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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ____________
Commission file number 000-22427
HESKA CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE 77-0192527
[State or other jurisdiction [I.R.S. Employer Identification No.]
of incorporation or organization]
1825 SHARP POINT DRIVE
FORT COLLINS, COLORADO 80525
(Address of principal executive offices)
(970) 493-7272
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
[ X ] Yes [ ] No
The number of shares of the Registrant's Common Stock, $.001 par value,
outstanding at November 10, 1997 was 18,815,246
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HESKA CORPORATION
FORM 10-Q
QUARTERLY REPORT
TABLE OF CONTENTS
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PAGE
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of September 30, 1997 and
December 31, 1996 ...................................................................... 1
Condensed Consolidated Statements of Operations for the three months and nine months
ended September 30, 1997 and 1996 ...................................................... 2
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 1997 and 1996 ............................................................ 3
Notes to Condensed Consolidated Financial Statements ................................... 4
Item 2 Management's Discussion and Analysis of Financial Condition and Results of
Operations ............................................................................. 8
PART II OTHER INFORMATION
Item 1 Legal Proceedings ...................................................................... Not Applicable
Item 2 Changes in Securities and Use of Proceeds .............................................. 21
Item 3 Defaults upon Senior Securities ........................................................ Not Applicable
Item 4 Submission of Matters to a Vote of Security Holders .................................... Not Applicable
Item 5 Other Information ...................................................................... Not Applicable
Item 6 Exhibits and Reports on Form 8-K ....................................................... 21
Exhibit Index ....................................................................................... 22
Signatures .......................................................................................... 23
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HESKA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
DOLLARS IN THOUSANDS
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 21,862 $ 6,609
Marketable securities 18,021 17,091
Accounts receivable, net 2,038 749
Inventories, net 8,459 4,430
Other current assets 414 334
--------- ---------
Total current assets 50,794 29,213
Property and equipment, net 15,322 8,209
Intangible assets, net 5,205 3,480
Restricted marketable securities and other assets 1,252 1,267
--------- ---------
Total assets $ 72,573 $ 42,169
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,989 $ 1,634
Accrued liabilities 1,861 940
Deferred revenue 1,534 1,413
Current portion of capital lease obligations 575 464
Current portion of long-term debt 2,098 807
--------- ---------
Total current liabilities 11,057 5,258
Capital lease obligations, less current portion 1,772 1,459
Long-term debt, less current portion 8,257 2,942
Accrued pension liability 142 127
--------- ---------
Total liabilities 21,228 9,786
--------- ---------
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, $.001 par value, 25,000,000 shares authorized;
none and 10,459,999 shares issued and outstanding, with an aggregate
liquidation preference of none and
$62,588, respectively -- 62,588
Common stock, $.001 par value, 40,000,000 shares authorized;
18,781,071 and 1,021,645 shares issued and outstanding, respectively 19 1
Additional paid-in capital 112,727 1,067
Deferred compensation (1,854) (879)
Cumulative translation adjustment (3) --
Stock subscription receivable from officers (156) (118)
Accumulated deficit (59,388) (30,276)
--------- ---------
Total stockholders' equity 51,345 32,383
--------- ---------
Total liabilities and stockholders' equity $ 72,573 $ 42,169
========= =========
</TABLE>
See accompanying notes to consolidated financial statements
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HESKA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Products and services, net $ 4,578 $ 2,772 $ 11,