrued liabilities and other
|
|
|
530
|
|
|
|
(55
|
)
|
|
|
(40
|
)
|
Income taxes payable
|
|
|
|
|
|
|
38
|
|
|
|
(38
|
)
|
Deferred revenue and other
|
|
|
(1,542
|
)
|
|
|
(1,608
|
)
|
|
|
(214
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
1,690
|
|
|
|
8,615
|
|
|
|
1,941
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(554
|
)
|
|
|
(276
|
)
|
|
|
(620
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities
|
|
|
(554
|
)
|
|
|
(276
|
)
|
|
|
(620
|
)
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
372
|
|
|
|
53
|
|
|
|
75
|
|
Proceeds from (repayments of) line of credit borrowings, net
|
|
|
(1,572
|
)
|
|
|
(6,841
|
)
|
|
|
(1,123
|
)
|
Repayments of debt and capital lease obligations
|
|
|
(776
|
)
|
|
|
(770
|
)
|
|
|
(381
|
)
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
(1,976
|
)
|
|
|
(7,558
|
)
|
|
|
(1,429
|
)
|
|
|
|
|
|
|
|
|
|
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH
|
|
|
21
|
|
|
|
(86
|
)
|
|
|
200
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
(819
|
)
|
|
|
695
|
|
|
|
92
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR
|
|
|
5,524
|
|
|
|
4,705
|
|
|
|
5,400
|
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS, END OF YEAR
|
|
$
|
4,705
|
|
|
$
|
5,400
|
|
|
$
|
5,492
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
622
|
|
|
$
|
409
|
|
|
$
|
162
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash transfer of inventory to property and equipment
|
|
$
|
547
|
|
|
$
|
128
|
|
|
$
|
815
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
-44-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Heska Corporation (Heska or the Company) develops, manufactures, markets, sells and
supports veterinary products. Heskas core focus is on the canine and feline companion animal
health markets.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include the accounts of the Company and of
its wholly-owned subsidiaries since their respective dates of acquisitions. All material
intercompany transactions and balances have been eliminated in consolidation.
Reverse Stock Split
The Company completed a 1-for-10 reverse stock split which was effective on December 30, 2010.
Except as otherwise indicated, all related amounts reported in the consolidated financial
statements, including common share quantities, earnings per share amounts and exercise prices of
options, have been retroactively adjusted for the effect of this reverse stock split.
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 Companys
obligations are fulfilled under agreements to license product rights and/or technology rights,
evaluating long-lived assets for impairment, estimating the expense associated with the granting of
stock options and in determining the need for, and the amount of, a valuation allowance on deferred
tax assets.
Trade Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount. The allowance for doubtful
accounts is the Companys best estimate of the amount of probable credit losses in the Companys
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. The Company has no significant off-balance-sheet
concentrations of credit risk such as foreign exchange contracts, options contracts or other
foreign currency hedging arrangements. Its accounts receivable balances are due primarily from
domestic veterinary clinics and individual veterinarians, and both domestic and international
corporations.
-45-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
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 1,380,932 and 506,016 Euros at December 31, 2009 and 2010,
respectively. The Company held 119,905,609 and 38,539,410 Yen at December 31, 2009 and 2010,
respectively. The Company held 235,846 and 217,356 Swiss Francs at December 31, 2009 and 2010,
respectively. The majority of the Companys cash and cash equivalents are held at U.S.-based or
Swiss-based financial institutions in accounts not insured by governmental entities.
Fair Value of Financial Instruments
The Companys 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, 2009 and 2010, approximates the
carrying value due primarily to the floating rate of interest on such debt instruments.
Inventories
Inventories are stated at the lower of cost or market using the first-in, first-out method.
Inventory manufactured by the Company includes the cost of material, labor and overhead. If the
cost of inventories exceeds estimated fair value, provisions are made to reduce the carrying value
to estimated fair value.
Inventories, net consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2010
|
|
Raw materials
|
|
$
|
4,969
|
|
|
$
|
4,203
|
|
Work in process
|
|
|
3,371
|
|
|
|
3,483
|
|
Finished goods
|
|
|
4,782
|
|
|
|
5,388
|
|
Allowance for excess or obsolete inventory
|
|
|
(1,104
|
)
|
|
|
(1,173
|
)
|
|
|
|
|
|
|
|
|
|
$
|
12,018
|
|
|
$
|
11,901
|
|
|
|
|
|
|
|
|
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.
-46-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Property and equipment consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
December 31,
|
|
|
|
Useful Life
|
|
|
2009
|
|
|
2010
|
|
Land
|
|
|
N/A
|
|
|
$
|
377
|
|
|
$
|
377
|
|
Building
|
|
|
10 to 20 years
|
|
|
|
2,678
|
|
|
|
2,678
|
|
Machinery and equipment
|
|
|
3 to 15 years
|
|
|
|
26,185
|
|
|
|
27,302
|
|
Leasehold and building improvements
|
|
|
7 to 15 years
|
|
|
|
5,314
|
|
|
|
5,322
|
|
Construction in progress
|
|
|
|
|
|
|
|
|
|
|
385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,554
|
|
|
|
36,064
|
|
Less accumulated depreciation and amortization
|
|
|
|
|
|
|
(28,205
|
)
|
|
|
(30,578
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6,349
|
|
|
$
|
5,486
|
|
|
|
|
|
|
|
|
|
|
|
|
From time to time, the Company utilizes marketing programs whereby its instruments in
inventory may be placed in a customers location on a rental basis. The cost of these instruments
is transferred to machinery and equipment and depreciated, typically over a four year period.
During 2008, 2009 and 2010, total costs transferred from inventory were approximately $547
thousand, $128 thousand and $815 thousand, respectively.
Depreciation and amortization expense for property and equipment was $3.3 million, $2.6
million and $2.3 million for the years ended December 31, 2008, 2009 and 2010, 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 with 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. The Company
identified certain long-lived assets where the estimated fair value was less than carrying value as
of December 31, 2008 and therefore the Company recorded an impairment charge of approximately $232
thousand. The Company determined the estimated fair value based on discounted future cash flows
related to these long-lived assets.
Goodwill
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 Companys recorded goodwill relates to the 1997 acquisition of Heska AG, the Companys
Swiss subsidiary. This goodwill is reviewed at least annually for impairment. At December 31,
2009 and 2010, goodwill was approximately $905 thousand and $999 thousand, respectively, and is
included in the assets of the Core Companion Animal Health segment. The Company completed its
annual analysis of the estimated fair value of its goodwill at December 31, 2010 and determined
there was no indicated impairment of its goodwill. The change in carrying value of the goodwill
between years was solely due to foreign currency rate changes. There can be no assurance that
future goodwill impairments will not occur.
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.
-47-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
The Companys 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 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 has not received any significant up-front
payments in 2008, 2009 or 2010. Revenue from royalties is recognized based upon historical
experience or as the Company is informed of sales on which it is entitled to royalties.
For multiple-element arrangements that are not subject to a higher level of authoritative
literature, the Company follows the authoritative guidance for accounting for revenue arrangements
with multiple deliverables in determining the separate units of accounting. For those arrangements
subject to appropriate separation criteria, the Company must determine whether the various elements
meet the criteria to be accounted for as separate elements. If the elements cannot be separated,
revenue is recognized once revenue recognition criteria for the entire arrangement have been met or
over the period that the Companys obligations to the customer are fulfilled, as appropriate. If
the elements are determined to be separable, the revenue is allocated to the separate elements
based on relative fair value and recognized separately for each element when the applicable revenue
recognition criteria have been met. In accounting for these multiple element arrangements, the
Company must make determinations about whether elements can be accounted for separately and make
estimates regarding their relative fair values.
Cost of Products Sold
Royalties payable in connection with certain licensing agreements (see Note 9) are reflected
in cost of products sold as incurred.
Stock-Based Compensation
During the years ended December 31, 2009 and 2010, the Companys income from operations and
income before income taxes were reduced by $313 thousand and $336 thousand, respectively, and net
income was reduced by $233 thousand and $287 thousand, respectively, for compensation related to
stock options issued. Basic and diluted earnings per share were reduced by $0.00 and $0.00 for
2009 and $0.00 and $0.00 for 2010. During the year ended December 31, 2008, the Companys loss
from operations and loss before income taxes was increased by $362 thousand, net loss was increased
by $219 thousand and basic and diluted loss per share were not impacted. For all years presented,
there was no material impact on cash flow from
operations and cash flow from financing activities. At December 31, 2010, the Company had two
stock-based compensation plans. See Note 6 for a description of these plans and additional
disclosures regarding the plans.
-48-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Restructuring and Other Expenses
The Company recorded net restructuring expenses of $785 thousand for the year ended December
31, 2008 (See Note 7). At December 31, 2008, approximately $578 thousand of accrued restructuring
expenses remained on the Companys balance sheet.
Restructuring expenses were approximately $621 thousand related primarily to personnel
severance and other costs for 24 individuals and $164 thousand related to inventory of discontinued
products, including a monitoring product the manufacturer had informed the Company it no longer
intends to support.
The Company recorded $232 thousand in impairment expense in the year ended December 31, 2008.
This charge was related to certain handheld instruments the Company had capitalized as rental units
(the Rental Units) for use by the Companys customers. The majority of the Rental Units were
being depreciated over a four year life. The supplier of these handheld instruments had the right
to cancel the agreement under which the Company purchases affiliated cartridges and supplies for
the Rental Units prior to year end 2009, which would prevent the Company from obtaining a future
benefit from Rental Unit usage of these items if the supplier refused to sell the Company
cartridges and supplies beyond its contractual obligation and the Company sold all its remaining
inventory of these items. Accordingly, the Company concluded that the appropriate depreciation
period for the Rental Units was through year end 2009. Based on average usage assumptions for
these instruments, the Company calculated the future discounted cash flows associated with usage of
the Rental Units through year end 2009 and recorded an impairment to reduce the carrying amount of
the Rental Units to this level.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expenses were $705 thousand,
$471 thousand and $735 thousand for the years ended December 31, 2008, 2009 and 2010, 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 income (loss) per common share is computed using the weighted average number of
common shares outstanding during the period. Diluted net income per share is computed using the
sum of the weighted average number of shares of common stock outstanding, and, if not
anti-dilutive, the effect of outstanding common stock equivalents (such as stock options and
warrants) determined using the treasury stock method. At December 31, 2008, 2009 and 2010,
securities that have been excluded from diluted net income per share because they would be
anti-dilutive are outstanding options to purchase 1,283,527, 1,259,721 and 1,121,264 shares,
respectively, of the Companys common stock. Securities included in the
diluted net income per share calculation at December 31, 2009 and 2010, using the treasury
stock method, were outstanding options to purchase approximately 3 thousand and 34 thousand shares
of the Companys common stock, respectively.
-49-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
Comprehensive Income (Loss)
Comprehensive income (loss), as shown in the Consolidated Statements of Stockholders Equity,
includes net income adjusted for the results of certain stockholders equity changes. Such changes
include foreign currency items and minimum pension liability adjustments. At December 31, 2010,
Accumulated Other Comprehensive Income (Loss) consists of $851 thousand gain for cumulative translation
adjustments, $589 thousand loss for unrealized pension liability and $22 thousand of unrealized gain on
available for sale investments. At December 31, 2009, Accumulated Other Comprehensive Income (Loss)
consists of $564 thousand gain for cumulative translation adjustments, $611 thousand loss for
unrealized pension liability and $17 thousand of unrealized gain on available for sale investments.
At December 31, 2008, Accumulated Other Comprehensive Income (Loss) consists of $507 thousand gain
for cumulative translation adjustments, $479 thousand loss for unrealized pension liability and $18
thousand of unrealized gain on available for sale investments.
Foreign Currency Translation
The functional currency of the Companys Swiss subsidiary is the Swiss Franc. Assets and
liabilities of the Companys 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 June 2009, the FASB issued an amendment to the accounting and disclosure requirements for
transfers of financial assets. The guidance requires additional disclosures for transfers of
financial assets and changes the requirements for derecognizing financial assets. The guidance was
effective for fiscal years beginning after November 15, 2009. The implementation of this standard
did not have a material impact on the Companys consolidated financial position and results of
operations.
In October 2009, the FASB issued guidance on revenue recognition to require companies to
allocate revenue in multiple-element arrangements based on an elements estimated selling price if
vendor-specific or other third-party evidence of value is not available. This guidance is
effective beginning January 1, 2011 with earlier application permitted. The adoption of this
guidance will not have a material impact on the Companys consolidated financial statements.
-50-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS (Continued)
3. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2010
|
|
Real estate mortgage loan with a
commercial bank, due in monthly
installments, with a stated interest
rate of prime plus 2.5% at December 31,
2009 (5.75%). This loan was fully paid
in April 2010.
|
|
$
|
57
|
|
|
$
|
|
|
Term loan with a commercial bank,
secured by machinery and equipment, due
in monthly installments, with a stated
interest rate of prime plus 2.5% at
December 31, 2009 (5.75%). This loan
was fully paid in June 2010.
|
|
|
259
|
|
|
|
|
|
Term loan with a commercial bank,
secured by machinery and equipment, due
in monthly installments, with a stated
interest rate of prime plus 2.5% at
December 31, 2009 (5.75%). This loan
was fully paid in June 2010.
|
|
|
65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
381
|
|
|
|
|
|
Less installments due within one year
|
|
|
(381
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
The Company has a credit and security agreement with Wells Fargo Bank, National
Association which expires December 31, 2013. The agreement included the real estate mortgage loan
and term loans above, until such loans were fully repaid in 2010, and a $15.0 million asset-based
revolving line of credit with a stated interest rate at December 31, 2010 of LIBOR plus 5.75%
(6.05%). Amounts due under the credit facility are secured by a first security interest in
essentially all of the Companys 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 capital, 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, 2010, approximately $3.1 million
was outstanding on the line of credit and there was $5.9 million available capacity for additional
borrowings under the line of credit agreement.
4. SUPPLEMENTAL DISCLOSURE OF INTEREST AND OTHER EXPENSE (INCOME) INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
(in thousands)
|
|
Interest and other expense (income):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
(66
|
)
|
|
$
|
(64
|
)
|
|
$
|
(58
|
)
|
Interest expense
|
|
|
624
|
|
|
|
407
|
|
|
|
189
|
|
Other, net
|
|
|
82
|
|
|
|
(37
|
)
|
|
|
158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
640
|
|
|
$
|
306
|
|
|
$
|
289
|
|
|
|
|
|
|
|
|
|
|
|
5. INCOME TAXES
As of December 31, 2010, the Company had a domestic net operating loss carryforward (NOL),
of approximately $160.7 million, a domestic alternative minimum tax credit carryforward of
approximately $257 thousand and domestic research and development tax
credit carryforward of approximately $352
thousand for federal tax purposes. The Companys federal NOL is scheduled to expire
as follows: $15.1 million at the end of 2011, $32.1 million at the
end of 2012, $107.5 million in 2018 through 2022, $5.5 million in
2024 and 2025 and $407 thousand in 2027 through 2029,
with the majority scheduled to expire in 2018 or later.
The NOL and tax credit carryforwards are subject to alternative minimum tax limitations and to
examination by the tax authorities. In addition, the Company had a change of ownership as
defined under the provisions of Section 382 of the Internal Revenue Code of 1986, as amended (an
Ownership Change). The Company does not believe this Ownership Change will place a significant
restriction on its ability to utilize its NOL in the future.
-51-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company is subject to income taxes in the U.S. federal jurisdiction, and various foreign,
state and local jurisdictions. Tax regulations within each jurisdiction are subject to the
interpretation of the related tax laws and regulations and require significant judgment to apply.
In the United States, the tax years 2007 2009 remain open to examination by the federal Internal
Revenue Service and the tax years 2006 2009 remain open for various state taxing authorities.
The components of income (loss) before income taxes were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
Domestic
|
|
$
|
(1,451
|
)
|
|
$
|
3,576
|
|
|
$
|
(101
|
)
|
Foreign
|
|
|
130
|
|
|
|
162
|
|
|
|
170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,321
|
)
|
|
$
|
3,738
|
|
|
$
|
69
|
|
|
|
|
|
|
|
|
|
|
|
Temporary differences that give rise to the components of deferred tax assets are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2010
|
|
Current deferred tax assets:
|
|
|
|
|
|
|
|
|
Inventory
|
|
$
|
430
|
|
|
$
|
453
|
|
Accrued compensation
|
|
|
229
|
|
|
|
226
|
|
Net operating loss carryforwards domestic
|
|
|
790
|
|
|
|
618
|
|
Other
|
|
|
652
|
|
|
|
795
|
|
|
|
|
|
|
|
|
|
|
|
2,101
|
|
|
|
2,092
|
|
Valuation allowance
|
|
|
(1,161
|
)
|
|
|
(2,039
|
)
|
|
|
|
|
|
|
|
Total current deferred tax assets
|
|
$
|
940
|
|
|
$
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent deferred tax assets:
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
294
|
|
|
$
|
352
|
|
Alternative minimum tax credit
|
|
|
179
|
|
|
|
257
|
|
Deferred revenue
|
|
|
2,121
|
|
|
|
2,198
|
|
Property and equipment
|
|
|
1,799
|
|
|
|
1,873
|
|
Net operating loss carryforwards domestic
|
|
|
59,036
|
|
|
|
58,419
|
|
|
|
|
|
|
|
|
|
|
|
63,429
|
|
|
|
63,099
|
|
Valuation allowance
|
|
|
(35,042
|
)
|
|
|
(33,815
|
)
|
|
|
|
|
|
|
|
Total noncurrent deferred tax assets (liabilities)
|
|
$
|
28,387
|
|
|
$
|
29,284
|
|
|
|
|
|
|
|
|
-52-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The components of the income tax expense (benefit) are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
Current income tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
|
$
|
69
|
|
|
$
|
7
|
|
State
|
|
|
|
|
|
|
91
|
|
|
|
16
|
|
Foreign
|
|
|
|
|
|
|
45
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
Total current expense (benefit)
|
|
|
|
|
|
|
205
|
|
|
|
61
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(450
|
)
|
|
|
1,148
|
|
|
|
(9
|
)
|
State
|
|
|
(63
|
)
|
|
|
143
|
|
|
|
(1
|
)
|
Foreign
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred expense (benefit)
|
|
|
(471
|
)
|
|
|
1,291
|
|
|
|
(10
|
)
|
Valuation allowance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$
|
(471
|
)
|
|
$
|
1,496
|
|
|
$
|
51
|
|
|
|
|
|
|
|
|
|
|
|
The Companys income tax expense (benefit) relating to income (loss) for the periods
presented differs from the amounts that would result from applying the federal statutory rate to
that income (loss) as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
Statutory federal tax rate
|
|
|
34
|
%
|
|
|
34
|
%
|
|
|
34
|
%
|
State income taxes, net of federal benefit
|
|
|
5
|
%
|
|
|
3
|
%
|
|
|
52
|
%
|
Other permanent differences
|
|
|
(4
|
)%
|
|
|
2
|
%
|
|
|
121
|
%
|
Domestic NOL utilization
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in tax rate
|
|
|
|
|
|
|
31
|
%
|
|
|
40
|
%
|
Foreign rate difference
|
|
|
1
|
%
|
|
|
|
|
|
|
(29
|
)%
|
Change in valuation allowance
|
|
|
|
|
|
|
(29
|
)%
|
|
|
(472
|
)%
|
Other
|
|
|
|
|
|
|
(1
|
)%
|
|
|
328
|
%
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
36
|
%
|
|
|
40
|
%
|
|
|
74
|
%
|
|
|
|
|
|
|
|
|
|
|
6. CAPITAL STOCK
Common Stock
The Company completed a 1-for-10 reverse stock split which was effective on December 30, 2010.
Except as otherwise indicated, all related amounts reported in the consolidated financial
statements, including common share quantities, earnings per share amounts and exercise prices of
options, have been retroactively adjusted for the effect of this reverse stock split.
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 (the 1997
Plan) and terminated two prior option plans. 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 2009, the stockholders approved an amendment to the 1997 Plan
allowing for the continued issuance of incentive stock options and a 25,000 reduction in shares
which may be issued under the 1997 Plan. In May 2003, the stockholders approved a new plan, the
2003 Stock Incentive Plan, which allows for the granting of options for
up to 239,050 shares of the Companys common stock. The number of shares reserved for
issuance under all plans as of January 1, 2011 was 219,253.
-53-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 Companys 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 Companys expected term input was estimated based on the Companys historical experience for
time from option grant to option exercise for all employees in 2010, 2009 and 2008; the Company
treated all employees in one grouping in all three years. The Companys expected volatility input was estimated based on the Companys historical stock price
volatility in 2010, 2009 and 2008. The Companys risk-free interest rate input was determined
based on the U.S. Treasury yield curve at the time of option issuance in 2010, 2009 and 2008. The
Companys expected dividends input was zero in 2010, 2009 and 2008. Weighted average assumptions
used in 2010, 2009 and 2008 for each of these four key inputs are listed in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
Risk-free interest rate
|
|
|
1.89
|
%
|
|
|
1.41
|
%
|
|
|
1.10
|
%
|
Expected lives
|
|
2.9 years
|
|
|
3.0 years
|
|
|
3.0 years
|
|
Expected volatility
|
|
|
56
|
%
|
|
|
64
|
%
|
|
|
66
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
A summary of the
Companys stock option plans, with options to purchase
fractional shares resulting from the Companys December 2010
1-for-10 reverse stock split included in the cancelled
row for 2010, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
|
Exercise
|
|
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
Outstanding at beginning of period
|
|
|
1,211,683
|
|
|
$
|
13.979
|
|
|
|
1,283,382
|
|
|
$
|
12.835
|
|
|
|
1,291,634
|
|
|
$
|
11.846
|
|
Granted at Market
|
|
|
157,525
|
|
|
$
|
7.694
|
|
|
|
107,499
|
|
|
$
|
4.529
|
|
|
|
104,900
|
|
|
$
|
5.945
|
|
Cancelled
|
|
|
(57,375
|
)
|
|
$
|
25.008
|
|
|
|
(99,247
|
)
|
|
$
|
16.713
|
|
|
|
(53,459
|
)
|
|
$
|
21.572
|
|
Exercised
|
|
|
(28,451
|
)
|
|
$
|
8.527
|
|
|
|
|
|
|
$
|
|
|
|
|
(1,199
|
)
|
|
$
|
5.834
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
1,283,382
|
|
|
$
|
12.835
|
|
|
|
1,291,634
|
|
|
$
|
11.846
|
|
|
|
1,341,876
|
|
|
$
|
11.003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of period
|
|
|
1,104,117
|
|
|
$
|
13.360
|
|
|
|
1,098,560
|
|
|
$
|
12.648
|
|
|
|
1,142,209
|
|
|
$
|
11.871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The total estimated fair value of stock options granted during the years ended December
31, 2010, 2009 and 2008 were computed to be approximately $274 thousand, $205 thousand and $452
thousand, 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,
2010, 2009 and 2008 was computed to be approximately $2.57, $1.91 and $2.87, respectively. The
total intrinsic value of options exercised during the years ended December 31, 2010, 2009 and 2008
was $2 thousand, $0 and $137 thousand, respectively. The cash proceeds from options exercised
during the years ended December 31, 2010, 2009 and 2008 was $7 thousand, $0 and $243 thousand.
-54-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table
summarizes information about stock options outstanding and exercisable at
December 31, 2010, excluding outstanding options to purchase an
aggregate of 133.5 fractional shares resulting from the
Companys December 2010
1-for-10 reverse stock split with
a weighted average remaining contractual life of 3.44 years, a
weighted average exercise price
of $12.98
and exercise prices ranging from $3.40 to $31.50. The Company
intends to issue whole shares only from option exercises.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
Number of
|
|
|
Weighted
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
Options
|
|
|
Average
|
|
|
|
|
|
|
Options
|
|
|
|
|
|
|
Outstanding
|
|
|
Remaining
|
|
|
Weighted
|
|
|
Exercisable
|
|
|
Weighted
|
|
|
|
at
|
|
|
Contractual
|
|
|
Average
|
|
|
at
|
|
|
Average
|
|
|
|
December 31,
|
|
|
Life in
|
|
|
Exercise
|
|
|
December 31,
|
|
|
Exercise
|
|
Exercise Prices
|
|
2010
|
|
|
Years
|
|
|
Price
|
|
|
2010
|
|
|
Price
|
|
$2.70 - $4.96
|
|
|
307,989
|
|
|
|
7.86
|
|
|
$
|
4.472
|
|
|
|
135,293
|
|
|
$
|
4.221
|
|
$4.97 - $8.80
|
|
|
310,645
|
|
|
|
3.79
|
|
|
$
|
7.981
|
|
|
|
303,811
|
|
|
$
|
8.018
|
|
$8.81 - $12.40
|
|
|
208,176
|
|
|
|
1.78
|
|
|
$
|
10.864
|
|
|
|
207,301
|
|
|
$
|
10.871
|
|
$12.41 - $16.50
|
|
|
276,702
|
|
|
|
4.28
|
|
|
$
|
13.937
|
|
|
|
275,702
|
|
|
$
|
13.937
|
|
$16.51 - $31.50
|
|
|
238,364
|
|
|
|
4.77
|
|
|
$
|
20.095
|
|
|
|
220,102
|
|
|
$
|
20.244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$2.70 - $31.50
|
|
|
1,341,876
|
|
|
|
4.69
|
|
|
$
|
11.003
|
|
|
|
1,142,209
|
|
|
$
|
11.871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2010, there was $508 thousand of total unrecognized compensation
expense related to outstanding stock options. That cost is expected to be recognized over a
weighted-average period of 2.5 years with all cost to be recognized by the end of December 2014,
assuming all options vest according to the vesting schedules in place at December 31, 2010. As of
December 31, 2010, the aggregate intrinsic value of outstanding options was $150 thousand and the
aggregate intrinsic value of exercisable options was $100 thousand.
Employee Stock Purchase Plan (the ESPP)
Under the 1997 Employee Stock Purchase Plan, the Company is authorized to issue up to 325,000
shares of common stock to its employees, of which 289,136 had been issued as of December 31, 2010.
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 Companys
common stock. Each offering period is five years, with six-month accumulation 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, 2008, 2009 and 2010, the weighted-average fair value of the
purchase rights granted was $2.60, $0.51 and $0.95 per share, respectively.
7. RESTRUCTURING EXPENSES
In the fourth quarter of 2008, the Company recorded restructuring charges of $621 thousand for
personnel severance and other costs related to 24 individuals and $164 thousand related to
inventory costs of discontinued products, including a monitoring product the manufacturer had
informed the Company it no longer intends to support.
-55-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Shown below is a reconciliation of restructuring costs for the years ended December 31, 2008
and 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
Balance at
|
|
|
December 31, 2008
|
|
|
Balance at
|
|
|
|
December 31,
|
|
|
Costs
|
|
|
Payments/
|
|
|
December 31,
|
|
|
|
2007
|
|
|
Incurred
|
|
|
Settlements
|
|
|
2008
|
|
Severance pay, benefits and other
|
|
$
|
|
|
|
$
|
621
|
|
|
$
|
(43
|
)
|
|
$
|
578
|
|
Products and other
|
|
|
|
|
|
|
164
|
|
|
|
(164
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
785
|
|
|
$
|
(207
|
)
|
|
$
|
578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The balance of $578 thousand is included in accrued restructuring in the accompanying
consolidated balance sheets as of December 31, 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
Balance at
|
|
|
December 31, 2009
|
|
|
Balance at
|
|
|
|
December 31,
|
|
|
Costs
|
|
|
Payments/
|
|
|
December 31,
|
|
|
|
2008
|
|
|
Incurred
|
|
|
Settlements
|
|
|
2009
|
|
Severance pay, benefits and other
|
|
$
|
578
|
|
|
$
|
|
|
|
$
|
(578
|
)
|
|
$
|
|
|
Products and other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
578
|
|
|
$
|
|
|
|
$
|
(578
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8. MAJOR CUSTOMERS
The Company had one customer to whom sales represented 13% of total revenue for 2010. The
Company had one customer in 2009 to whom sales represented 11% of total revenue.
The Company had no customers in 2008 to whom sales represented 10% or
more of total revenue.
No customer
represented 10% or more of total accounts receivable at December 31, 2009 or 2010.
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, 2010, 2009 and 2008, royalties of $515 thousand, $600 thousand and
$580 thousand became payable under these agreements, respectively.
The Company has a contract with two suppliers for unconditional annual minimum inventory
purchases totaling approximately $2.9 million in fiscal 2011.
The Company has entered into operating leases for its office and research facilities and
certain equipment with future minimum payments as of December 31, 2010 as follows (in thousands):
|
|
|
|
|
Year Ending December 31,
|
|
|
|
|
2011
|
|
$
|
2,116
|
|
2012
|
|
|
2,084
|
|
2013
|
|
|
1,822
|
|
2014
|
|
|
1,809
|
|
2015
|
|
|
1,809
|
|
Thereafter
|
|
|
13,707
|
|
|
|
|
|
|
|
$
|
23,347
|
|
|
|
|
|
The Company had rent expense of $2.1 million, $2.1 million and $1.8 million in 2008, 2009
and 2010, respectively.
-56-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
From time to time, the Company may be involved in litigation relating to claims arising out of
its operations. At December 31, 2010, the Company had no material litigation pending.
The Companys current terms and conditions of sale include a limited warranty that its
products and services will conform to published specifications at the time of shipment and a more
extensive warranty related to certain of its products. 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. The Companys warranty reserve on December 31, 2010 was $356
thousand.
10. SEGMENT REPORTING
The Company is comprised of two reportable segments, Core Companion Animal Health (CCA) and
Other Vaccines, Pharmaceuticals and Products (OVP). The Core Companion Animal Health segment
includes diagnostic instruments and supplies, as well as single use diagnostic and other tests,
pharmaceuticals and vaccines, primarily for canine and feline use. These products are sold
directly by the Company as well as through independent third-party distributors and through other
distribution relationships. CCA segment products manufactured at the Des Moines, Iowa production
facility included in the OVP segments 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 Companys reportable segments is shown in the
following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core
|
|
|
|
|
|
|
|
|
|
Companion
|
|
|
Other Vaccines,
|
|
|
|
|
|
|
Animal
|
|
|
Pharmaceuticals
|
|
|
|
|
|
|
Health
|
|
|
and Products
|
|
|
Total
|
|
2008
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
68,140
|
|
|
$
|
13,513
|
|
|
$
|
81,653
|
|
Operating income (loss)
|
|
|
(2,220
|
)
|
|
|
1,539
|
|
|
|
(681
|
)
|
Interest expense
|
|
|
474
|
|
|
|
150
|
|
|
|
624
|
|
Total assets
|
|
|
58,581
|
|
|
|
11,857
|
|
|
|
70,438
|
|
Net assets
|
|
|
34,602
|
|
|
|
7,921
|
|
|
|
42,523
|
|
Capital expenditures
|
|
|
216
|
|
|
|
338
|
|
|
|
554
|
|
Depreciation and amortization
|
|
|
2,341
|
|
|
|
925
|
|
|
|
3,266
|
|
-57-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core
|
|
|
|
|
|
|
|
|
|
Companion
|
|
|
Other Vaccines,
|
|
|
|
|
|
|
Animal
|
|
|
Pharmaceuticals
|
|
|
|
|
|
|
Health
|
|
|
and Products
|
|
|
Total
|
|
2009
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
66,449
|
|
|
$
|
9,229
|
|
|
$
|
75,678
|
|
Operating income
|
|
|
3,156
|
|
|
|
888
|
|
|
|
4,044
|
|
Interest expense
|
|
|
319
|
|
|
|
88
|
|
|
|
407
|
|
Total assets
|
|
|
52,146
|
|
|
|
11,988
|
|
|
|
64,134
|
|
Net assets
|
|
|
36,924
|
|
|
|
8,131
|
|
|
|
45,055
|
|
Capital expenditures
|
|
|
254
|
|
|
|
22
|
|
|
|
276
|
|
Depreciation and amortization
|
|
|
1,631
|
|
|
|
934
|
|
|
|
2,565
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Core
|
|
|
|
|
|
|
|
|
|
Companion
|
|
|
Other Vaccines,
|
|
|
|
|
|
|
Animal
|
|
|
Pharmaceuticals
|
|
|
|
|
|
|
Health
|
|
|
and Products
|
|
|
Total
|
|
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
55,655
|
|
|
$
|
9,796
|
|
|
$
|
65,451
|
|
Operating
income (loss)
|
|
|
1,073
|
|
|
|
(715
|
)
|
|
|
358
|
|
Interest expense
|
|
|
128
|
|
|
|
61
|
|
|
|
189
|
|
Total assets
|
|
|
53,720
|
|
|
|
9,328
|
|
|
|
63,048
|
|
Net assets
|
|
|
39,016
|
|
|
|
6,782
|
|
|
|
45,798
|
|
Capital expenditures
|
|
|
366
|
|
|
|
254
|
|
|
|
620
|
|
Depreciation and amortization
|
|
|
1,413
|
|
|
|
885
|
|
|
|
2,298
|
|
Total revenue by principal geographic area was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
United States
|
|
$
|
69,062
|
|
|
$
|
65,249
|
|
|
$
|
57,927
|
|
Europe
|
|
|
4,413
|
|
|
|
3,984
|
|
|
|
3,025
|
|
Other International
|
|
|
8,178
|
|
|
|
6,445
|
|
|
|
4,499
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
81,653
|
|
|
$
|
75,678
|
|
|
$
|
65,451
|
|
|
|
|
|
|
|
|
|
|
|
Total assets by principal geographic areas were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
United States
|
|
$
|
67,207
|
|
|
$
|
60,059
|
|
|
$
|
59,155
|
|
Europe
|
|
|
3,231
|
|
|
|
4,075
|
|
|
|
3,893
|
|
Other International
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
70,438
|
|
|
$
|
64,134
|
|
|
$
|
63,048
|
|
|
|
|
|
|
|
|
|
|
|
-58-
HESKA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. QUARTERLY FINANCIAL INFORMATION
(unaudited)
The following summarizes selected quarterly financial information for each of the two years in
the periods ended December 31, 2009 and 2010 (amounts in thousands, except per share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q1
|
|
|
Q2
|
|
|
Q3
|
|
|
Q4
|
|
|
Total
|
|
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
20,141
|
|
|
$
|
18,629
|
|
|
$
|
19,550
|
|
|
$
|
17,358
|
|
|
$
|
75,678
|
|
Gross profit
|
|
|
7,373
|
|
|
|
7,031
|
|
|
|
7,420
|
|
|
|
6,635
|
|
|
|
28,459
|
|
Operating income
|
|
|
1,017
|
|
|
|
1,010
|
|
|
|
1,159
|
|
|
|
858
|
|
|
|
4,044
|
|
Net income
|
|
|
460
|
|
|
|
579
|
|
|
|
743
|
|
|
|
460
|
|
|
|
2,242
|
|
Net income per share basic
|
|
|
0.09
|
|
|
|
0.11
|
|
|
|
0.14
|
|
|
|
0.09
|
|
|
|
0.43
|
|
Net income per share diluted
|
|
|
0.09
|
|
|
|
0.11
|
|
|
|
0.14
|
|
|
|
0.09
|
|
|
|
0.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
17,694
|
|
|
$
|
15,107
|
|
|
$
|
17,635
|
|
|
$
|
15,015
|
|
|
$
|
65,451
|
|
Gross profit
|
|
|
6,205
|
|
|
|
5,847
|
|
|
|
6,593
|
|
|
|
6,147
|
|
|
|
24,792
|
|
Operating income (loss)
|
|
|
(488
|
)
|
|
|
(207
|
)
|
|
|
365
|
|
|
|
688
|
|
|
|
358
|
|
Net income (loss)
|
|
|
(331
|
)
|
|
|
(164
|
)
|
|
|
241
|
|
|
|
272
|
|
|
|
18
|
|
Net income
(loss) per share basic
|
|
|
(0.06
|
)
|
|
|
(0.03
|
)
|
|
|
0.05
|
|
|
|
0.05
|
|
|
|
0.00
|
|
Net income
(loss) per share diluted
|
|
|
(0.06
|
)
|
|
|
(0.03
|
)
|
|
|
0.05
|
|
|
|
0.05
|
|
|
|
0.00
|
|
|
|
|
Item 9.
|
|
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
|
None.
|
|
|
Item 9A.
|
|
Controls and Procedures.
|
Evaluation of Disclosure Controls and Procedures
.
Our management, with the participation of our chief executive officer and our chief financial
officer, evaluated the effectiveness of our disclosure controls and procedures, as defined by Rule
13a-15 of the Exchange Act, as of the period covered by this Annual Report on Form 10-K. Based on
this evaluation, our chief executive officer and chief financial officer have concluded that our
disclosure controls and procedures are effective to provide reasonable assurance that information
we are required to disclose in reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the SECs rules and forms
and that such information is accumulated and communicated to our management, including our chief
executive officer and chief financial officer, as appropriate, to allow timely decisions regarding
disclosure.
-59-
Managements Report on Internal Control Over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the
supervision and with the participation of our management, including our chief executive officer and
chief financial officer, the Company conducted an evaluation of the effectiveness of its internal
control over financial reporting based on criteria outlined in the COSO Internal Control over
Financial Reporting Guidance for Smaller Public Companies, a supplemental implementation guide
issued in 2007 which modified criteria established in the framework in Internal ControlIntegrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on
this evaluation, the Companys management has concluded that the Companys internal control over
financial reporting was effective as of December 31, 2010.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risks
that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate. Accordingly, even an effective system
of internal control will provide only reasonable assurance that the objectives of the internal
control system are met.
This
annual report does not include an attestation report of our
independent registered public accounting firm regarding internal
control over financial reporting. Managements report was not
subject to attestation by our independent registered public
accounting firm pursuant to rules of the Securities and Exchange
Commission that permit us to provide only managements report to
this annual report.
Changes in Internal Control over Financial Reporting
.
There has been no change in our internal control over financial reporting during the fourth
fiscal quarter covered by this Form 10-K that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
|
|
|
Item 9B.
|
|
Other Information.
|
None.
-60-
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 2011 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 our senior executive and financial
officers (including our principal executive officer, principal financial officer and principal
accounting officer). The code of ethics is available on our website at www.heska.com. We intend
to disclose any amendments to or waivers from the code of ethics at that location.
Audit Committee
The information required by this section with respect to our Audit Committee will be
incorporated by reference to the information in the section entitled Directors and Executive
Officers in the Proxy Statement.
Section
16(a)
Beneficial Ownership Reporting Compliance
The information required by this item is incorporated by reference to the information in the
section entitled Section 16(a) Beneficial Ownership Reporting Compliance in the Proxy Statement.
|
|
|
Item 11.
|
|
Executive Compensation.
|
The information required by this section will be incorporated by reference to the information
in the sections entitled Director Compensation and Executive Compensation in the Proxy
Statement.
|
|
|
Item 12.
|
|
Security Ownership of Certain Beneficial Owners and Management.
|
The
other 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.
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, 2010,
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) Number of Securities
|
|
|
|
(a) Number of Securities
|
|
|
(b) Weighted-Average
|
|
|
Remaining Available for Future
|
|
|
|
to be Issued Upon
|
|
|
Exercise Price of
|
|
|
Issuance Under Equity
|
|
|
|
Exercise of Outstanding
|
|
|
Outstanding Options
|
|
|
Compensation Plans (excluding
|
|
Plan Category
|
|
Options and Rights (1)
|
|
|
and Rights (1)
|
|
|
securities reflected in column (a))
|
|
Equity Compensation
Plans Approved by
Stockholders
|
|
|
1,341,876
|
|
|
$
|
11.00
|
|
|
|
255,117
|
|
Equity Compensation
Plans Not Approved
by Stockholders
|
|
None
|
|
|
None
|
|
|
None
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,341,876
|
|
|
$
|
11.00
|
|
|
|
255,117
|
|
|
|
|
|
|
|
|
|
|
|
(1) Excluding
outstanding options to purchase an aggregate of 133.5 fractional shares resulting form our
December 2010 reverse stock split.
-61-
|
|
|
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 CompensationEmployment, 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 2011 Annual Meeting of Stockholders.
-62-
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
|
|
|
Costs and
|
|
|
Other
|
|
|
|
|
|
|
Balance at
|
|
Allowance for doubtful accounts
|
|
of Year
|
|
|
Expenses
|
|
|
Additions
|
|
|
Deductions
|
|
|
End of Year
|
|
Year ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
$
|
96
|
|
|
$
|
137
|
|
|
|
|
|
|
$
|
(24
|
)(a)
|
|
$
|
209
|
|
December 31, 2009
|
|
$
|
209
|
|
|
$
|
89
|
|
|
|
|
|
|
$
|
(121
|
)(a)
|
|
$
|
177
|
|
December 31, 2010
|
|
$
|
177
|
|
|
$
|
57
|
|
|
|
|
|
|
$
|
(98
|
)(a)
|
|
$
|
136
|
|
|
|
|
(a)
|
|
Write-offs of uncollectible accounts.
|
-63-
(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)
|
|
|
|
|
|
|
Restated Certificate of Incorporation of the Registrant.
|
|
3(ii)
|
|
|
|
|
|
|
Certificate of Amendment to Restated Certificate of Incorporation of
Registrant.
|
|
3(iii)
|
|
|
|
|
|
|
Certificate of Amendment to the Restated Certificate of
Incorporation, as amended, of Registrant.
|
|
3(iv)
|
|
|
|
(15)
|
|
|
Bylaws of the Registrant.
|
|
10.1
|
*
|
|
|
|
|
|
1997 Incentive Stock Plan of Registrant, as amended.
|
|
10.2
|
*
|
|
|
(10)
|
|
|
1997 Incentive Stock Plan Employees and Consultants Option Agreement.
|
|
10.3
|
*
|
|
|
(10)
|
|
|
1997 Incentive Stock Plan Outside Directors Option Agreement.
|
|
10.4
|
*
|
|
|
(13)
|
|
|
2003 Equity Incentive Plan, as amended and restated.
|
|
10.5
|
*
|
|
|
(13)
|
|
|
2003 Equity Incentive Plan Option Agreement.
|
|
10.6
|
*
|
|
|
(15)
|
|
|
1997 Employee Stock Purchase Plan of Registrant, as amended.
|
|
10.7
|
*
|
|
|
(9)
|
|
|
Management Incentive Plan Master Document.
|
|
10.8
|
*
|
|
|
|
|
|
2011 Management Incentive Plan.
|
|
10.9
|
*
|
|
|
|
|
|
Director Compensation Policy.
|
|
10.10
|
*
|
|
|
(11)
|
|
|
Form of Indemnification Agreement entered into between Registrant
and its directors and certain officers.
|
|
10.11
|
*
|
|
|
(8)
|
|
|
Amended and Restated Employment Agreement with Robert B. Grieve,
dated March 29, 2006.
|
|
10.12
|
*
|
|
|
(11)
|
|
|
Amendment to Employment Agreement between Registrant and Robert B.
Grieve, dated effective as of January 1, 2008.
|
|
10.13
|
*
|
|
|
(10)
|
|
|
Employment Agreement between Diamond Animal Health, Inc. and Michael
McGinley, dated May 1, 2000.
|
|
10.14
|
*
|
|
|
(11)
|
|
|
Amendment to Employment Agreement between Diamond Animal Health,
Inc. and Michael McGinley, dated effective as of January 1, 2008.
|
|
10.15
|
*
|
|
|
(4)
|
|
|
Employment Agreement between Registrant and Jason Napolitano, dated
May 6, 2002.
|
|
10.16
|
*
|
|
|
(11)
|
|
|
Amendment to Employment Agreement between Registrant and Jason
Napolitano, dated effective as of January 1, 2008.
|
|
10.17
|
*
|
|
|
(4)
|
|
|
Employment Agreement between Registrant and Michael Bent, dated May
1, 2000.
|
|
10.18
|
*
|
|
|
(11)
|
|
|
Amendment to Employment Agreement between Registrant and Michael
Bent, dated effective as of January 1, 2008.
|
|
10.19
|
|
|
|
(10)
|
|
|
Employment Agreement between Registrant and Nancy Wisnewski, dated
April 15, 2002.
|
|
10.20
|
|
|
|
(11)
|
|
|
Amendment to Employment Agreement between Registrant and Nancy
Wisnewski, dated effective as of January 1, 2008.
|
|
10.21
|
|
|
|
(6)
|
|
|
Net Lease Agreement between Registrant and CCMRED 40, LLC, dated May
24, 2004.
|
|
10.22
|
|
|
|
(7)
|
|
|
First Amendment to Net Lease Agreement and Development Agreement
between Registrant and CCMRED 40, LLC, dated February 11, 2005.
|
|
10.23
|
|
|
|
(7)
|
|
|
Second Amendment to Net Lease Agreement between Registrant and
CCMRED 40, LLC, dated July 14, 2005.
|
|
10.24
|
|
|
|
(14)
|
|
|
Third Amendment to Net Lease Agreement between Registrant and
Millbrae Square Company, effective as of January 1, 2010.
|
|
10.25
|
+
|
|
|
(10)
|
|
|
Third Amended and Restated Credit and Security Agreement between
Registrant, Diamond Animal Health, Inc. and Wells Fargo Business
Credit, Inc., dated December 30, 2005.
|
-64-
|
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Notes
|
|
Description of Document
|
|
10.26
|
+
|
|
|
(11)
|
|
|
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.
|
|
10.27
|
+
|
|
|
(11)
|
|
|
Second Amendment to Third Amended and Restated Credit and Security
Agreement between Registrant, Diamond Animal Health, Inc. and Wells
Fargo Bank, National Association, dated July 20, 2007.
|
|
10.28
|
|
|
|
(11)
|
|
|
Third Amendment to Third Amended and Restated Credit and Security
Agreement between Registrant, Diamond Animal Health, Inc. and Wells
Fargo Bank, National Association, dated December 21, 2007.
|
|
10.29
|
+
|
|
|
(12)
|
|
|
Fourth and Fifth Amendments to Third Amended and Restated Credit and
Security Agreement between Registrant, Diamond Animal Health, Inc.
and Wells Fargo Bank, National Association, dated October 16, 2008.
|
|
10.30
|
+
|
|
|
(13)
|
|
|
Sixth Amendment to Third Amended and Restated Credit and Security
Agreement between Registrant, Diamond Animal Health, Inc. and Wells
Fargo Bank, National Association, dated December 30, 2008.
|
|
10.31
|
+
|
|
|
(14)
|
|
|
Seventh Amendment to Third Amended and Restated Credit and Security
Agreement between Registrant, Diamond Animal Health, Inc. and Wells
Fargo Bank, National Association, dated November 30, 2009.
|
|
10.32
|
+
|
|
|
|
|
|
Eighth Amendment to Third Amended and Restated Credit and Security
Agreement between Registrant, Diamond Animal Health, Inc. and Wells
Fargo Bank, National Association, dated December 15, 2010.
|
|
10.33
|
+
|
|
|
(1)
|
|
|
Product Supply Agreement between Registrant and Quidel Corporation,
dated July 3, 1997.
|
|
10.34
|
+
|
|
|
(2)
|
|
|
First Amendment to Product Supply Agreement between Registrant and
Quidel Corporation, dated March 15, 1999.
|
|
10.35
|
|
|
|
(13)
|
|
|
Letter Amendment to Product Supply Agreement between Registrant and
Quidel Corporation dated July 7, 2004.
|
|
10.36
|
+
|
|
|
(3)
|
|
|
Amended and Restated Bovine Vaccine Distribution Agreement between
Diamond Animal Health, Inc. and Agri Laboratories, Ltd., dated
September 30, 2002.
|
|
10.37
|
+
|
|
|
(5)
|
|
|
First Amendment to Amended and Restated Bovine Vaccine Distribution
Agreement between Diamond Animal Health, Inc. and Agri Laboratories,
Ltd., dated September 20, 2004.
|
|
10.38
|
+
|
|
|
(10)
|
|
|
Second Amendment to Amended and Restated Bovine Vaccine Distribution
Agreement between Diamond Animal Health, Inc. and Agri Laboratories,
Ltd., dated December 10, 2004.
|
|
10.39
|
+
|
|
|
(10)
|
|
|
Third Amendment to Amended and Restated Bovine Vaccine Distribution
Agreement between Diamond Animal Health, Inc. and Agri Laboratories,
Ltd., dated May 26, 2006.
|
|
10.40
|
+
|
|
|
(11)
|
|
|
Fourth Amendment to Amended and Restated Bovine Vaccine Distribution
Agreement between Diamond Animal Health, Inc. and Agri Laboratories,
Ltd., dated as of November 16, 2007.
|
|
10.41
|
+
|
|
|
|
|
|
Fifth Amendment to Amended and Restated Bovine Vaccine Distribution
Agreement between Diamond Animal Health, Inc. and Agri Laboratories,
Ltd., dated as of December 23, 2010.
|
|
10.42
|
+
|
|
|
(10)
|
|
|
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.
|
-65-
|
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
Notes
|
|
Description of Document
|
|
10.43
|
+
|
|
|
(12)
|
|
|
Letter Amendment to Supply and Distribution Agreement between
Registrant and Boule Medical AB, dated July 12, 2005; Letter
Amendment to Supply and Distribution Agreement between Registrant
and Boule Medical AB, dated March 20, 2007; Letter Amendment to
Supply and Distribution Agreement between Registrant and Boule
Medical AB, dated January 23, 2008; and Sixth Amendment to Supply
and Distribution Agreement between Registrant and Boule Medical AB,
dated October 1, 2008.
|
|
10.44
|
+
|
|
|
(10)
|
|
|
Supply and License Agreement between Registrant and Schering-Plough
Animal Health Corporation, dated as of August 1, 2003.
|
|
10.45
|
+
|
|
|
(13)
|
|
|
Amendment No. 1 to Supply and License Agreement between Registrant
and Schering-Plough Animal Health Corporation, dated August 31,
2005.
|
|
10.46
|
+
|
|
|
(10)
|
|
|
Distribution Agreement between Registrant and Arkray Global
Business, Inc. dated November 1, 2004.
|
|
10.47
|
+
|
|
|
(11)
|
|
|
Clinical Chemistry Analyzer Agreement between Registrant and
FUJIFILM Corporation, dated as of January 30, 2007.
|
|
21.1
|
|
|
|
|
|
|
Subsidiaries of the Company.
|
|
23.1
|
|
|
|
|
|
|
Consent of Ehrhardt Keefe Steiner & Hottman PC, Independent
Registered Public Accounting Firm.
|
|
24.1
|
|
|
|
|
|
|
Power of Attorney (See Signature Page 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.
|
|
**
|
|
Furnished herewith.
|
|
(1)
|
|
Filed with the Registrants Form 10-Q for the quarter ended September 30, 1997.
|
|
(2)
|
|
Filed with the Registrants Form 10-K for the year ended December 31, 2001.
|
|
(3)
|
|
Filed with the Registrants Form 10-Q for the quarter ended September 30, 2002.
|
|
(4)
|
|
Filed with the Registrants Form 10-K for the year ended December 31, 2002.
|
|
(5)
|
|
Filed with the Registrants Form 10-Q for the quarter ended September 30, 2004.
|
|
(6)
|
|
Filed with the Registrants Form 10-K for the year ended December 31, 2004.
|
|
(7)
|
|
Filed with the Registrants Form 10-Q for the quarter ended June 30, 2005.
|
|
(8)
|
|
Filed with the Registrants Form 10-K for the year ended December 31, 2005.
|
|
(9)
|
|
Filed with the Registrants Form 10-Q for the quarter ended March 31, 2006.
|
|
(10)
|
|
Filed with the Registrants Form 10-K for the year ended December 31, 2006.
|
|
(11)
|
|
Filed with the Registrants Form 10-K for the year ended December 31, 2007.
|
|
(12)
|
|
Filed with the Registrants Form 10-Q for the quarter ended September 30, 2008.
|
|
(13)
|
|
Filed with the Registrants Form 10-K for the year ended December 31, 2008.
|
|
(14)
|
|
Filed with the Registrants Form 10-K for the year ended December 31, 2009.
|
|
(15)
|
|
Filed with the Registrants Form 10-Q for the quarter ended March 31, 2010.
|
-66-
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 18, 2011.
|
|
|
|
|
|
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 18, 2011
|
|
|
|
|
|
/s/ JASON A. NAPOLITANO
|
|
Executive Vice President,
|
|
|
|
|
Chief Financial Officer and Secretary
|
|
|
|
|
(Principal Financial Officer)
|
|
March 18, 2011
|
|
|
|
|
|
|
|
Vice President, Controller
|
|
|
Michael A. Bent
|
|
(Principal Accounting Officer)
|
|
March 18, 2011
|
|
|
|
|
|
/s/ WILLIAM A. AYLESWORTH
|
|
Lead Director
|
|
March 18, 2011
|
William A. Aylesworth
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
March 18, 2011
|
Peter Eio
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
March 18, 2011
|
G. Irwin Gordon
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
March 18, 2011
|
Louise L. McCormick
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
March 18, 2011
|
John F. Sasen, Sr.
|
|
|
|
|
-67-
Exhibit 3(i)
RESTATED CERTIFICATE OF INCORPORATION
OF
HESKA CORPORATION
HESKA CORPORATION, a corporation organized and existing under the laws of the State of
Delaware, hereby certifies as follows:
FIRST: The name of this corporation is Heska Corporation.
SECOND: The original Certificate of Incorporation of the corporation was filed with
the Secretary of State of the State of Delaware on March 27, 1997 and the original name of
the corporation was Heska Merger Corporation. A Restated Certificate of Incorporation of
the corporation was filed with the Secretary of State of the State of Delaware on May 28,
1997. A Certificate of Merger whereby Heska Corporation, a California corporation, was
merged with and into this corporation and this corporations name was changed to Heska
Corporation was filed with the Secretary of State of the State of Delaware on May 29, 1997.
A Restated Certificate of Incorporation was filed with the Secretary of State of the State
of Delaware on July 7, 1997.
THIRD: The Restated Certificate of Incorporation of said
corporation shall be amended and restated to read in full as follows:
ARTICLE I
The name of this corporation is HESKA CORPORATION.
ARTICLE II
The registered office of the corporation within the State of Delaware is located at 1209
Orange Street, in the City of Wilmington, County of New Castle. The name of its registered agent at
such address is The Corporation Trust Company.
ARTICLE III
The purpose of this corporation is to engage in any lawful act or activity for which a
corporation may be organized under the General Corporation Law of Delaware.
ARTICLE IV
A. Authorized Stock. This corporation is authorized to issue two classes of shares, to be
designated Common Stock and Preferred Stock, respectively. This corporation is authorized to issue
seventy-five million (75,000,000) shares of Common Stock, $.00l par value per share, and
twenty-five million (25,000,000) shares of Preferred Stock, $.00l par value per share.
B. Preferred Stock. The Preferred Stock may be issued in any number of series, as determined
by the Board of Directors. The Board of Directors may by resolution fix the designation and number
of shares of any such series, and may determine, alter, or revoke the rights, preferences,
privileges and restrictions granted to or imposed upon any wholly unissued series. The Board of
Directors may thereafter in the same manner, within the limits and restrictions stated in any
resolution or resolutions of the Board of Directors originally fixing the number of shares
constituting any series, increase or decrease the number of shares of any such series (but not
below the number of shares of that series then outstanding). In case the number of shares of any
series shall be decreased, the shares constituting such decrease shall resume the status which they
had prior to the adoption of the resolution originally fixing the number of shares of such series.
C. Common Stock.
1. Relative Rights of Preferred Stock and Common Stock. All preferences, voting
powers, relative, participating, optional or other special rights and privileges, and
qualifications, limitations or restrictions of the Common Stock are expressly made subject
and subordinate to those that may be fixed with respect to any shares of the Preferred
Stock.
2. Voting Rights. Except as otherwise required by law or this Restated Certificate of
Incorporation, each holder of Common Stock shall have one vote in respect of each share of
stock held by such holder of record on the books of the corporation for the election of
directors and on all matters submitted to a vote of stockholders of the corporation.
3. Dividends. Subject to the preferential rights of the Preferred Stock, if any, the
holders of shares of Common Stock shall be entitled to receive, when and if declared by
the Board of Directors, out of the assets of the corporation which are by law available
therefor, dividends payable either in cash, in property or in shares of capital stock.
4. Liquidation, Dissolution or Winding Up. In the event of any dissolution,
liquidation or winding up of the affairs of the corporation, after distribution in full of
the preferential amounts, if any, to be distributed to the holders of shares of the
Preferred Stock, holders of Common Stock shall be entitled, unless otherwise provided
by law or this Restated Certificate of Incorporation, to receive all of the remaining
assets of the corporation of whatever kind available for distribution to stockholders
ratably in proportion to the number of shares of Common Stock held by them respectively.
-2-
ARTICLE V
The corporation is to have perpetual existence.
ARTICLE VI
A. Classified Board. The Board of Directors shall be divided into three classes, designated
Class I, Class II and Class III, as nearly equal in number as possible, and the term of office of
directors of one class shall expire at each annual meeting of stockholders, and in all cases as to
each director when such directors successor shall be elected and shall qualify or upon such
directors earlier resignation, removal from office, death or incapacity. Additional directorships
resulting from an increase in number of directors shall be apportioned among the classes as equally
as possible. The initial term of office of directors of Class I shall expire at the annual meeting
of stockholders in 1998; that of Class II shall expire at the annual meeting in 1999; and that of
Class III shall expire at the annual meeting in 2000; and in all cases as to each director when
such directors successor shall be elected and shall qualify or upon such directors earlier
resignation, removal from office, death or incapacity. At each annual meeting of stockholders,
beginning with the annual meeting of stockholders in 1998, the number of directors equal to the
number of directors of the class whose term expires at the time of such meeting (or, if less, the
number of directors properly nominated and qualified for election) shall be elected to hold office
until the third succeeding annual meeting of stockholders after their election.
B. Changes. The Board of Directors of this corporation, by amendment to the corporations
bylaws, is expressly authorized to change the number of directors in any or all of the classes of
directors without the consent of the stockholders.
C. Elections. Elections of directors need not be by written ballot unless the Bylaws of the
corporation shall so provide.
D. Vote Required to Amend or Repeal. The affirmative vote of the holders of at least sixty-six
and two-thirds percent (66-2/3%) of the voting power of all of the then outstanding shares of the
stock of the corporation entitled to vote generally in the election of directors, voting together
as a single class, shall be required to amend in any respect or repeal this Article
VI.
-3-
ARTICLE VII
A. Special Meetings of Stockholders. Special meetings of the stockholders of the corporation
may be called for any purpose or purposes, unless otherwise prescribed by statute or by this
Restated Certificate of Incorporation, only at the request of the Chairman of the Board of
Directors, the Chief Executive Officer or President of the corporation or by a resolution duly
adopted by the affirmative vote of a majority of the Board of Directors.
ARTICLE VIII
A. Amend or Repeal Bylaws. The Board of Directors is expressly empowered to adopt, amend or
repeal the Bylaws of the corporation; provided, however, that any adoption, amendment or repeal of
the Bylaws of the corporation by the Board of Directors shall require the approval of at least
sixty-six and two-thirds percent (66-2/3%) of the total number of authorized directors (whether or
not there exist any vacancies in previously authorized directorships at the time any resolution
providing for adoption, amendment or repeal is presented to the Board of Directors). The
stockholders shall also have the power to adopt, amend or repeal the Bylaws of the corporation,
provided, however, that in addition to any vote of the holders of any class or series of stock of
the corporation required by law, the affirmative vote of the holders of more than fifty percent
(50%) of the voting power of all of the then outstanding shares of the stock of the corporation
entitled to vote generally in the election of directors, voting together as a single class, shall
be required for such adoption, amendment or repeal by the stockholders of any provisions of the
Bylaws of the corporation. Notwithstanding the foregoing sentence, the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the
then outstanding shares of the stock of the corporation entitled to vote generally in the election
of directors, voting together as a single class, shall be required for the amendment or repeal of
Article 3.1 of the Bylaws of the corporation.
ARTICLE IX
The books of the corporation may be kept at such place within or without the State of Delaware
as the bylaws of the corporation may provide or as may be designated from time to time by the board
of directors of the corporation.
-4-
ARTICLE X
Whenever a compromise or arrangement is proposed between the corporation and its creditors or
any class of them and/or between the corporation and its stockholders or any class of them, any
court of equitable jurisdiction within the State of Delaware may, on the application in a summary
way of the corporation or of any creditor or stockholder thereof or on the application of any
receivers appointed for the corporation under the provisions of section 291 of Title 8 of the
Delaware Code or on the application of trustees in dissolution or of any receiver or receivers
appointed for the corporation under the provisions of section 279 of Title 8 of the Delaware Code
order a meeting of the creditors or class of creditors, and/or the stockholders or class of
stockholders of the corporation, as the case may be, to be summoned in such manner as the said
court directs. If a majority, in number representing three-fourths in value of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of the corporation, as the
case may be, agree to any compromise or arrangement and to any reorganization of this corporation
as consequence of such compromise or arrangement, the said compromise or arrangement and the said
reorganization shall if sanctioned by the court to which the said application has been made, be
binding on all the creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of the corporation, as the case may be, and also on the corporation.
ARTICLE XI
A. Limitation on Liability. A director of the corporation shall not be personally liable to
the corporation or its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (1) for any breach of the directors duty of loyalty to the
corporation and its stockholders; (2) for acts or omissions not in good faith or which involve
intentional misconduct or knowing violations of law; (3) under Section 174 of the Delaware General
Corporation Law; or (4) for any transaction from which the director derived an improper personal
benefit.
If the Delaware General Corporation Law hereafter is amended to further eliminate or limit the
liability of directors, then the liability of a director of the corporation, in addition to the
limitation on personal liability provided herein, shall be limited to the fullest extent permitted
by the amended Delaware General Corporation Law.
B. Indemnification. The corporation is authorized to indemnify the directors and officers of
this corporation to the fullest extent permissible under Delaware law.
-5-
C. Insurance. The corporation may maintain insurance, at its expense, to protect itself and
any director, officer, employee or agent of the corporation or another corporation, partnership,
joint venture, trust or other enterprise against any such expense, liability or loss, whether or
not the corporation would have the power to indemnify such person against such expense, liability
or loss under the Delaware General Corporation Law.
D. Repeal and Modification. Any repeal or modification of the foregoing provisions of this
Article XI shall not adversely affect any right or protection of any director, officer, employee or
agent of the corporation existing at the time of such repeal or modification.
ARTTCLE XII
The corporation reserves the right to amend or repeal any provision contained in this Restated
Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights
conferred upon a stockholder herein are granted subject to this reservation.
* * * * *
Four: This Restated Certificate of Incorporation was duly adopted by the Board of
Directors of this corporation.
Five: This Restated Certificate of Incorporation was duly adopted by written consent
of the stockholders of the corporation in accordance with Sections 228, 242 and 245 of the
General Corporation Law of the State of Delaware and written notice of such action has
been given as provided in Section 228.
IN WITNESS THEREOF, Heska Corporation has caused this certificate to be signed by the
undersigned officer, thereunto duly authorized, this 24th day of May, 2000.
|
|
|
|
|
|
|
|
|
By:
|
/s/ Ronald L. Hendrick
|
|
|
|
Name:
|
Ronald L. Hendrick
|
|
|
|
Title:
|
Executive Vice President and
Chief Financial Officer
|
|
|
-6-
Exhibit 3(ii)
CERTIFICATE OF AMENDMENT
TO RESTATED
CERTIFICATE OF INCORPORATION
OF
HESKA CORPORATION
Heska Corporation, a corporation organized and existing under the laws of the State of
Delaware, (the
Corporation
), does hereby certify that:
1. This Amendment to the Corporations Restated Certificate of Incorporation has been duly
adopted in accordance with the provisions of Section 242 of the General Corporation Law of the
State of Delaware.
2. This Amendment to the Corporations Restated Certificate of Incorporation amends Article IV
of the Corporations Restated Certificate of Incorporation, by deleting the existing Article IV in
its entirety and substituting therefor a new Article IV to read in its entirety as follows:
ARTICLE IV
A. Authorized Stock.
The total authorized stock of the Corporation, which shall be an aggregate of
175,000,000 shares, shall consist of three classes: (i) a class consisting of 75,000,000 shares of
existing Common Stock having a par value of $0.001 per share (the
Original Common Stock
);
(ii) a second class consisting of 75,000,000 shares of NOL Restricted Common Stock having a par
value of $0.001 per share (the
Common Stock
, and together with the Original Common Stock,
the
Common Stock Securities
); and (iii) a third class consisting of 25,000,000 shares of
Preferred Stock having a par value of $0.001 per share (the
Preferred Stock
).
B. Preferred Stock.
The Preferred Stock may be issued in any number of series, as determined by
the Board of Directors. The Board of Directors may by resolution fix the designation and number of
shares of any such series, and may determine, alter, or revoke the rights, preferences, privileges
and restrictions granted to or imposed upon any wholly unissued series. The Board of Directors may
thereafter in the same manner, within the limits and restrictions stated in any resolution or
resolutions of the Board of Directors originally fixing the number of shares constituting any
series, increase or decrease the number of shares of any such series (but not below the number of
shares of that series then outstanding). In case the number of shares of any series shall be
decreased, the shares constituting such decrease shall resume the status which they had prior to
the adoption of the resolution originally fixing the number of shares of such series.
C. Common Stock Securities.
1.
Relative Rights of Preferred Stock and Common Stock Securities
. All preferences,
voting powers, relative, participating, optional or other special rights and privileges, and
qualifications, limitations or restrictions of the Common Stock Securities are expressly made
subject and subordinate to those that may be fixed with respect to any shares of the Preferred
Stock.
2.
Relative Rights of Original Common Stock and Common Stock
. Except as otherwise
provided in this Article IV, all shares of Original Common Stock and Common Stock shall be
identical and shall entitle the holder thereof to the same preferences, voting powers, relative,
participating, optional or other special rights and privileges, and qualifications, limitations or
restrictions.
3.
Voting Rights
. Except as otherwise required by law or this Restated Certificate of
Incorporation, the holder or holders of Common Stock Securities shall vote together as one class,
and each holder of Common Stock Securities shall have one vote in respect of each share of such
stock held by such holder of record on the books of the corporation, for the election of directors
and on all matters submitted to a vote of stockholders of the corporation.
4.
Dividends
. Subject to the preferential rights of the Preferred Stock, if any, the
holders of shares of Common Stock Securities shall be entitled to receive, when and if declared by
the Board of Directors, out of the assets of the corporation which are by law available therefor,
dividends payable either in cash, in property or in shares of capital stock.
5.
Liquidation, Dissolution or Winding Up
. In the event of any dissolution,
liquidation or winding up of the affairs of the corporation, after distribution in full of the
preferential amounts, if any, to be distributed to the holders of shares of the Preferred Stock,
holders of Common Stock Securities shall be entitled, unless otherwise provided by law or this
Restated Certificate of Incorporation, to receive all of the remaining assets of the corporation of
whatever kind available for distribution to stockholders ratably in proportion to the number of
shares of Common Stock Securities held by them respectively.
6.
Subdivisions and Combinations of Shares
. The corporation shall not in any manner
subdivide (by stock split, stock dividend or otherwise) or combine (by stock split, stock dividend
or otherwise) the outstanding Common Stock or Original Common Stock unless all outstanding Common
Stock Securities are proportionately subdivided or combined.
7.
Automatic Conversion
. Each share of NOL Restricted Common Stock shall
automatically be converted into the equivalent number of shares of Original Common Stock at the
close of business of the Corporation on the Restriction Release Date. Upon the occurrence of such
automatic conversion, all shares of NOL Restricted Common Stock shall be converted without any
further action by the holders of such shares and whether or not the certificates representing such
shares are surrendered to the Corporation or its transfer agent, and shall no longer be deemed to
be outstanding and all rights with respect to such shares shall immediately cease and terminate,
except only the right to receive shares of Original Common Stock in exchange therefor. Upon the
occurrence of such automatic conversion, the holders of NOL Restricted Common Stock shall, upon
notice from the Corporation, surrender the certificates representing such shares at the office of
the Corporation or of its transfer agent for the Common Stock. Thereupon, there shall be issued
and delivered to such holder a certificate or certificates for the number of shares of Original
Common Stock into which the shares of NOL Restricted Common Stock so surrendered were automatically
converted. The Corporation shall not be obligated to issue such certificates unless certificates
evidencing the shares of NOL Restricted Common Stock so converted are either delivered to the
Corporation or any such transfer agent, or the holder notifies the Corporation that such
certificates have been lost, stolen, or destroyed and executes an agreement satisfactory to the
Corporation to indemnify the Corporation from any loss incurred by it in connection therewith.
Following such automatic conversion, all shares of NOL Restricted Common Stock so converted shall
be retired and cancelled, and the Corporation shall not reissue any shares of NOL Restricted Common
Stock. The Corporation shall, at all times prior to automatic conversion of the NOL Restricted
Common Stock, cause to be authorized and reserved for issuance a number of shares of Original
Common Stock sufficient to permit conversion of the NOL Restricted Common Stock.
2
D. Reclassification.
Immediately upon the effectiveness of the filing of this Certificate of Amendment to the
Corporations Restated Certificate of Incorporation with the Secretary of State of the State of
Delaware (the
Effective Time
), each share of Original Common Stock issued and outstanding
immediately prior to the Effective Time shall be reclassified as and converted into and shall
become one share of NOL Restricted Common Stock (
Common Stock
, pursuant to the
Reclassification
).
The Reclassification of the shares of Original Common Stock into shares of Common Stock shall
be deemed to occur at the Effective Time, regardless of when any certificate previously
representing such shares of Original Common Stock (if such shares are held in certificated form)
are physically surrendered to the Corporation in exchange for certificates representing shares of
such Common Stock. Each certificate outstanding immediately prior to the Effective Time
representing shares of Original Common Stock shall, until surrendered to the Corporation in
exchange for a certificate representing such new number of shares of Common Stock, automatically
represent from and after the Effective Time the reclassified number of shares of Common Stock. All
options and rights issuable or issued with respect to Original Common Stock pursuant to any stock
option plan, employee stock purchase plan or other stock plan of the Corporation prior to the
Effective Time shall represent options and rights for the equivalent number of shares of Common
Stock from and after the Effective Time.
E. Transfer Restrictions.
1.
Certain Definitions
. As used in this Section E:
Acquire
or
Acquisition
and similar terms means the acquisition of record,
legal, beneficial or any other ownership of Corporation Securities by any means, including, without
limitation, (a) the exercise of any rights under any option, warrant, convertible security, pledge
or other security interest or similar right to acquire shares, or (b) the entering into of any
swap, hedge or other arrangement that results in the acquisition of any of the economic
consequences of ownership of Corporation Securities, but shall not include the acquisition of any
such rights unless, as a result, the acquirer would be considered an owner of Corporation
Securities under the rules of Section 382 of the Code.
Business Day
means any day, other than a Saturday, Sunday or day on which banks
located in Denver, Colorado, are authorized or required by law to close.
Code
means the Internal Revenue Code of 1986, as amended, and the regulations
promulgated thereunder.
Corporation Securities
means (a) shares of Common Stock Securities, (b) shares of
Preferred Stock of any class or series of Preferred Stock (other than Preferred Stock that is not
stock pursuant to Treasury Regulation Sections 1.382-2(a)(3) and 1.382-2T(f)(18)(ii) or any
successor provision), (c) warrants, rights or options (within the meaning of Treasury Regulation
Section 1.382-4(d), or any successor provision) to purchase Stock and (d) any other interests that
would be treated as stock of the Corporation pursuant to Treasury Regulation Section
1.382-2T(f)(18), or any successor provision.
Dispose
or
Disposition
means any direct or indirect sale, transfer,
assignment, conveyance, pledge or other disposition or other action in any manner whatsoever,
whether voluntary or involuntary, by operation of law or otherwise, by any Person or group that
reduces the Percentage Stock Ownership of any Person or group.
Entity
means an entity within the meaning of Treasury Regulation Section
1.382-3(a)(1).
3
Five Percent Shareholder
means (i) a Person or group of Persons that is identified as
a 5-percent shareholder of the Corporation pursuant to Treasury Regulation Section 1.382-2T(g)(1)
(or any successor provision) or (ii) a Person that is a first tier entity or higher tier
entity of the Corporation if that person has a public group or individual, or a higher tier
entity of that Person has a public group or individual, that is treated as a 5-percent
shareholder of the Corporation pursuant to Treasury Regulation Section 1.382-2T(g) or any
successor provision (where the terms first tier entity, higher tier entity and public group
are defined in Treasury Regulation Section 1.382-2T(f) (or any successor provision), but excluding
any public group with respect to the Corporation, as that term is defined in Treasury Regulation
Section 1.382-2T(f)(13) (or any successor provision). For the purposes of determining the
existence and identity of, and the amount of Corporation Securities owned by, any Five Percent
Shareholder, the Corporation is entitled to rely conclusively on (a) the existence and absence of
filings of Schedules 13D or 13G under the Securities Exchange Act of 1934, as amended (or any
similar schedules) as of any date, and (b) its actual knowledge of the ownership of the Corporation
Securities.
Percentage Stock Ownership
and similar terms means percentage Stock Ownership of any
Person or group for purposes of Section 382 of the Code, as determined in accordance with Treasury
Regulation Section 1.382-2T(g), (h), (j) and (k) (or any successor provision).
Person
means an individual, corporation, estate, trust, association, limited
liability company, partnership, joint venture or similar organization, and also includes a
syndicate or group as those terms are used for the purposes of Section 13(d)(3) of the Securities
Exchange Act of 1934, as amended.
Prohibited Transfer
means any purported Transfer of Corporation Securities to the
extent that such a Transfer is prohibited and/or void under this Article IV.
Restriction Release Date
means such date, after the Effective Time, that is the
earlier of (i) the date that Section 382 of the Code or any successor statute is repealed if the
Board of Directors determines in good faith that this Article IV is no longer necessary or
advisable for preservation of the Tax Benefits, (ii) the date that the Board of Directors
determines in good faith that it is in the best interests of the Corporation and its stockholders
for the transfer restrictions set forth in this Article IV to terminate, or (iii) January 1, 2026.
Any such determinations by the Board of Directors shall be set forth in a written resolution that
is publicly announced or otherwise made available to stockholders.
Restricted Holder
means a Person or group of Persons that (a) is a Five Percent
Shareholder and Acquires or proposes to Acquire Corporation Securities, or (b) is proposing to
Acquire Corporation Securities, and following such proposed Acquisition of Corporation Securities,
would be a Five Percent Shareholder.
Stock
means any interest that would be treated as stock of the Corporation
pursuant to Treasury Regulation Sections 1.382-2(a)(3) and 1.382-2T(f)(18) (or any successor
provisions).
Stock Ownership
means any direct or indirect ownership of Stock, including any
ownership by virtue of application of constructive ownership rules, with such direct, indirect and
constructive ownership determined under the provisions of Section 382 of the Code.
Tax Benefits
means the net operating loss carryovers, capital loss carryovers,
general business credit carryovers, alternative minimum tax credit carryovers and foreign tax
credit carryovers, as well as any loss or deduction attributable to a net unrealized built-in
loss within the meaning of Section 382 of the Code, of the Corporation or any direct or indirect
subsidiary thereof.
4
Transfer
means any direct or indirect Acquisition or Disposition of Corporation
Securities or other action in any manner whatsoever, whether voluntary or involuntary, by operation
of law or otherwise, that alters the Percentage Stock Ownership of any Person or group, or any
attempt to do any of the foregoing. A Transfer shall also include the creation or grant of an
option (including within the meaning of Treasury Regulation Section 1.382-4(d)). A Transfer shall
not include an issuance or grant of Corporation Securities by the Corporation.
Treasury Regulation
means a Treasury Regulation promulgated under the Code.
2.
Transfer Restrictions
.
(a) From and after the Effective Time and prior to the Restriction Release Date, no Transfer
shall be permitted, and any such purported Transfer shall be void
ab initio
, to the extent that
after giving effect to such purported Transfer (or any series of Transfers of which such Transfer
is a part), either (i) any Person or group of Persons shall become a Five Percent Shareholder, or
(ii) the Percentage Stock Ownership interest in the Corporation of any Five Percent Shareholder
shall be increased. The prior sentence is not intended to prevent the Corporation Securities from
being DTC-eligible and shall not preclude the settlement of any transactions in the Corporation
Securities entered into through the facilities of a national securities exchange or any national
securities quotation system, provided, that if the settlement of the transaction would result in a
Prohibited Transfer, such Transfer shall nonetheless be a Prohibited Transfer.
(b) The restrictions contained in this Article IV are for the purposes of reducing the risk
that any ownership change of the Corporation Securities (as defined in the Code) may limit the
Corporations ability to utilize its Tax Benefits. In connection therewith, and to provide for
effective policing of these provisions, a Restricted Holder who proposes to Acquire Corporation
Securities shall, prior to the date of the proposed Acquisition, request in writing (a
Request
) that the Board of Directors of the Corporation (or a committee thereof that has
been appointed by the Board of Directors) review the proposed Acquisition and authorize or not
authorize the proposed Acquisition in accordance with this Section E.2(b) of Article IV. A Request
shall be mailed or delivered to the Secretary of the Corporation at the Corporations principal
place of business, or telecopied to the Corporations telecopier number at its principal place of
business. Such Request shall be deemed to have been received by the Corporation when actually
received by the Secretary of the Corporation. A Request shall include (i) the name, address and
telephone number of the Restricted Holder, (ii) a description of the Restricted Holders direct and
indirect ownership of Corporation Securities, (iii) a description of the Corporation Securities
that the Restricted Holder proposes to Acquire, (iv) the date on which the proposed Acquisition is
expected to take place (or, if the Acquisition is proposed to be made by a Five Percent Shareholder
in a transaction on a national securities exchange or any national securities quotation system, a
statement to that effect), (v) the name of the proposed transferor of the Corporation Securities
that the Restricted Holder proposes to Acquire (or, if the Acquisition is proposed to be made by a
Five Percent Shareholder in a transaction on a national securities exchange or any national
securities quotation system, a statement to that effect), and (vi) a request that the Board of
Directors (or a committee thereof that has been appointed by the Board of Directors) authorize, if
appropriate, the Acquisition pursuant to this Section E.2(b) of Article IV.
5
(c) The Board of Directors may authorize an Acquisition by a Restricted Holder, or otherwise
determine to waive the application of any restrictions contained in this Article IV, if it
determines, in its sole discretion, that, after taking into account the preservation of the Tax
Benefits, such Acquisition or waiver would be in the best interests of the Corporation and its
stockholders and in such cases, the restrictions set forth in Section E.2(a) of this Article IV
shall not apply, notwithstanding the effect of any such authorization or waiver on the Tax
Benefits. Any proposed Acquisition by a Restricted
Holder that is not so authorized by the Board of Directors or subject to such a waiver shall
be deemed a Prohibited Transfer. The Board of Directors may, in its sole discretion, impose any
conditions that it deems reasonable and appropriate in connection with authorizing any such
Acquisition by a Restricted Holder or granting such a waiver. In addition, the Board of Directors
may, in its sole discretion, require such representations from the Restricted Holder or such
opinions of counsel to be rendered by counsel selected by the Board of Directors, in each case as
to such matters as the Board of Directors may determine. Any Restricted Holder who makes a Request
to the Board of Directors shall reimburse the Corporation, on demand, for all costs and expenses
incurred by the Corporation with respect to any proposed Acquisition of Corporation Securities
subject to such Request, whether or not such Request is granted, including, without limitation, the
Corporations costs and expenses incurred in determining whether to authorize the proposed
Acquisition, which costs may include, but are not limited to, any expenses of counsel and/or tax
advisors engaged by the Board of Directors to advise the Board of Directors or deliver an opinion
thereto.
3.
Treatment of Excess Securities.
(a) No employee or agent of the Corporation shall record any Prohibited Transfer, and the
purported transferee of a Prohibited Transfer (the
Purported Transferee
) shall not be
recognized as a stockholder of the Corporation for any purpose whatsoever in respect of the
Corporation Securities which are the subject of the Prohibited Transfer (the
Excess
Securities
). The Purported Transferee shall not be entitled with respect to such Excess
Securities to any rights of stockholders of the Corporation, including, without limitation, the
right to vote such Excess Securities and to receive dividends or distributions, whether liquidating
or otherwise, in respect thereof. Once the Excess Securities have been acquired in a Transfer that
is not a Prohibited Transfer, such Corporation Securities shall cease to be Excess Securities.
(b) If the Board of Directors determines that a Prohibited Transfer has been recorded by an
agent or employee of the Corporation notwithstanding the prohibition in Section E.3(a) of this
Article IV, such recording and the Prohibited Transfer shall be void
ab initio
and have no legal
effect and, upon written demand by the Corporation, the Purported Transferee shall transfer or
cause to be transferred any certificate or other evidence of ownership of the Excess Securities
within the Purported Transferees possession or control, together with any dividends or other
distributions that were received by the Purported Transferee from the Corporation with respect to
the Excess Securities (the
Prohibited Distributions
), to an agent designated by the Board
of Directors (the
Agent
). In the event of an attempted Prohibited Transfer involving the
purchase or Acquisition of Corporation Securities in violation of this Article 4 by a Restricted
Holder, the Agent shall thereupon sell to a buyer or buyers, which may include the Corporation or
the purported transferor, the Excess Securities transferred to it in one or more arms-length
transactions (including over a national securities exchange or national securities quotation system
on which the Corporation Securities may be traded); provided, however, that the Agent, in its sole
discretion, shall effect such sale or sales in an orderly fashion and shall not be required to
effect any such sale within any specific time frame if, in the Agents discretion, such sale or
sales would disrupt the market for the Corporation Securities, would adversely affect the value of
the Corporation Securities or would be in violation of applicable securities laws. If the
Purported Transferee has resold the Excess Securities before receiving the Corporations demand to
surrender the Excess Securities to the Agent, the Purported Transferee shall be deemed to have sold
the Excess Securities for the Agent, shall be deemed to hold in trust for the Agent, and shall be
required to transfer to the Agent, any Prohibited Distributions and proceeds of such sale, except
to the extent that the Corporation grants written permission to the Purported Transferee to retain
a portion of such sales proceeds not exceeding the amount that the Purported Transferee would have
received from the Agent pursuant to Section E.3(c) of this Article IV if the Agent, rather than the
Purported Transferee, had resold the Excess Securities.
6
(c) The Agent shall apply any proceeds of a sale by it of Excess Securities and, if the
Purported Transferee had previously resold the Excess Securities, any amounts received by it from a
Purported Transferee, together with any Prohibited Distributions received by it, as follows: (i)
first, to reimburse itself to the extent necessary to cover its costs and expenses incurred in
accordance with its duties hereunder; (ii) second, to reimburse the Purported Transferee for the
amounts paid by the Purported Transferee for the Excess Securities (or in the case of any
Prohibited Transfer by gift, devise or inheritance or any other Prohibited Transfer without
consideration, the fair market value, calculated on the basis of the closing market price for the
Corporation Securities on the day before the Prohibited Transfer), and (iii) third, the remainder,
if any, to the original transferor, or, if the original transferor cannot be readily identified, to
the Company to the extent of any amounts owing to the Company pursuant to Section E.3(f) below,
with the remainder, if any, to be donated to an entity designated by the Corporations Board of
Directors that is described in Section 501(c) of the Code, contributions to which must be eligible
for deduction under each of Sections 170(b)(1)(A), 2055 and 2522 of the Code. The recourse of any
Purported Transferee with respect of any Prohibited Transfer shall be limited to the amount payable
to the Purported Transferee pursuant to clause (ii) of this Section E.3(c) of this Article IV.
Except as may be required by law, in no event shall the proceeds of any sale of Excess Securities
pursuant to this Article IV inure to the benefit of the Corporation or the Agent, except to the
extent used to cover costs and expenses incurred by the Agent in performing its duties hereunder.
(d) In the event of any Transfer which does not involve a transfer of securities of the
Corporation within the meaning of Delaware law (
Securities
, and individually, a
Security
) but which would cause a Five Percent Shareholder to violate a restriction on
Transfers provided for in this Article IV, the application of Section E.3(b) and Section E.3(c)
shall be modified as described in this Section E.3(d). In such case, no such Five Percent
Shareholder shall be required to dispose of any interest that is not a Security, but such Five
Percent Shareholder and/or any Person whose ownership of Securities is attributed to such Five
Percent Shareholder shall be deemed to have disposed of and shall be required to dispose of
sufficient Securities (which Securities shall be disposed of in the inverse order in which they
were acquired) to cause such Five Percent Shareholder, following such disposition, not to be in
violation of this Article IV. Such disposition shall be deemed to occur simultaneously with the
Transfer giving rise to the application of this provision, and such number of Securities that are
deemed to be disposed of shall be considered Excess Securities and shall be disposed of through the
Agent as provided in Section E.3(b) and Section E.3(c), except that the maximum aggregate amount
payable either to such Five Percent Shareholder, or to such other Person that was the record owner
of such Excess Securities, in connection with such sale shall be the fair market value of such
Excess Securities at the time of the purported Transfer. All expenses incurred by the Agent in
disposing of such Excess Stock shall be paid out of any amounts due such Five Percent Shareholder
or such other Person. The purpose of this Section E.3(d) is to extend the restrictions in Section
E.2(a) and Section E.3(a) to situations in which there is a Five Percent Shareholder without a
direct Transfer of Securities, and this Section E.3(d), along with the other provisions of this
Article IV, shall be interpreted to produce the same results, with differences as the context
requires, as a direct Transfer of Corporation Securities.
(e) If the Purported Transferee fails to surrender to the Agent the Excess Securities or the
proceeds of a sale thereof, or any Prohibited Distributions received by it, or to otherwise comply
with Section E.3 of this Article IV, within thirty (30) days from the date on which the Corporation
makes a demand pursuant to Section E.(3)(b) of this Article IV, or any written demand with respect
to a deemed disposition pursuant to Section E.3(d) of this Article IV, then the Corporation may
take such actions as it deems necessary or advisable to enforce the provisions hereof, and/or
enjoin or rescind any violation hereof, including the institution of legal or equitable proceedings
to compel such surrender.
7
(f) If any Person shall knowingly violate, or knowingly cause any other Person under control
of such Person (a
Controlled Person
) to violate this Article IV, then that Person and any
such Controlled Person shall be jointly and severally liable for, and shall pay to the
Corporation, such amount as will, after taking account of all taxes imposed with respect to the
receipt or accrual of such amount and all costs incurred by the Corporation as a result of such
violation, put the Corporation in the same financial position as it would have been in had such
violation not occurred.
4.
Amendment of Transfer Restrictions
. Notwithstanding the provisions of Article XII
of the Corporations Restated Certificate of Incorporation, the Corporation may only amend or
repeal any of the provisions set forth in this Section E. by the affirmative vote of the holders of
two-thirds of the shares entitled to vote thereon.
5.
Legends; Compliance
(a) All certificates reflecting Corporation Securities on or after the Effective Time shall,
until the Restriction Release Date, bear a conspicuous legend in substantially the following form:
THE RESTATED CERTIFICATE OF INCORPORATION, AS AMENDED (THE CERTIFICATE OF INCORPORATION), OF
THE CORPORATION CONTAINS RESTRICTIONS PROHIBITING THE TRANSFER (AS DEFINED IN THE CERTIFICATE OF
INCORPORATION) OF STOCK OF THE CORPORATION (INCLUDING THE CREATION OR GRANT OF CERTAIN OPTIONS,
RIGHTS AND WARRANTS) WITHOUT THE PRIOR AUTHORIZATION OF THE BOARD OF DIRECTORS OF THE CORPORATION
(THE BOARD OF DIRECTORS) IF SUCH TRANSFER AFFECTS THE PERCENTAGE OF STOCK OF THE CORPORATION
(WITHIN THE MEANING OF SECTION 382 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE CODE)
AND THE TREASURY REGULATIONS PROMULGATED THEREUNDER) THAT IS TREATED AS OWNED BY A FIVE PERCENT
SHAREHOLDER UNDER THE CODE AND SUCH REGULATIONS. IF THE TRANSFER RESTRICTIONS ARE VIOLATED, THEN
THE TRANSFER WILL BE VOID
AB INITIO
AND THE PURPORTED TRANSFEREE OF THE STOCK WILL BE REQUIRED TO
TRANSFER EXCESS SECURITIES (AS DEFINED IN THE CERTIFICATE OF INCORPORATION) TO THE CORPORATIONS
AGENT. IN THE EVENT OF A TRANSFER WHICH DOES NOT INVOLVE SECURITIES OF THE CORPORATION WITHIN THE
MEANING OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE (SECURITIES) BUT WHICH WOULD
VIOLATE THE TRANSFER RESTRICTIONS, THE PURPORTED TRANSFEREE (OR THE RECORD OWNER) OF THE SECURITIES
WILL BE REQUIRED TO TRANSFER SUFFICIENT SECURITIES PURSUANT TO THE TERMS PROVIDED FOR IN THE
CORPORATIONS CERTIFICATE OF INCORPORATION TO CAUSE THE FIVE PERCENT STOCKHOLDER TO NO LONGER BE IN
VIOLATION OF THE TRANSFER RESTRICTIONS. THE CORPORATION WILL FURNISH WITHOUT CHARGE TO ANY
PROPERLY INTERESTED PERSON A COPY OF THE CERTIFICATE OF INCORPORATION, CONTAINING THE
ABOVE-REFERENCED TRANSFER RESTRICTIONS, UPON WRITTEN REQUEST TO THE CORPORATION AT ITS PRINCIPAL
PLACE OF BUSINESS.
The Board of Directors may also require that any certificates issued by the Corporation
evidencing ownership of shares of Stock that are subject to conditions imposed by the Board of
Directors under Section E.2(b) of this Article IV also bear a conspicuous legend referencing the
applicable restrictions.
(b) The Corporation shall have the power to make appropriate notations upon its stock transfer
records and to instruct any transfer agent, registrar, securities intermediary or depository with
respect to the requirements of this Article IV for any uncertificated Corporation Securities or
Corporation Securities held in an indirect holding system. At the request of the Corporation, or
as a condition to the registration of the Transfer of any Stock, any Person who is a beneficial,
legal or record holder of Stock,
and any proposed transferee of such Stock and any Person controlling, controlled by or under
common control with the proposed transferee of such Stock, shall provide such information as the
Corporation may request from time to time in order to determine compliance with this Article IV or
the status of the Tax Benefits of the Corporation.
8
(c) Nothing contained in this Article IV shall limit the authority of the Board of Directors
of the Corporation to take such other action to the extent permitted by law as it deems necessary
or advisable to preserve the Corporations Tax Benefits. The Board of Directors of the Corporation
shall have the power to determine all matters necessary for determining compliance with this
Article IV, including, without limitation, determining (i) the identification of Five Percent
Shareholders and Restricted Holders, (ii) whether a Transfer or proposed Transfer is a Prohibited
Transfer, (iii) the Percentage Stock Ownership in the Corporation of any Five Percent Shareholders
and Restricted Holders, (iv) whether an instrument or right constitutes a Corporation Security, (v)
the amount (or fair market value) due to a Purported Transferee, (vi) the interpretation of the
provisions of this Article IV, and (vii) any other matters which the Board of Directors deems
relevant. In addition, the Board of Directors may, to the extent permitted by law, from time to
time establish, modify, amend or rescind Bylaws, regulations and procedures of the Corporation not
inconsistent with the express provisions of this Article IV for purposes of determining whether any
Transfer of Stock would jeopardize the Corporations ability to preserve or use the Tax Benefits,
or for the orderly application, administration and implementation of the provisions of this Article
IV. In the case of an ambiguity in the application of any of the provisions of this Article IV,
including any definition used herein, the Board of Directors shall have the power to determine the
application of such provisions with respect to any situation based on its reasonable belief,
understanding or knowledge of the circumstances. In the event that this Article IV requires an
action by the Board of Directors but fails to provide specific guidance with respect to such
action, the Board of Directors shall have the power to determine the action to be taken so long as
such action is not contrary to the provisions of this Article IV. All actions, calculations,
interpretations and determinations that are done or made by the Board of Directors in good faith
pursuant to this Article IV shall be final, conclusive and binding on the Corporation, the Agent,
and all other parties to a Transfer; provided, however, that the Board of Directors may delegate
all or any portion of its duties and powers under this Article IV to a committee of the Board of
Directors as it deems advisable or necessary. All references in this Article IV to the Code and
the regulations promulgated thereunder shall be deemed to include any successor provision.
(d) To the fullest extent permitted by law, the Corporation and the members of the Board of
Directors shall be fully protected in relying in good faith upon the information, opinions, reports
or statements of the chief executive officer, the chief financial officer or the chief accounting
officer of the Corporation or of the Corporations legal counsel, independent auditors, transfer
agent, investment bankers or other employees and agents in making the determinations and findings
contemplated by this Article IV, and the members of the Board of Directors shall not be responsible
for any good faith errors made in connection therewith.
9
(e) Nothing contained in this Article IV shall be construed to give any Person other than the
Corporation or the Agent any legal or equitable right, remedy or claim under this Article IV. This
Article IV shall be for the sole and exclusive benefit of the Corporation and the Agent.
(f) With regard to any power, restriction, remedy or right provided herein or otherwise
available to the Corporation or the Agent provided under this Article IV, (i) no waiver will be
effective unless expressly contained in writing signed by the waiving party; and (ii) no waiver
alteration, modification or impairment will be implied by reason of any previous waiver, extension
of time, delay or omission in exercise, or other indulgence.
(g) If any provision of this Article IV or the application of any such provision to any Person
or under any circumstance shall be held invalid, illegal or unenforceable in any respect by a court
of competent jurisdiction, such invalidity, illegality or unenforceability shall not affect any
other provision of this Article IV.
[SIGNATURE PAGE FOLLOWS]
10
IN WITNESS WHEREOF, this Certificate of Amendment to the Corporations Restated Certificate of
Incorporation has been executed by a duly authorized officer of the corporation on this the 4th day
of May 2010.
|
|
|
|
|
Heska Corporation
|
|
|
By:
|
/s/ Jason Napolitano
|
|
|
|
Name:
|
Jason Napolitano
|
|
|
|
Title:
|
Executive Vice President, CFO and Secretary
|
|
|
11
Exhibit 3(iii)
CERTIFICATE OF AMENDMENT
TO THE
RESTATED CERTIFICATE OF INCORPORATION, AS AMENDED,
OF
HESKA CORPORATION
Heska Corporation (the
Corporation
), a corporation organized and existing under and
by virtue of the General Corporation Law of the State of Delaware (the
DGCL
), does hereby
certify:
1. This Certificate of Amendment to the Corporations Restated Certificate of Incorporation,
as amended (the
Certificate
), has been duly adopted in accordance with the provisions of
Section 242 of the DGCL.
2. This Certificate of Amendment to the Certificate amends Article IV of the Certificate by
deleting the existing Paragraph A of Article IV in its entirety and substituting therefore a new
Paragraph A of Article IV, to read in its entirety as follows:
A.
Authorized Stock
. The total authorized stock of the Corporation, which shall be
an aggregate of 17,500,000 shares, shall consist of three classes: (i) a first class
consisting of 7,500,000 shares of Common Stock having a par value of $0.01 per share
(the
Original Common Stock
); (ii) a second class consisting of 7,500,000
shares of Public Common Stock having a par value of $0.01 per share (the
Common
Stock
or
NOL Restricted Common Stock
and, together with the Original
Common Stock, the
Common Stock Securities
); and (iii) a third class
consisting of 2,500,000 shares of Preferred Stock having a par value of $0.01 per
share (the
Preferred Stock
).
Effective as of 12:01 a.m., Eastern Time, on December 30, 2010 (the Effective
Time), (i) each ten shares of Original Common Stock, issued and outstanding or held
by the Corporation as treasury stock, if any, shall, automatically and without any
action on the part of the respective holders thereof, be combined and converted into
one share of Original Common Stock, and (ii) each ten shares of Common Stock, issued
and outstanding or held by the Corporation as treasury stock, if any, shall,
automatically and without any action on the part of the respective holders thereof,
be combined and converted into one share of Common Stock. No fractional shares shall
be issued and, in lieu thereof, the holder shall receive a cash payment equal to the
fair value, as determined by the Board of Directors, of such fractional shares as of
the Effective Time.
3. This Certificate of Amendment shall become effective as of 12:01 a.m., Eastern Time, on
December 30, 2010.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment to be executed by
a duly authorized officer on this 29th day of December, 2010.
|
|
|
|
|
|
Heska Corporation
|
|
|
By:
|
/s/ Jason A. Napolitano
|
|
|
|
Name:
|
Jason A. Napolitano
|
|
|
|
Title:
|
Executive Vice President and Chief Financial Officer
|
|
Exhibit 10.1
HESKA CORPORATION
1997 STOCK INCENTIVE PLAN
(AS AMENDED MARCH 6, 2007 AND MAY 5, 2009)
TABLE OF CONTENTS
|
|
|
|
|
|
|
Page
|
|
|
|
|
|
|
ARTICLE 1. INTRODUCTION
|
|
|
3
|
|
|
|
|
|
|
ARTICLE 2. ADMINISTRATION
|
|
|
3
|
|
2.1 Committee Composition
|
|
|
3
|
|
2.2 Committee Responsibilities
|
|
|
3
|
|
|
|
|
|
|
ARTICLE 3. SHARES AVAILABLE FOR GRANTS
|
|
|
3
|
|
3.1 Basic Limitation
|
|
|
3
|
|
3.2 Annual Increase in Shares
|
|
|
4
|
|
3.3 Additional Shares
|
|
|
4
|
|
|
|
|
|
|
ARTICLE 4. ELIGIBILITY
|
|
|
4
|
|
4.1 Nonstatutory Stock Options and Restricted Shares
|
|
|
4
|
|
4.2 Incentive Stock Options
|
|
|
4
|
|
|
|
|
|
|
ARTICLE 5. OPTIONS
|
|
|
4
|
|
5.1 Stock Option Agreement
|
|
|
4
|
|
5.2 Number of Shares
|
|
|
4
|
|
5.3 Exercise Price
|
|
|
4
|
|
5.4 Exercisability and Term
|
|
|
5
|
|
5.5 Effect of Change in Control
|
|
|
5
|
|
5.6 Modification or Assumption of Options
|
|
|
5
|
|
5.7 Buyout Provisions
|
|
|
5
|
|
|
|
|
|
|
ARTICLE 6. PAYMENT FOR OPTION SHARES
|
|
|
5
|
|
6.1 General Rule
|
|
|
5
|
|
6.2 Surrender of Stock
|
|
|
6
|
|
6.3 Exercise/Sale
|
|
|
6
|
|
6.4 Exercise/Pledge
|
|
|
6
|
|
6.5 Promissory Note
|
|
|
6
|
|
6.6 Other Forms of Payment
|
|
|
6
|
|
|
|
|
|
|
ARTICLE 7. [Reserved]
|
|
|
6
|
|
|
|
|
|
|
ARTICLE 8. RESTRICTED SHARES
|
|
|
6
|
|
8.1 Time, Amount and Form of Awards
|
|
|
6
|
|
8.2 Payment for Awards
|
|
|
6
|
|
8.3 Vesting Conditions
|
|
|
7
|
|
8.4 Voting and Dividend Rights
|
|
|
7
|
|
|
|
|
|
|
ARTICLE 9. PROTECTION AGAINST DILUTION
|
|
|
7
|
|
9.1 Adjustments
|
|
|
7
|
|
9.2 Dissolution or Liquidation
|
|
|
7
|
|
9.3 Reorganizations
|
|
|
7
|
|
1
|
|
|
|
|
|
|
Page
|
|
|
|
|
|
|
ARTICLE 10. AWARDS UNDER OTHER PLANS
|
|
|
8
|
|
|
|
|
|
|
ARTICLE 11. LIMITATION ON RIGHTS
|
|
|
8
|
|
11.1 Retention Rights
|
|
|
8
|
|
11.2 Stockholders Rights
|
|
|
8
|
|
11.3 Regulatory Requirements
|
|
|
8
|
|
|
|
|
|
|
ARTICLE 12. WITHHOLDING TAXES
|
|
|
8
|
|
12.1 General
|
|
|
8
|
|
12.2 Share Withholding
|
|
|
8
|
|
|
|
|
|
|
ARTICLE 13. FUTURE OF THE PLAN
|
|
|
8
|
|
13.1 Term of the Plan
|
|
|
8
|
|
13.2 Amendment or Termination
|
|
|
9
|
|
|
|
|
|
|
ARTICLE 14. DEFINITIONS
|
|
|
9
|
|
|
|
|
|
|
ARTICLE 15. EXECUTION
|
|
|
11
|
|
2
HESKA CORPORATION
1997 STOCK INCENTIVE PLAN
ARTICLE 1. INTRODUCTION
.
The Plan was adopted by the Board effective March 15, 1997. The purpose of the Plan is to
promote the long-term success of the Company and the creation of stockholder value by (a)
encouraging Employees, Outside Directors and Consultants to focus on critical long-range
objectives, (b) encouraging the attraction and retention of Employees, Outside Directors and
Consultants with exceptional qualifications and (c) linking Employees, Outside Directors and
Consultants directly to stockholder interests through increased stock ownership. The Plan seeks to
achieve this purpose by providing for Awards in the form of Restricted Shares or Options (which may
constitute incentive stock options or nonstatutory stock options).
The Plan shall be governed by, and construed in accordance with, the laws of the State of
Colorado (except their choice-of-law provisions).
ARTICLE 2. ADMINISTRATION
.
2.1 Committee Composition
. The Plan shall be administered by the Committee. The Committee
shall consist exclusively of two or more directors of the Company, who shall be appointed by
the Board. In addition, the composition of the Committee shall satisfy:
(a) Such requirements as the Securities and Exchange Commission may establish for
administrators acting under plans intended to qualify for exemption under Rule 16b-3
(or its successor) under the Exchange Act; and
(b) Such requirements as the Internal Revenue Service may establish for outside
directors acting under plans intended to qualify for exemption under section
162(m)(4)(C) of the Code.
The Board may also appoint one or more separate committees of the Board, each composed of one or
more directors of the Company who need not satisfy the foregoing requirements, who may administer
the Plan with respect to Employees and Consultants who are not considered officers or directors of
the Company under section 16 of the Exchange Act, may grant Awards under the Plan to such Employees
and Consultants and may determine all terms of such Awards.
2.2 Committee Responsibilities
. The Committee shall (a) select the Employees, Outside
Directors and Consultants who are to receive Awards under the Plan, (b) determine the type,
number, vesting requirements and other features and conditions of such Awards, (c) interpret
the Plan and (d) make all other decisions relating to the operation of the Plan. The
Committee may adopt such rules or guidelines as it deems appropriate to implement the Plan.
The Committees determinations under the Plan shall be final and binding on all persons.
ARTICLE 3. SHARES AVAILABLE FOR GRANTS.
3.1 Basic Limitation
. Common Shares issued pursuant to the Plan may be authorized but
unissued shares or treasury shares. The aggregate number of Options and Restricted Shares
awarded under the Plan shall not exceed (a) 1,350,000 plus (b) the aggregate number of
Common Shares remaining available for grants under the Predecessor Plans on March 15, 1997,
plus (c) the additional Common Shares described in Sections 3.2 and 3.3 less (d) 250,000.
No additional grants shall be made under the Predecessor Plans after March 15, 1997. The
limitation of this Section 3.1 shall be subject to adjustment pursuant to Article 9.
3
3.2 Annual Increase in Shares
. As of January 1 of each year, commencing with the year 1998
and continuing through January 1, 2007, the aggregate number of Options and Restricted
Shares that may be awarded under the Plan shall be increased by a number of Common Shares
equal to the lesser of (a) 5% of the total number of Common Shares outstanding as of the
next preceding December 31 or (b) 1,500,000. After the annual increase on January 1, 2007,
there shall be no further annual increases under the Plan unless and until stockholder
approval of such increase has been obtained.
3.3 Additional Shares
. If Options granted under this Plan or under the Predecessor Plans
are forfeited or terminate for any other reason before being exercised, then the
corresponding Common Shares shall become available for the grant of Options and Restricted
Shares under this Plan. If Restricted Shares are forfeited, then the corresponding Common
Shares shall again become available for the grant of NQOs and Restricted Shares under the
Plan. The aggregate number of Common Shares that may be issued under the Plan upon the
exercise of ISOs shall not be increased when Restricted Shares are forfeited.
ARTICLE 4. ELIGIBILITY.
4.1 Nonstatutory Stock Options and Restricted Shares
. Only Employees, Outside Directors and
Consultants shall be eligible for the grant of NQOs and Restricted Shares.
4.2 Incentive Stock Options.
Only Employees who are common-law employees of the Company, a
Parent or a Subsidiary shall be eligible for the grant of ISOs. In addition, an Employee
who owns more than 10% of the total combined voting power of all classes of outstanding
stock of the Company or any of its Parents or Subsidiaries shall not be eligible for the
grant of an IS0 unless the requirements set forth in section 422(c)(6) of the Code are
satisfied.
ARTICLE 5. OPTIONS.
5.1 Stock Option Agreement
. Each grant of an Option under the Plan shall be evidenced by a
Stock Option Agreement between the Optionee and the Company. Such Option shall be subject
to all applicable terms of the Plan and may be subject to any other terms that are not
inconsistent with the Plan. The Stock Option Agreement shall specify whether the Option is
an IS0 or an NQO. The provisions of the various Stock Option Agreements entered into under
the Plan need not be identical. Options may be granted in consideration of a cash payment
or in consideration of a reduction in the Optionees other compensation. A Stock Option
Agreement may provide that a new Option will be granted automatically to the Optionee when
he or she exercises a prior Option and pays the Exercise Price in the form described in
Section 6.2.
5.2 Number of Shares
. Each Stock Option Agreement shall specify the number of Common Shares
subject to the Option and shall provide for the adjustment of such number in accordance with
Article 9. Options granted to any Optionee in a single fiscal year of the Company shall not
cover more than 500,000 Common Shares, except that Options granted to a new Employee in the
fiscal year of the Company in which his or her service as an Employee first commences shall
not cover more than one million Common Shares. The limitations set forth in the preceding
sentence shall be subject to adjustment in accordance with Article 9.
5.3 Exercise Price
. Each Stock Option Agreement shall specify the Exercise Price; provided
that the Exercise Price under an IS0 shall in no event be less than 100% of the Fair Market
Value of a Common Share on the date of grant and the Exercise Price under an NQO shall in no
event be less than 85% of the Fair Market Value of a Common Share on the date of grant. In
the case of an NQO, a Stock Option Agreement may specify an Exercise Price that varies in
accordance with a predetermined formula while the NQO is outstanding.
4
5.4 Exercisability and Term
. Each Stock Option Agreement shall specify the date when all or
any installment of the Option is to become exercisable. The Stock Option Agreement shall
also specify the term of the Option; provided that the term of an IS0 shall in no event
exceed 10 years from the date of grant. A Stock Option Agreement may provide for
accelerated exercisability in the event of the Optionees death, disability or retirement or
other events and may provide for expiration prior to the end of its term in the event of the
termination of the Optionees service. NQOs may also be awarded in combination with
Restricted Shares, and such an Award may provide that the NQOs will not be exercisable
unless the related Restricted Shares are forfeited.
5.5 Effect of Change in Control.
The Committee may determine, at the time of granting an
Option or thereafter, that such Option shall become exercisable as to all or part of the
Common Shares subject to such Option in the event that a Change in Control occurs with
respect to the Company, subject to the following limitations:
(a) In the case of an ISO, the acceleration of exercisability shall not occur without
the Optionees written consent.
(b) If the Company and the other party to the transaction constituting a Change in
Control agree that such transaction is to be treated as a pooling of interests for
financial reporting purposes, and if such transaction in fact is so treated, then the
acceleration of exercisability shall not occur to the extent that the surviving
entitys independent public accountants determine in good faith that such
acceleration would preclude the use of pooling of interests accounting.
5.6 Modification or Assumption of Options.
Within the limitations of the Plan, the Committee
may modify, extend or assume outstanding options or may accept the cancellation of
outstanding options (whether granted by the Company or by another issuer) in return for the
grant of new options for the same or a different number of shares and at the same or a
different exercise price. The foregoing notwithstanding, no modification of an Option
shall, without the consent of the Optionee, alter or impair his or her rights or obligations
under such Option.
5.7 Buyout Provisions
. The Committee may at any time (a) offer to buy out for a payment in
cash or cash equivalents an Option previously granted or (b) authorize an Optionee to elect
to cash out an Option previously granted, in either case at such time and based upon such
terms and conditions as the Committee shall establish.
ARTICLE 6. PAYMENT FOR OPTION SHARES
.
6.1 General Rule
. The entire Exercise Price of Common Shares issued upon exercise of Options
shall be payable in cash or cash equivalents at the time when such Common Shares are
purchased, except as follows:
(a) In the case of an IS0 granted under the Plan, payment shall be made only pursuant
to the express provisions of the applicable Stock Option Agreement. The Stock Option
Agreement may specify that payment may be made in any form(s) described in this
Article 6.
(b) In the case of an NQO, the Committee may at any time accept payment in any
form(s) described in this Article 6.
5
6.2 Surrender of Stock
. To the extent that this Section 6.2 is applicable, all or any part
of the Exercise Price may be paid by surrendering, Common Shares that are already owned by
the Optionee. Such Common Shares shall be valued at their Fair Market Value on the date
when the new Common Shares are purchased under the Plan. The Optionee shall not surrender,
Common Shares in payment of the Exercise Price if such action would cause the Company to
recognize compensation expense (or additional compensation expense) with respect to the
Option for financial reporting purposes.
6.3 Exercise/Sale
. To the extent that this Section 6.3 is applicable, all or any part of
the Exercise Price and any withholding taxes may be paid by delivering (on a form prescribed
by the Company) an irrevocable direction to a securities broker approved by the Company to
sell all or part of the Common Shares being purchased under the Plan and to deliver all or
part of the sales proceeds to the Company.
6.4 Exercise/Pledge
. To the extent that this Section 6.4 is applicable, all or any part of
the Exercise Price and any withholding taxes may be paid by delivering (on a form prescribed
by the Company) an irrevocable direction to pledge all or part of the Common Shares being
purchased under the Plan to a securities broker or lender approved by the Company, as
security for a loan, and to deliver all or part of the loan proceeds to the Company.
6.5 Promissory Note
. To the extent that this Section 6.5 is applicable, all or any part of
the Exercise Price and any withholding taxes may be paid by delivering (on a form prescribed
by the Company) a full-recourse promissory note; provided that the par value of the Common
Shares being purchased under the Plan shall be paid in cash or cash equivalents.
6.6 Other Forms of Payment.
To the extent that this Section 6.6 is applicable, all or any
part of the Exercise Price and any withholding taxes may be paid in any other form that is
consistent with applicable laws, regulations and rules.
ARTICLE 7. [Reserved]
ARTICLE 8. RESTRICTED SHARES.
8.1 Time, Amount and Form of Awards
. Awards under the Plan may be granted in the form of
Restricted Shares. Restricted Shares may also be awarded in combination with NQOs, and such
an Award may provide that the Restricted Shares will be forfeited in the event that the
related NQOs are exercised.
8.2 Payment for Awards
. To the extent that an Award is granted in the form of newly issued
Restricted Shares, the Award recipient, as a condition to the grant of such Award, shall be
required to pay the Company in cash or cash equivalents an amount equal to the par value of
such Restricted Shares. To the extent that an Award is granted in the form of Restricted
Shares from the Companys treasury, no cash consideration shall be required of the Award
recipients. Any amount not paid in cash may be paid with a full recourse promissory note.
6
8.3 Vesting Conditions
. Each Award of Restricted Shares may or may not be subject to
vesting. Vesting shall occur, in full or in installments, upon satisfaction of the
conditions specified in the Stock Award Agreement. A Stock Award Agreement may provide for
accelerated vesting in the event of the Participants death, disability or retirement or
other events. The Committee may determine, at the time of granting Restricted Shares or
thereafter, that all or part of such Restricted Shares shall become vested in the event that
a Change in Control occurs with respect to the Company, except as provided in the next
following sentence. If the Company and the other party to the transaction constituting a
Change in Control agree that such transaction is to be treated as a pooling of interests
for financial reporting purposes, and if such transaction in fact is so treated, then the
acceleration of vesting shall not occur to the extent that the surviving entitys
independent public accountants determine in good faith that such acceleration would preclude
the use of pooling of interests accounting.
8.4 Voting and Dividend Rights
. The holders of Restricted Shares awarded under the Plan
shall have the same voting, dividend and other rights as the Companys other stockholders.
A Stock Award Agreement, however, may require that the holders of Restricted Shares invest
any cash dividends received in additional Restricted Shares. Such additional Restricted
Shares shall be subject to the same conditions and restrictions as the Award with respect to
which the dividends were paid.
ARTICLE 9. PROTECTION AGAINST DILUTION.
9.1 Adjustments
. In the event of a subdivision of the outstanding Common Shares, a
declaration of a dividend payable in Common Shares, a declaration of a dividend payable in a
form other than Common Shares in an amount that has a material effect on the price of Common
Shares, a combination or consolidation of the outstanding Common Shares (by reclassification
or otherwise) into a lesser number of Common Shares, a recapitalization, a spin-off or a
similar occurrence, the Committee shall make such adjustments as it, in its sole discretion,
deems appropriate in one or more of (a) the number of Options and Restricted Shares
available for future Awards under Article 3, (b) the limitations set forth in Section 5.2,
(c) the number of Common Shares covered by each outstanding Option or (d) the Exercise Price
under each outstanding Option. Except as provided in this Article 9, a Participant shall
have no rights by reason of any issue by the Company of stock of any class or securities
convertible into stock of any class, any subdivision or consolidation of shares of stock of
any class, the payment of any stock dividend or any other increase or decrease in the number
of shares of stock of any class.
9.2 Dissolution or Liquidation
. To the extent not previously exercised, Options shall
terminate immediately prior to the dissolution or liquidation of the Company.
9.3 Reorganizations
. In the event that the Company is a party to a merger or other
reorganization, outstanding Options and Restricted Shares shall be subject to the agreement
of merger or reorganization. Such agreement may provide, without limitation, for the
continuation of outstanding Awards by the Company (if the Company is a surviving
corporation), for their assumption by the surviving corporation or its parent or subsidiary,
for the substitution by the surviving corporation or its parent or subsidiary of its own
awards for such Awards, for accelerated vesting and accelerated expiration, or for
settlement in cash or cash equivalents.
7
ARTICLE 10. AWARDS UNDER OTHER PLANS.
The Company may grant awards under other plans or programs. Such awards may be settled in the
form of Common Shares issued under this Plan. Such Common Shares shall be treated for all purposes
under the Plan like Restricted Shares and shall, when issued, reduce the number of Common Shares
available under Article 3.
ARTICLE 11. LIMITATION ON RIGHTS.
11.1 Retention Rights
. Neither the Plan nor any Award granted under the Plan shall be
deemed to give any individual a right to remain an Employee, Outside Director or Consultant.
The Company and its Parents, Subsidiaries and Affiliates reserve the right to terminate the
service of any Employee, Outside Director or Consultant at any time, with or without cause,
subject to applicable laws, the Companys certificate of incorporation and bylaws and a
written employment agreement (if any).
11.2 Stockholders Rights
. A Participant shall have no dividend rights, voting rights or
other rights as a stockholder with respect to any Common Shares covered by his or her Award
prior to the time when a stock certificate for such Common Shares is issued or, in the case
of an Option, the time when he or she becomes entitled to receive such Common Shares by
filing a notice of exercise and paying the Exercise Price. No adjustment shall be made for
cash dividends or other rights for which the record date is prior to such time, except as
expressly provided in the Plan.
11.3 Regulatory Requirements.
Any other provision of the Plan notwithstanding, the
obligation of the Company to issue Common Shares under the Plan shall be subject to all
applicable laws, rules and regulations and such approval by any regulatory body as may be
required. The Company reserves the right to restrict, in whole or in part, the delivery of
Common Shares pursuant to any Award prior to the satisfaction of all legal requirements
relating to the issuance of such Common Shares, to their registration, qualification or
listing or to an exemption from registration, qualification or listing.
ARTICLE 12. WITHHOLDING TAXES.
12.1 General
. To the extent required by applicable federal, state, local or foreign law, a
Participant or his or her successor shall make arrangements satisfactory to the Company for
the satisfaction of any withholding tax obligations that arise in connection with the Plan.
The Company shall not be required to issue any Common Shares or make any cash payment under
the Plan until such obligations are satisfied.
12.2 Share Withholding
. The Committee may permit a Participant to satisfy all or part of his
or her withholding or income tax obligations by having the Company withhold all or a portion
of any Common Shares that otherwise would be issued to him or her or by surrendering all or
a portion of any Common Shares that he or she previously acquired. Such Common Shares shall
be valued at their Fair Market Value on the date when taxes otherwise would be withheld in
cash.
ARTICLE 13. FUTURE OF THE PLAN.
13.1 Term of the Plan
. The Plan, as set forth herein, shall become effective on March 14,
1997. The Plan shall remain in effect until it is terminated under Section 13.2, except
that no ISOs shall be granted after May 4, 2019.
8
13.2 Amendment or Termination.
The Board may, at any time and for any reason, amend or
terminate the Plan. An amendment of the Plan shall be subject to the approval of the
Companys stockholders only to the extent required by applicable laws, regulations or rules.
No Awards shall be granted under the Plan after the termination thereof. The termination of
the Plan, or any amendment thereof, shall not affect any Award previously granted under the
Plan.
ARTICLE 14. DEFINITIONS.
14.1
Affiliate
means any entity other than a Subsidiary, if the Company and/or one or more
Subsidiaries own not less than 50% of such entity.
14.2
Award
means any award of an Option or a Restricted Share under the Plan.
14.3
Board
means the Companys Board of Directors, as constituted from time to time.
14.4
Change in Control
shall mean:
(a) The consummation of a merger or consolidation of the Company with or into another
entity or any other corporate reorganization, if more than 50% of the combined voting
power of the continuing or surviving entitys securities outstanding immediately
after such merger, consolidation or other reorganization is owned by persons who were
not stockholders of the Company immediately prior to such merger, consolidation or
other reorganization;
(b) The sale, transfer or other disposition of all or substantially all of the
Companys assets;
(c) A change in the composition of the Board, a result of which fewer than 50% of the
incumbent directors are directors who either (i) had been directors of the Company on
the date 24 months prior to the date of the event that may constitute a Change in
Control (the original directors) or (ii) were elected, or nominated for election,
to the Board with the affirmative votes of at least a majority of the aggregate of
the original directors who were still
in office at the time of the election or nomination and the directors whose election
or nomination was previously so approved; or
(d) Any transaction as a result of which any person is the beneficial owner (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities
of the Company representing at least 30% of the total voting power represented by the
Companys then outstanding voting securities. For purposes of this Paragraph (d),
the term person shall have the same meaning as when used in sections 13(d) and
14(d) of the Exchange Act but shall exclude (i) any person, or person affiliated with
said person, who, on March 15, 1997, is the beneficial owner of securities of the
Company representing at least 20% of the total voting power represented by the
Companys then outstanding voting securities (11,607,764), (ii) a trustee or other
fiduciary holding securities under an employee benefit plan of the Company or of a
Parent or Subsidiary and (iii) a corporation owned directly or indirectly by the
stockholders of the Company in substantially the same proportions as their ownership
of the common stock of the Company.
A transaction shall not constitute a Change in Control if its sole purpose is to change the state
of the Companys incorporation or to create a holding company that will be owned in substantially
the same proportions by the persons who held the Companys securities immediately before such
transaction.
9
14.5
Code
means the Internal Revenue Code of 1986, as amended.
14.6
Committee
means a committee of the Board, as described in Article 2.
14.7
Common Share
means one share of the common stock of the Company.
14.8
Company
means either (a) Heska Corporation, a California corporation (prior to the
formation of Heska Corporation, a Delaware corporation), or (b) Heska Corporation, a
Delaware corporation (following its formation).
14.9
Consultant
means a consultant or adviser who provides bona fide services to the
Company, a Parent, a Subsidiary or an Affiliate as an independent contractor. Service as a
Consultant shall be considered employment for all purposes of the Plan, except as provided
in Section 4.2.
14.10
Employee
means a common-law employee of the Company, a Parent, a Subsidiary or an
Affiliate.
14.11
Exchange Act
means the Securities Exchange Act of 1934, as amended.
14.12
Exercise Price
means the amount for which one Common Share may be purchased upon
exercise of such Option, as specified in the applicable Stock Option Agreement.
14.13
Fair Market Value
means the market price of Common Shares, determined by the
Committee in good faith on such basis as it deems appropriate. Whenever possible, the
determination of Fair Market Value by the Committee shall be based on the prices reported in
The Wall Street Journal. Such determination shall be conclusive and binding on all persons.
14.14
ISO
means an incentive stock option described in section 422(b) of the Code.
14.15
NQO
means a stock option not described in sections 422 or 423 of the Code.
14.16
Option
means an IS0 or NQO granted under the Plan and entitling the holder to
purchase Common Shares.
14.17
Optionee
means an individual or estate who holds an Option.
14.18
Outside Director
shall mean a member of the Board who is not an Employee. Service
as an Outside Director shall be considered employment for all purposes of the Plan, except
as provided in Section 4.2.
14.19
Parent
means any corporation (other than the Company) in an unbroken chain of
corporations ending with the Company, if each of the corporations other than the Company
owns stock possessing 50% or more of the total combined voting power of all classes of stock
in one of the other corporations in such chain. A corporation that attains the status of a
Parent on a date after the adoption of the Plan shall be considered a Parent commencing as
of such date.
14.20
Participant
means an individual or estate who holds an Award.
14.21
Plan
means this Heska Corporation 1997 Stock Incentive Plan, as amended from time to
time.
14.22
Predecessor Plans
means (a) the 1988 Heska Corporation Stock Plan and (b) the Heska
Corporation 1994 Key Executive Stock Plan.
10
14.23
Restricted Share
means a Common Share awarded under the Plan.
14.24
Stock Award Agreement
means the agreement between the Company and the recipient of a
Restricted Share that contains the terms, conditions and restrictions pertaining to such
Restricted Share.
14.25
Stock Option Agreement
means the agreement between the Company and an Optionee that
contains the terms, conditions and restrictions pertaining to his or her Option.
14.26
Subsidiary
means any corporation (other than the Company) in an unbroken chain of
corporations beginning with the Company, if each of the corporations other than the last
corporation in the unbroken chain owns stock possessing 50% or more of the total combined
voting power of all classes of stock in one of the other corporations in such chain. A
corporation that attains the status of a Subsidiary on a date after the adoption of the Plan
shall be considered a Subsidiary commencing as of such date.
ARTICLE 15. EXECUTION.
To record the adoption of the Plan by the Board, the Company has caused its duly authorized
officer to execute this document in the name of the Company.
|
|
|
|
|
|
HESKA CORPORATION
|
|
|
By:
|
/s/ Jason A. Napolitano
|
|
|
|
Executive Vice President and
|
|
|
|
Chief Financial Officer
|
|
11
Exhibit 10.8
Heska Corporation
2011 Management Incentive Plan
1.
|
|
The Category Percentages for the 2011 MIP are as follows:
|
|
|
|
Title
|
|
Heska MIP
|
Chief Executive Officer
|
|
50.0% of base pay
|
President
|
|
35.0% of base pay
|
Chief Financial Officer
|
|
35.0% of base pay
|
Executive Vice Presidents
|
|
35.0% of base pay
|
Vice Presidents
|
|
35.0% of base pay
|
Managing Directors
|
|
25.0% of base pay
|
Directors
|
|
25.0% of base pay
|
2.
|
|
The Plan Allocation for the 2011 MIP is as follows:
|
|
|
|
50% on overall achievement of the Financial Performance Metric (FPM) and
50% on Strategic Growth Initiatives (SGI).
|
|
3.
|
|
The Key Parameters for the 2011 MIP are as follows:
|
|
|
|
Pre-MIP Operating Income 50%
|
|
|
|
|
Strategic Growth Initiative Milestone Achievement 50%, as defined below
|
|
|
|
Milestone A: Execute contract by end of Q2 2011
|
|
|
|
Milestone B1: Execute contract by end of Q2 2011
|
|
|
|
|
Milestone B2: Launch first product by end of Q3 2011
|
|
|
|
Milestone C1: Execute agreement by end of Q3 2011
|
|
|
|
|
Milestone C2: Formalize alliance by end of Q3 2011
|
4.
|
|
The Payout Structure for the 2011 MIP is as follows:
|
|
|
|
For FPM of Pre-MIP Operating Income see the attached table
|
|
|
|
|
For SGI, achievement of milestones and Pre-MIP Operating Income of $1,500,000,
see the attached table. Each milestone is worth 20% of the potential MIP payout
for SGI
|
|
|
|
Payouts for each parameter will be calculated independent of the success or
failure of the other parameter
|
|
|
|
|
Maximum MIP Payout for Proposed 2011 MIP for the financial metric parameter is
paid at $5,562,500 of Pre-MIP Operating Income and 100% achievement of the five
milestones for SGI
|
|
|
|
|
For example, 100% achievement of the SGI milestones and $1,300,000 of Pre-MIP
Operating Income would pay no MIP for either category. Achievement of 60% of the
SGI milestones and $3,177,072 of Pre-MIP Operating Income would pay MIP of $315,000
for SGI and $315,000 for FPM
|
|
|
|
|
Any MIP payment in excess of the Maximum MIP Payout shall be at the sole and
absolute discretion of the Compensation Committee
|
Heska Corporation
2011 MIP Payout Table
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FPM
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
Operating
|
|
|
MIP
|
|
|
50% FPM
|
|
|
|
|
|
|
|
Income
|
|
Income
|
|
|
Payout
|
|
|
MIP
|
|
|
SGI Payout
|
|
|
Total Payout
|
|
Pre-MIP
|
|
Post-MIP
|
|
|
%
|
|
|
Amount
|
|
|
Amount*
|
|
|
Amount
|
|
1,500,000
|
|
|
975,000
|
|
|
|
0
|
%
|
|
|
|
|
|
|
525,000
|
|
|
|
525,000
|
|
1,779,512
|
|
|
1,202,012
|
|
|
|
10
|
%
|
|
|
52,500
|
|
|
|
525,000
|
|
|
|
577,500
|
|
2,059,024
|
|
|
1,429,024
|
|
|
|
20
|
%
|
|
|
105,000
|
|
|
|
525,000
|
|
|
|
630,000
|
|
2,338,536
|
|
|
1,656,036
|
|
|
|
30
|
%
|
|
|
157,500
|
|
|
|
525,000
|
|
|
|
682,500
|
|
2,618,048
|
|
|
1,883,048
|
|
|
|
40
|
%
|
|
|
210,000
|
|
|
|
525,000
|
|
|
|
735,000
|
|
2,897,560
|
|
|
2,110,060
|
|
|
|
50
|
%
|
|
|
262,500
|
|
|
|
525,000
|
|
|
|
787,500
|
|
3,177,072
|
|
|
2,337,072
|
|
|
|
60
|
%
|
|
|
315,000
|
|
|
|
525,000
|
|
|
|
840,000
|
|
3,456,584
|
|
|
2,564,084
|
|
|
|
70
|
%
|
|
|
367,500
|
|
|
|
525,000
|
|
|
|
892,500
|
|
3,736,096
|
|
|
2,791,096
|
|
|
|
80
|
%
|
|
|
420,000
|
|
|
|
525,000
|
|
|
|
945,000
|
|
4,015,608
|
|
|
3,018,108
|
|
|
|
90
|
%
|
|
|
472,500
|
|
|
|
525,000
|
|
|
|
997,500
|
|
4,295,125
|
|
|
3,245,125
|
|
|
|
100
|
%
|
|
|
525,000
|
|
|
|
525,000
|
|
|
|
1,050,000
|
|
4,548,600
|
|
|
3,446,100
|
|
|
|
110
|
%
|
|
|
577,500
|
|
|
|
525,000
|
|
|
|
1,102,500
|
|
4,802,075
|
|
|
3,647,075
|
|
|
|
120
|
%
|
|
|
630,000
|
|
|
|
525,000
|
|
|
|
1,155,000
|
|
5,055,550
|
|
|
3,848,050
|
|
|
|
130
|
%
|
|
|
682,500
|
|
|
|
525,000
|
|
|
|
1,207,500
|
|
5,309,025
|
|
|
4,049,025
|
|
|
|
140
|
%
|
|
|
735,000
|
|
|
|
525,000
|
|
|
|
1,260,000
|
|
5,562,500
|
|
|
4,250,000
|
|
|
|
150
|
%
|
|
|
787,500
|
|
|
|
525,000
|
|
|
|
1,312,500
|
|
5,562,500
|
+
|
|
4,250,000
|
|
|
Capped
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Assumes 100% achievement of milestones.
|
Exhibit 10.9
HESKA CORPORATION
DIRECTOR COMPENSATION POLICY
Non-employee directors of Heska Corporation, a Delaware corporation (the Company) shall
receive the following compensation for their service as a member of the Board of Directors (the
Board) of the Company:
Cash Compensation
Annual Retainer for Board Service
Effective January 1, 2010, each non-employee director shall be entitled to an annual cash
retainer in the amount of $30,000 (the Annual Retainer). The Company shall pay the Annual
Retainer on a quarterly basis in advance on the first day of the calendar quarter, subject to the
non-employee directors continued service to the Company as a non-employee director on such date.
Lead Director Retainer
Commencing July 1, 2010, a non-employee director who serves as the Lead Director of the Board
shall be entitled to an annual cash retainer in the amount of $10,000 (the Lead Director
Retainer). The Company shall pay the Lead Director Retainer on a quarterly basis in advance on
the first day of the calendar quarter, subject to the non-employee directors continued service to
the Company as Lead Director of the Board on such date.
Board Committee Chair Retainer
Commencing July 1, 2009, a non-employee director who serves as the Chair of the Audit,
Compensation or Corporate Governance committee of the Board shall be entitled to an annual cash
retainer in the amount of $2,500 (the Chair Retainer). The Company shall pay the Chair Retainer
on a quarterly basis in advance on the first day of the calendar quarter, subject to the
non-employee directors continued service to the Company as Chair of such committee on such date.
Board Committee Member Retainer
Commencing July 1, 2007, a non-employee director who serves as a member of the Audit,
Compensation or Corporate Governance committee shall be entitled to an annual cash retainer of
$2,500 for membership on each Board committee they serve on (the Committee Retainer). A
non-employee director who is also the Chair of a committee shall be entitled to the Committee
Retainer in addition to the Chair Retainer. The Company shall pay the Committee Retainer on a
quarterly basis in advance on the first day of the calendar quarter, subject to the non-employee
directors continued service to the Company as a member of such committee on such date.
Equity Compensation
Initial Award for New Directors
For new non-employee directors appointed or elected after January 1, 2007, on the date a new
director becomes a member of the Board, each non-employee director shall automatically receive a
grant of an option valued at $37,500 to purchase shares of the Companys common stock (an Initial
Option), at an exercise price equal to the fair market value of the common stock on the date of
grant, subject to such grant covering a maximum of 5,000 shares. The Initial Option is subject to
vesting over a period of four years in equal annual installments commencing on the date of grant,
subject to the non-employee directors continued service to the Company through the vesting dates.
The Initial Option will be immediately exercisable, but if early exercised, unvested shares shall
remain subject to the Companys right of repurchase at the exercise price upon termination of
service prior to the fourth anniversary of the date of grant. An employee director who ceases to
be an employee, but who remains a director, will not receive an Initial Option.
Annual Award for Continuing Board Members
Commencing with the 2007 Annual Meeting of Stockholders, each continuing non-employee director
shall automatically receive an annual grant of an option valued at $37,500 to purchase shares of
the Companys common stock (an Annual Option), at an exercise price equal to the fair market
value of the common stock on the date of grant which shall be the date of each Company Annual
Meeting of stockholders, subject to such grant covering a maximum of 5,000 shares. The Annual
Option for continuing Board members shall vest in full on the earlier of (i) the one year
anniversary of the date of grant and (ii) the date immediately preceding the date of the Annual
Meeting of the Companys stockholders for the year following the year of grant for the award,
subject to the non-employee directors continued service to the Company through the vesting date.
The Annual Option shall be immediately exercisable, but if early exercised, remain subject to the
Companys right of repurchase at the exercise price upon termination of service prior to the
vesting date.
Provisions Applicable to All Non-Employee Director Equity Compensation Grants
All grants shall be subject to the terms and conditions of the Companys 1997 Stock Incentive
Plan or 2003 Equity Incentive Plan, as applicable, and the terms of the Stock Option Agreement
issued thereunder.
For purposes of this Director Compensation Policy, the value for Initial Grants and Annual
Grants to non-employee directors shall be determined in accordance with the Companys option
valuation policy in place at the time of grant for financial reporting purposes.
Any unvested shares underlying non-employee director option grants shall become fully vested
in the event of: (1) the termination of the non-employee directors services because of death,
total and permanent disability or retirement at or after age 65; or (2) a change in control occurs
with respect to the Company while such non-employee director is a member of the Board.
2
Expense Reimbursement
All non-employee directors shall be entitled to reimbursement from the Company for their
reasonable travel (including airfare and ground transportation), lodging and meal expenses incident
to meetings of the Board or committees thereof or in connection with other Board related business.
The Company shall also reimburse directors for attendance at director continuing education programs
that are relevant to their service on the Board and which attendance is pre-approved by the Chair
of the Corporate Governance Committee and Chairman of the Board. The Company shall make
reimbursement to a non-employee director within a reasonable amount of time following submission by
the non-employee director of reasonable written substantiation for the expenses.
Amended and Restated February 23, 2011
3
Exhibit 10.32
[***] 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.
EIGHTH AMENDMENT TO THIRD AMENDED AND RESTATED
CREDIT AND SECURITY AGREEMENT
This Amendment, dated as of December 15, 2010, is made by and between Heska Corporation, a
Delaware corporation (Heska), Diamond Animal Health, Inc., an Iowa corporation (Diamond) (each
of Heska and Diamond may be referred to herein individually as a Borrower and collectively as the
Borrowers), and Wells Fargo Bank, National Association, operating through its Wells Fargo Capital
Finance operating division (the Lender).
Recitals
The Borrowers and the Lender are parties to a Third Amended and Restated Credit and Security
Agreement dated as of December 30, 2005 (as amended to date and as the same may be hereafter
amended from time to time, the Credit Agreement).
The Borrowers have requested that certain amendments be made to the Credit Agreement, which
the Lender is willing to make pursuant to the terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements
herein contained, it is agreed as follows:
1.
Defined Terms
. Capitalized terms used in this Amendment which are defined in the
Credit Agreement shall have the same meanings as defined therein, unless otherwise defined herein.
In addition, Section 1.1 of the Credit Agreement is amended by adding or amending, as the case may
be, the following definitions:
Maturity Date means December 31, 2013.
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,
and/or exchanging for otherwise similar customer instruments requiring service, whether
accounted for as equipment or inventory.
Revolving Floating Rate means Daily Three Month LIBOR plus the Spread, which annual rate
shall change when and as Daily Three Month LIBOR changes.
2.
Spread
. Section 2.7 of the Credit Agreement is hereby amended to read it its
entirety as follows:
Section 2.7
Spread
. The spread (the Spread) means, from December 1,
2010 through the first adjustment as described below, 5.75%, and thereafter, 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 deliver to the
Lender their audited financial statements for the prior fiscal year; provided,
however, that in no case shall any decrease in the Spread occur during a Default
Period:
|
|
|
|
|
Prior Fiscal Year Net Income
|
|
Spread
|
|
Less than $0
|
|
|
5.75
|
%
|
Greater than or equal to $0
but less than $2,500,000
|
|
|
4.75
|
%
|
Greater than or equal to $2,500,000
but less than $5,000,000
|
|
|
3.75
|
%
|
Greater than or equal to $5,000,000
|
|
|
2.75
|
%
|
2
[***] Certain information on this page has been omitted and filed separately with the Securities
and Exchange Commission. Confidential treatment has been requested with respect to the omitted
portions.
3.
Financial Covenants
. Sections 6.12 and 6.13 of the Credit Agreement are hereby
amended to read in their entireties as follows:
Section 6.12
Minimum Capital
. Heska will maintain, on a consolidated
basis, as of each date listed below, its Capital at an amount not less than the
amount set forth opposite such date:
|
|
|
|
|
Date
|
|
Minimum Capital
|
|
November 30, 2010
|
|
$
|
13,900,000
|
|
December 31, 2010
|
|
$
|
14,000,000
|
|
January 31, 2011
|
|
|
[***]
|
|
February 28, 2011
|
|
|
[***]
|
|
March 31, 2011
|
|
|
[***]
|
|
April 30, 2011
|
|
|
[***]
|
|
May 31, 2011
|
|
|
[***]
|
|
June 30, 2011
|
|
|
[***]
|
|
July 31, 2011
|
|
|
[***]
|
|
August 31, 2011
|
|
|
[***]
|
|
September 30, 2011
|
|
|
[***]
|
|
October 31, 2011
|
|
|
[***]
|
|
November 30, 2011
|
|
|
[***]
|
|
December 31, 2011
|
|
|
[***]
|
|
The covenant levels for January 31, 2011 through and including December 31,
2011 shall be adjusted upwards or downwards, respectively on a dollar-for-dollar
basis, by an amount equal to the amount by which Heskas Capital, as evidenced by
Heskas audited balance sheet as of December 31, 2010, is greater than or less than
[***]; provided, however, that any such downward adjustment shall not exceed
$500,000.
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):
|
|
|
|
|
|
|
Minimum Net
|
|
Period
|
|
Income
|
|
Twelve months ending December 31, 2010
|
|
$
|
(1,550,000
|
)
|
Three months ending March 31, 2011
|
|
|
[***]
|
|
Six months ending June 30, 2011
|
|
|
[***]
|
|
Nine months ending September 30, 2011
|
|
|
[***]
|
|
Twelve months ending December 31, 2011
|
|
|
[***]
|
|
3
[***] Certain information on this page has been omitted and filed separately with the Securities
and Exchange Commission. Confidential treatment has been requested with respect to the omitted
portions.
4.
Capital Expenditures
. Section 7.10 of the Credit Agreement is hereby amended to
read in its entirety as follows:
Section 7.10
Capital Expenditures
. The Borrowers, together with any
Affiliates, will not incur or contract to incur, in the aggregate, Capital
Expenditures in the aggregate during the fiscal year-to-date period ending on any
date described below in excess of the amount set forth opposite such date:
|
|
|
|
|
|
|
Maximum Capital
|
|
Period
|
|
Expenditures
|
|
November 30, 2010
|
|
$
|
1,000,000
|
|
December 31, 2010
|
|
$
|
1,000,000
|
|
January 31, 2011
|
|
|
[***]
|
|
February 28, 2011
|
|
|
[***]
|
|
March 31, 2011
|
|
|
[***]
|
|
April 30, 2011
|
|
|
[***]
|
|
May 31, 2011
|
|
|
[***]
|
|
June 30, 2011
|
|
|
[***]
|
|
July 31, 2011
|
|
|
[***]
|
|
August 31, 2011
|
|
|
[***]
|
|
September 30, 2011
|
|
|
[***]
|
|
October 31, 2011
|
|
|
[***]
|
|
November 30, 2011
|
|
|
[***]
|
|
December 31, 2011
|
|
|
[***]
|
|
In addition to the foregoing, the amounts set forth above shall be adjusted upward
on a dollar-for-dollar basis by the amount allocated for such purpose in accordance
with Section 2.22, from the date of such increase through the end of the fiscal year
in which such increase occurs.
5.
Compliance Certificate
. Exhibit B to the Credit Agreement is replaced in its
entirety by Exhibit B to this Amendment.
6.
No Other Changes
. Except as explicitly amended by this Amendment, all of the terms
and conditions of the Credit Agreement shall remain in full force and effect and shall apply to any
advance or letter of credit thereunder.
7.
Consent to Reverse Stock Split
. Notwithstanding Section 7.5 of the Credit
Agreement, the Lender hereby consents to Heskas 10-to-1 reverse stock split proposed to be
effected in December 2010, provided that cash payments to shareholders shall be made only in
respect of odd amounts of shares held in Heska stockholder accounts (accounts containing a number
of shares prior to Heskas 10-to-1 reverse split not divisible by 10) and such cash payments in the
aggregate shall not exceed $50,000.
4
8.
Restructuring Fee
. The Borrower shall pay to the Lender, as of the date of this
Agreement, a fully earned, non-refundable fee of $25,000 in consideration of the Lenders execution
of this Amendment.
9.
Conditions Precedent
. This Amendment shall be effective when the Lender shall have
received an executed original hereof, together with the following, each in form and substance
acceptable to the Lender in its sole discretion:
(a) Payment of the fee described in paragraph 8.
(b) Such other matters as the Lender may require.
10.
Representations and Warranties
. The Borrowers hereby represent and warrant to the
Lender as follows:
(a) The Borrowers have all requisite power and authority to execute this Amendment and
to perform all of its obligations hereunder, and this Amendment has been duly executed and
delivered by the Borrowers and constitute the legal, valid and binding obligation of the
Borrowers, enforceable in accordance with their terms.
(b) The execution, delivery and performance by the Borrowers of this Amendment have
been duly authorized by all necessary corporate action and do not (i) require any
authorization, consent or approval by any governmental department, commission, board,
bureau, agency or instrumentality, domestic or foreign, (ii) violate any provision of any
law, rule or regulation or of any order, writ, injunction or decree presently in effect,
having applicability to the Borrowers, or the articles of incorporation or by-laws of the
Borrowers, or (iii) result in a breach of or constitute a default under any indenture or
loan or credit agreement or any other agreement, lease or instrument to which any Borrower
is a party or by which it or its properties may be bound or affected.
(c) All of the representations and warranties contained in Article V of the Credit
Agreement are correct on and as of the date hereof as though made on and as of such date,
except to the extent that such representations and warranties relate solely to an earlier
date.
11.
No Waiver
. The execution of this Amendment and acceptance of any documents
related hereto shall not be deemed to be a waiver of any Default or Event of Default under the
Credit Agreement or breach, default or event of default under any Security Document or other
document held by the Lender, whether or not known to the Lender and whether or not existing on the
date of this Amendment.
12.
Release
. The Borrowers hereby absolutely and unconditionally release and forever
discharge the Lender, and any and all participants, parent corporations, subsidiary corporations,
affiliated corporations, insurers, indemnitors, successors and assigns thereof, together with all
of the present and former directors, officers, agents and employees of any of the foregoing, from
any and all claims, demands or causes of action of any kind, nature or description, whether arising
in law or equity or upon contract or tort or under any state or federal
law or otherwise, which any Borrower has had, now has or has made claim to have against any such
person for or by reason of any act, omission, matter, cause or thing whatsoever arising from the
beginning of time to and including the date of this Amendment, whether such claims, demands and
causes of action are matured or unmatured or known or unknown.
5
[***] Certain information on this page has been omitted and filed separately with the Securities
and Exchange Commission. Confidential treatment has been requested with respect to the omitted
portions.
13.
Costs and Expenses
. The Borrowers hereby reaffirm their agreement under the Credit
Agreement to pay or reimburse the Lender on demand for all costs and expenses incurred by the
Lender in connection with the Loan Documents, including without limitation all reasonable fees and
disbursements of legal counsel. Without limiting the generality of the foregoing, the Borrowers
specifically agree to pay all fees and disbursements of counsel to the Lender for the services
performed by such counsel in connection with the preparation of this Amendment and the documents
and instruments incidental hereto. The Borrowers hereby agree that the Lender may, at any time or
from time to time in its sole discretion and without further authorization by the Borrowers, make a
loan to the Borrowers under the Credit Agreement, or apply the proceeds of any loan, for the
purpose of paying any such fees, disbursements, costs and expenses.
14.
Miscellaneous
. This Amendment may be executed in any number of counterparts, each
of which when so executed and delivered shall be deemed an original and all of which counterparts,
taken together, shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed as of
the date first written above.
|
|
|
|
|
|
|
|
|
HESKA CORPORATION
|
|
DIAMOND ANIMAL HEALTH, INC.
|
|
|
|
|
|
|
|
|
|
|
|
By
|
|
/s/ Jason A. Napolitano
Its Chief Financial Officer
|
|
By
|
|
/s/ Jason A. Napolitano
Its Chief Financial Officer
|
|
|
|
|
|
|
|
|
|
|
|
WELLS FARGO BANK, NATIONAL ASSOCIATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By
|
|
[***]
[***], Authorized Signatory
|
|
|
|
|
|
|
6
Exhibit B to Eighth Amendment
Compliance Certificate
|
|
|
|
|
To:
|
|
|
|
|
|
|
Wells Fargo Capital Finance
|
|
|
Date:
, 20
|
|
|
Subject:
|
|
Heska Corporation
Financial Statements
|
In accordance with our Third Amended and Restated Credit and Security Agreement dated as of
December 30, 2005 (the Credit Agreement), attached are the financial statements of Heska
Corporation (Heska) as of and for
, 20
(the Reporting Date) and the
year-to-date period then ended (the Current Financials). All terms used in this certificate have
the meanings given in the Credit Agreement.
I certify that, to the best of my knowledge, the Current Financials have been prepared in
accordance with GAAP, subject to year-end audit adjustments, and fairly present the Borrowers
financial condition and the results of its operations as of the date thereof.
|
|
|
Events of Default
. (Check one):
|
|
|
o
|
|
The undersigned does not have knowledge of the occurrence of a Default or Event
of Default under the Credit Agreement.
|
|
|
o
|
|
The undersigned has knowledge of the occurrence of a Default or Event of
Default under the Credit Agreement and attached hereto is a statement of the facts with
respect to thereto.
|
|
|
|
|
I hereby certify to the Lender as follows:
|
|
|
o
|
|
The Reporting Date does not mark the end of one of the Borrowers fiscal
quarters, hence I am completing all paragraphs below except paragraph 4.
|
|
|
o
|
|
The Reporting Date marks the end of one of the Borrowers fiscal quarters, hence I
am completing all paragraphs below.
|
|
|
|
|
Financial Covenants
. I further hereby certify as follows:
|
1.
Accounts Payable
. Pursuant to Section 6.5 of the Credit Agreement, as of
the Reporting Date, Past Due Payables on a consolidated basis was $
, which
o
satisfies
o
does not satisfy the requirement that the Borrowers have no Past Due Payables.
[***] Certain information on this page has been omitted and filed separately with the Securities
and Exchange Commission. Confidential treatment has been requested with respect to the omitted
portions.
2.
Minimum Capital
. Pursuant to Section 6.12 of the Credit Agreement, as of the
Reporting Date, Heskas 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, 2010
|
|
$
|
13,900,000
|
|
December 31, 2010
|
|
$
|
14,000,000
|
|
January 31, 2011
|
|
|
[***]
|
|
February 28, 2011
|
|
|
[***]
|
|
March 31, 2011
|
|
|
[***]
|
|
April 30, 2011
|
|
|
[***]
|
|
May 31, 2011
|
|
|
[***]
|
|
June 30, 2011
|
|
|
[***]
|
|
July 31, 2011
|
|
|
[***]
|
|
August 31, 2011
|
|
|
[***]
|
|
September 30, 2011
|
|
|
[***]
|
|
October 31, 2011
|
|
|
[***]
|
|
November 30, 2011
|
|
|
[***]
|
|
December 31, 2011
|
|
|
[***]
|
|
The covenant levels for January 31, 2011 through and including December 31,
2011 shall be adjusted upwards or downwards, respectively on a dollar-for-dollar
basis, by an amount equal to the amount by which Heskas Capital, as evidenced by
Heskas audited balance sheet as of December 31, 2010, is greater than or less than
[***]; provided, however, that any such downward adjustment shall not exceed
$500,000.
B-2
[***] Certain information on this page has been omitted and filed separately with the Securities
and Exchange Commission. Confidential treatment has been requested with respect to the omitted
portions.
3.
Minimum Net Income
. Pursuant to Section 6.13 of the Credit Agreement, as of
the Reporting Date, Heskas Net Income was, on a consolidated basis, $
,
which
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:
|
|
|
|
|
|
|
Minimum Net
|
|
Period
|
|
Income
|
|
Twelve months ending December 31, 2010
|
|
$
|
(1,550,000)
|
|
Three months ending March 31, 2011
|
|
|
[***]
|
|
Six months ending June 30, 2011
|
|
|
[***]
|
|
Nine months ending September 30, 2011
|
|
|
[***]
|
|
Twelve months ending December 31, 2011
|
|
|
[***]
|
|
4.
Minimum Liquidity
. Pursuant to Section 6.14 of the Credit Agreement, as of
the Reporting Date, Heskas 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.
5.
Minimum Individual Book Net Worth
. Pursuant to Section 6.15 of the Credit
Agreement, as of the Reporting Date, Heskas Book Net Worth was $
and
Diamonds Book Net Worth was $
, which
o
satisfies
o
does not
satisfy the requirement that such amounts be no less than zero on the Reporting Date.
6.
Maximum Contributions
. Pursuant to Section 7.4(a)(v) of the Credit
Agreement, as of the Reporting Date, Heskas fiscal year-to-date aggregate contributions to
non-Borrower Subsidiaries was $
, which
o
satisfies
o
does not
satisfy the requirement that such amounts be no more than $700,000 during any fiscal year.
B-3
[***] Certain information on this page has been omitted and filed separately with the Securities
and Exchange Commission. Confidential treatment has been requested with respect to the omitted
portions.
7.
Capital Expenditures
. Pursuant to Section 7.10 of the Credit Agreement, for
the fiscal year-to-date period ending on the Reporting Date, Heskas Capital Expenditures
were, in the aggregate and on a consolidated basis, $
which
o
satisfies
o
does not satisfy the requirement that such amount be not more than $
during
the period ending on the Reporting Date, as set forth in the table below and adjusted, if
applicable, in accordance with Section 7.10:
|
|
|
|
|
|
|
Maximum Capital
|
|
Period
|
|
Expenditures
|
|
November 30, 2010
|
|
$
|
1,000,000
|
|
December 31, 2010
|
|
$
|
1,000,000
|
|
January 31, 2011
|
|
|
[***]
|
|
February 28, 2011
|
|
|
[***]
|
|
March 31, 2011
|
|
|
[***]
|
|
April 30, 2011
|
|
|
[***]
|
|
May 31, 2011
|
|
|
[***]
|
|
June 30, 2011
|
|
|
[***]
|
|
July 31, 2011
|
|
|
[***]
|
|
August 31, 2011
|
|
|
[***]
|
|
September 30, 2011
|
|
|
[***]
|
|
October 31, 2011
|
|
|
[***]
|
|
November 30, 2011
|
|
|
[***]
|
|
December 31, 2011
|
|
|
[***]
|
|
Attached hereto are all relevant facts in reasonable detail to evidence the computations of the
financial covenants referred to above. These computations were made in accordance with GAAP.
B-4
Exhibit 10.41
[***] 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.
FIFTH AMENDMENT
TO
AMENDED AND RESTATED
BOVINE VACCINE DISTRIBUTION AGREEMENT
This Fifth Amendment (
Fifth Amendment
) is entered into as of the 23rd day of
December, 2010 (
Effective Date
) by and between
DIAMOND ANIMAL HEALTH, INC.
, an Iowa
corporation with offices at 2538 Southeast 43
rd
Street, Des Moines, Iowa 50317
(
Diamond
) and
AGRI LABORATORIES, LTD.
, a Delaware corporation, with offices at 20927
State Route K, St. Joseph, Missouri 64505 (
Distributor
) as an amendment to that certain
Amended and Restated Bovine Vaccine Distribution Agreement dated as of September 30, 2002 between
Diamond and Distributor (the
Original Agreement
), as amended by that certain First
Amendment dated as of September 20, 2004 (the
First Amendment
) that certain Second
Amendment dated as of December 10, 2004 (the
Second Amendment
) that certain Third
Amendment dated as of May 26, 2006 (the
Third Amendment
) and that certain Fourth
Amendment dated as of November 16, 2007 (the
Fourth Amendment
) (collectively, the
Agreement
).
WHEREAS, Diamond and Distributor are parties to the Agreement providing for the distribution
of certain bovine antigens; and
WHEREAS,
as of the Effective Date, Diamond, Distributor [***];
WHEREAS, Diamond and Distributor desire to amend the Agreement to provide for the distribution
of [***] and to document certain other amendments agreed upon by the parties, all on the terms and
conditions of this Fifth Amendment.
NOW, THEREFORE, the parties agree as follows:
1.
Definitions
. Capitalized terms used herein shall have the meaning ascribed to them
in the Agreement, unless otherwise defined herein. Capitalized terms defined in the Recitals to
this Fifth Amendment are hereby incorporated by reference in the Agreement.
2.
Pricing, Payment and Term Amendments
.
(i)
Price List
. As of the Effective Date,
Exhibit A
of the Agreement is
hereby deleted in its entirety and replaced with
Exhibit A
of this Fifth Amendment.
[***] Certain information on this page has been omitted and filed separately with the Securities
and Exchange Commission. Confidential treatment has been requested with respect to the omitted
portions.
(ii)
Price Adjustments
. Sections 3.02 and 3.03 of the Agreement are hereby deleted in
their entirety and replaced with the following paragraphs:
3.02
Annual Price Adjustment
. Purchase Prices for each Product set
forth in
Exhibit A
shall be in effect for Products having specified
delivery dates on or after the Effective Date. Diamond may increase
Purchase Prices for each Product to be delivered in each subsequent Contract
Year by written notice to Distributor within ninety (90) days prior to the
end of the preceding Contract Year, taking into account factors including,
but not limited to, cost changes, volume changes and plant utilization;
provided that, such increase for any Contract Year, plus any increase in the
preceding Contract Year pursuant to Section 3.03, shall not exceed [***] of
the Purchase Price in effect at the beginning of the preceding Contract
Year; provided that, [***], Diamonds right to increase Purchase Prices
under this Section 3.02 shall apply for every other Contract Year, beginning
for Contract Year 2014, and applying for every other Contract Year
thereafter. [***]
3.03
Cost Increases and Decreases
. Diamond shall have the right,
but not the obligation, to increase or decrease Purchase Prices by notice to
Distributor in writing during any Contract Year by an amount equal to any
cost increases or decreases for raw materials and packaging components for
each Product to the extent such increases or decreases, individually or in
the aggregate, would cause total finished cost of goods of such Product to
increase or decrease by more than [***]. Upon Distributors request,
Diamond will furnish reasonable supporting documentation therefor.
(iii)
Additional Prepayments; [***]
. The Agreement is hereby amended as of the
Effective Date to add the following new Section 3.04(iv):
3.04(iv) (A) On or before the first day of each Contract Quarter beginning
with the first (1
st
) Contract Quarter during Contract Year 2011
and continuing during the term of this Agreement, Distributor shall pay to
Diamond an amount equal to the Minimum Prepayment, which amount shall be
credited, effective upon issuance of Diamond invoices, against the invoice
prices for all Products to be shipped in such Contract Year. For purposes
of this Agreement, the
Minimum Prepayment
shall be an amount equal
to [***]. Distributor shall not be required to make a Minimum Prepayment
during the pendency of a regulatory order issued by the USDA as a result of
Diamonds negligent act or omission (a
USDA Shut Down Event
).
2
[***] Certain information on this page has been omitted and filed separately with the Securities
and Exchange Commission. Confidential treatment has been requested with respect to the omitted
portions.
(B) If [***]; provided that, Distributor shall not be obligated to make
such payments for any Contract Year if: (1) a USDA Shut Down Event occurs
and continues for more than one hundred twenty (120) days during such
Contract Year or (2) Distributor has ordered Products for shipment in such
Contract Year in an amount equal to or greater than [***] and Diamond has
failed to fill such orders.
(C) If [***]. Distributor shall not be obligated to make such payments
for any Contract Year if: (1) a USDA Shut Down Event occurs and continues
for more than one hundred twenty (120) days during such Contract Year or (2)
Distributor has ordered Products for shipment in such Contract in an amount
equal to or greater than [***], and Diamond has failed to fill such orders.
(D) Diamond shall be entitled to retain any portion of the [***] shall
not apply in any Contract Year in which a USDA Shut Down Event occurs and
continues for more than one hundred twenty (120) days during such Contract
Year. In any Contract Year in which [***].
(E) Notwithstanding any provision of the Agreement to the contrary, no [***] as those terms
are defined and calculated in the Agreement.
(iv)
Term Amendments
. Section 6.01 of the Agreement is hereby deleted in its entirety
and replaced with the following paragraph:
6.01
Term
. The initial Term of this Agreement with respect to all
Products shall be for a period commencing on the [***] and ending on December 15,
2015. This Agreement shall automatically renew after the initial Term with respect
to all Products for additional renewal terms of one (1) year each, unless either
party gives at least twelve (12) months written notice to the other prior to the
expiration of the initial Term or any renewal Term that it does not wish to renew
this Agreement with respect to such Products; provided that, the initial Term or any
renewal Term shall be extended beyond the date it would otherwise be scheduled to
expire as provided above by a number of days equal to the number of days, if any,
that any stop sale order issued by Diamond was in effect prior to such scheduled
expiration date.
3
[***] Certain information on this page has been omitted and filed separately with the Securities
and Exchange Commission. Confidential treatment has been requested with respect to the omitted
portions.
(v)
Private Label Authority
. Effective on the Effective Date, the Agreement
shall be amended to add the following new Section 3.08:
3.08
Private Label
. [***].
(vi)
Pricing, Payment and Term Amendments
. Without limiting the generality of the
foregoing, the amendments set forth in this Section 2 shall become effective as set forth herein
and remain in effect without regard to [***].
3.
Contingent Provisions [***]
. Effective on [***], the provisions of this
Section 3 shall come into force and effect; provided that, [***], this Section 3 shall be
void and of no force and effect whatsoever, but the remainder of this Fifth Amendment shall
remain in full force and effect.
(i)
[***] to Agreement
. [***].
(ii)
Term
. Effective on [***], Section 6.01 of the Agreement shall be deleted
in its entirety hereby and replaced with the following paragraph:
6.01
Term
. The initial Term of this Agreement with respect to all
Products other than [***] shall be for a period commencing on the [***] and
ending on the seventh (7
th
) anniversary of [***]. This Agreement
shall automatically renew after the initial Term with respect to all
Products other than [***] for additional renewal terms of one (1) year each,
unless either party gives at least twelve (12) months written notice to the
other prior to the expiration of the initial Term or any renewal Term that
it does not wish to renew this Agreement with respect to such Products;
provided that, the initial Term or any renewal Term shall be extended beyond
the date it would otherwise be scheduled to expire as provided above by a
number of days equal to the number of days, if any, that any stop sale order
issued by Diamond was in effect prior to such scheduled expiration date.
The initial term of this Agreement with respect to [***] shall be for a
period commencing on [***] and ending on the seventh (7
th
)
anniversary of [***]. This Agreement shall automatically renew after the
initial Term with respect to [***] for additional renewal terms of one (1)
year each, unless either party gives at least twelve (12) months written
notice to the other prior to the expiration of the initial Term or any
renewal Term that it does not wish to renew this Agreement with respect to
[***]; provided that, the initial Term or any renewal Term shall be extended
beyond the date it would otherwise be scheduled to expire as provided above
by a number of days equal to the number of days, if any, that any stop sale
order issued by Diamond was in effect prior to such scheduled expiration
date.
(iii)
[***]
. Effective on [***], Section 1.02 of the Agreement shall be
amended hereby to add the following new paragraphs at the end of such Section:
For the period beginning on [***].
4
[***] Certain information on this page has been omitted and filed separately with the Securities
and Exchange Commission. Confidential treatment has been requested with respect to the omitted
portions.
(iv)
Adjustment to Prepayments [***]
. Effective on [***], Section 3.04 of the
Agreement shall be amended hereby to add the following new Section 3.04(iv)(F):
3.04(iv)(F) Notwithstanding any provision of the Agreement to the contrary,
if Diamond elects not to renew this Agreement with respect to [***] pursuant
to Section 6.01 (a
Non-renewal
), then, unless and until either
party elects not to renew this Agreement with respect to [***], the Minimum
Prepayment for each Contract Year following such Non-renewal and any
applicable extension shall be in an amount equal to [***].
(v)
USDA Shut Down Event
. Effective on [***], the Agreement shall be
amended hereby to add the following new Section 3.09:
3.09
USDA Shut Down Event Reimbursements
. If at any time following
[***], Diamonds manufacturing facility is shut down and Diamond is unable to supply
[***] to Distributor for a period exceeding one hundred twenty (120) consecutive
days as a result of a USDA Shut Down Event, then Diamond shall reimburse to
Distributor [***]
[***]
Any such refund shall be made in twenty-four (24) equal monthly installments
beginning on the first day of the calendar month following the six (6)-month
anniversary of the Shut Down Event and continuing on the first day of each calendar
month thereafter until the applicable amount is paid in full. However, Distributor
may elect by written notice to Diamond within one hundred fifty (150) days after the
Shut Down Event, in its sole discretion, to have any such applicable refund credited
to [***].
4.
Confidentiality of Fifth Amendment
. Notwithstanding any provision of the Agreement
to the contrary, this Fifth Amendment shall be publicly available information for SEC filing, press
release and other discussion purposes; provided, the parties shall agree to a draft of this Fifth
Amendment (the
Redacted Version
) including highlighted items which shall be redacted from
any initial SEC filings and shall be deemed Confidential Information under Section 13.05 of the
Agreement. If the parties do not mutually agree on the Redacted Version within thirty (30) days
after the Effective Date, this Fifth Amendment shall be null and void.
5.
Captions
. The captions set forth in this Fifth Amendment are for convenience only
and shall not be used in any way to construe or interpret this Fifth Amendment, the Agreement, or
the Research and Development Agreement.
5
6.
Effect of Amendment
. This Fifth Amendment is hereby incorporated by reference into
the Agreement as if fully set forth therein, the Agreement as amended by this Fifth Amendment shall
continue in full force and effect following execution and delivery hereof, and
references to the term Agreement shall include this Fifth Amendment. In the event of any
conflict between the terms and conditions of the Original Agreement, First Amendment, Second
Amendment, Third Amendment or Fourth Amendment and this Fifth Amendment, the terms and conditions
of this Fifth Amendment shall control.
IN WITNESS WHEREOF, the parties have caused this Fifth Amendment be executed by their duly
authorized representatives as of the date first written above.
|
|
|
|
|
|
DIAMOND ANIMAL HEALTH, INC.
|
|
|
By:
|
/s/ Michael J. McGinley
|
|
|
|
Its: Vice President
|
|
|
|
|
|
|
|
AGRI LABORATORIES, LTD.
|
|
|
By:
|
/s/ Steve Schram
|
|
|
|
Its: CEO/President
|
|
|
|
|
|
|
6
[***] Certain information on this page has been omitted and filed separately with the Securities
and Exchange Commission. Confidential treatment has been requested with respect to the omitted
portions.
Schedule I
[***]
[***] Certain information on this page has been omitted and filed separately with the Securities
and Exchange Commission. Confidential treatment has been requested with respect to the omitted
portions.
Schedule II
Agri Distributors
AGRILABS Distributors
Company
Animal Medic, Inc.
Fuller Supply Co., Inc.
IVESCO, LLC.
Jeffers Inc.
Lextron
[***]
Michigan Veterinary Farm Supply
MWI Veterinary Supply Co
[***]
Northwest Vet Supply, Inc.
Professional Vet Products
Robert J. Matthews Co.
Southern Livestock Supply Co., Inc.
United Pharmacal Co., Inc.
Valley Vet Supply
Veterinary & Poultry Supply, Inc.
Walco International, Inc.
[***]
West Plains Vet Supply of Springfield
West Plains Vet Supply
Butler Animal Health
Veterinary Services, Inc.
Micro Beef Technologies
Universal
[***]
[***]
[***] Certain information on this page has been omitted and filed separately with the Securities
and Exchange Commission. Confidential treatment has been requested with respect to the omitted
portions.
Exhibit A
|
|
|
|
|
HESKA - DIAMOND
|
|
|
|
|
ANIMAL HEALTH [***]
|
|
|
|
|
LEAD TIME
|
|
|
|
|
Product/Size
|
|
DAH Item Number
|
|
[***] PRICE LIST
|
Titanium 3 (50ds)
|
|
[***]
|
|
[***]
|
Titanium 3 (10ds)
|
|
[***]
|
|
[***]
|
Titanium 5 (50ds)
|
|
[***]
|
|
[***]
|
Titanium 5 (10ds)
|
|
[***]
|
|
[***]
|
Titanium 5 L5 (5ds)
|
|
[***]
|
|
[***]
|
Titanium 5 L5 (10ds)
|
|
[***]
|
|
[***]
|
Titanium 5 L5 (50ds)
|
|
[***]
|
|
[***]
|
Titanium BRSV 3 (50ds)
|
|
[***]
|
|
[***]
|
Titanium IBR (50ds)
|
|
[***]
|
|
[***]
|
Titanium IBR (10ds)
|
|
[***]
|
|
[***]
|
[***]
|
|
[***]
|
|
[***]
|
[***]
|
|
[***]
|
|
[***]
|
[***]
|
|
[***]
|
|
[***]
|
Master Guard 10 (10ds)
|
|
[***]
|
|
[***]
|
MasterGuard 10 (25ds)
|
|
[***]
|
|
[***]
|
MasterGuard 5 (25ds)
|
|
[***]
|
|
[***]
|
MasterGuard Preg 5 (25ds)
1
|
|
[***]
|
|
[***]
|
[***]
|
|
[***]
|
|
[***]
|
|
|
|
1
|
|
The MasterGuard Preg 5 (25ds) [***], DAH Item Numbers [***].
|
Batch Size Minimum Order Qty
[***]
[***]
NOTE: DATING
[***]
[***] Certain information on this page has been omitted and filed separately with the Securities
and Exchange Commission. Confidential treatment has been requested with respect to the omitted
portions.
Exhibit B
[***]
Exhibit 21.1
SUBSIDIARIES OF COMPANY
Diamond Animal Health, Inc., an Iowa corporation
Sensor Devices, Inc., a Wisconsin Corporation (inactive)
Heska AG, a corporation incorporated under the laws of Switzerland
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements Nos.
333-102871, 333-30951, 333-34111, 333-39448, 333-47129, 333-72155, 333-38138, 333-55112, 333-82096,
333-89738, 333-106679, 333-112701, 333-115995, 333-123196 and 333-132916 of Heska Corporation (the
Company) on Form S-8, of our report dated March 18, 2011 relating to the consolidated financial
statements of the Company, appearing in the Companys Annual Report on Form 10-K for the year ended
December 31, 2010. We also consent to the reference to us under the caption Experts in the
Registration Statements.
March 18, 2011
Denver, Colorado
Exhibit 31.1
CERTIFICATION
I, Robert B. Grieve, certify that:
|
1.
|
|
I have reviewed this annual report on Form 10-K of Heska Corporation;
|
|
2.
|
|
Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
|
|
3.
|
|
Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this
report;
|
|
4.
|
|
The registrants other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
|
a.
|
|
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this
report is being prepared;
|
|
b.
|
|
Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted
accounting principles; and
|
|
c.
|
|
Evaluated the effectiveness of the registrants disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
|
|
d.
|
|
Disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter (the
registrants fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrants internal control
over financial reporting; and
|
|
5.
|
|
The registrants other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the
audit committee of the registrants board of directors (or persons performing the equivalent
functions):
|
|
a.
|
|
All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect
the registrants ability to record, process, summarize and report financial information;
and
|
|
b.
|
|
Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrants internal control over financial reporting.
|
|
|
|
|
|
Date: March 18, 2011
|
/s/ Robert B. Grieve
|
|
|
ROBERT B. GRIEVE
|
|
|
Chairman of the Board and Chief
Executive Officer
(Principal Executive Officer)
|
|
Exhibit 31.2
CERTIFICATION
I, Jason A. Napolitano, certify that:
|
1.
|
|
I have reviewed this annual report on Form 10-K of Heska Corporation;
|
|
2.
|
|
Based on my knowledge, this report does not contain any untrue statement of a material fact
or omit to state a material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
|
|
3.
|
|
Based on my knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the periods presented in this
report;
|
|
4.
|
|
The registrants other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
|
|
a.
|
|
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during the period in which this
report is being prepared;
|
|
b.
|
|
Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted
accounting principles; and
|
|
c.
|
|
Evaluated the effectiveness of the registrants disclosure controls and procedures
and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
|
|
d.
|
|
Disclosed in this report any change in the registrants internal control over
financial reporting that occurred during the registrants most recent fiscal quarter (the
registrants fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrants internal control
over financial reporting; and
|
|
5.
|
|
The registrants other certifying officer and I have disclosed, based on our most recent
evaluation of internal control over financial reporting, to the registrants auditors and the
audit committee of the registrants board of directors (or persons performing the equivalent
functions):
|
|
a.
|
|
All significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to adversely affect
the registrants ability to record, process, summarize and report financial information;
and
|
|
b.
|
|
Any fraud, whether or not material, that involves management or other employees who
have a significant role in the registrants internal control over financial reporting.
|
|
|
|
|
|
Date: March 18, 2011
|
/s/ Jason A. Napolitano
|
|
|
JASON A. NAPOLITANO
|
|
|
Executive Vice President and Chief Financial
Officer
(Principal Financial Officer)
|
|
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Robert B. Grieve, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of Heska Corporation on Form 10-K for
the year ended December 31, 2010 fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 and that information contained in such Form 10-K fairly
presents in all material respects the financial condition and results of operations of Heska
Corporation.
|
|
|
|
|
Date: March 18, 2011
|
By:
|
/s/ Robert B. Grieve
|
|
|
|
Name:
|
ROBERT B. GRIEVE
|
|
|
|
Title:
|
Chairman of the Board and
Chief Executive Officer
|
|
I, Jason A. Napolitano, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of Heska Corporation on Form 10-K for
the year ended December 31, 2010 fully complies with the requirements of Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 and that information contained in such Form 10-K fairly
presents in all material respects the financial condition and results of operations of Heska
Corporation.
|
|
|
|
|
Date: March 18, 2011
|
By:
|
/s/ Jason A. Napolitano
|
|
|
|
Name:
|
JASON A. NAPOLITANO
|
|
|
|
Title:
|
Executive Vice President and
Chief Financial Officer
|
|
A signed original of this written statement required by Section 906 has been provided to Heska
Corporation and will be retained by Heska Corporation and furnished to the Securities and Exchange
Commission or its staff upon request.
Heska (NASDAQ:HSKA)
Historical Stock Chart
From May 2024 to Jun 2024
Heska (NASDAQ:HSKA)
Historical Stock Chart
From Jun 2023 to Jun 2024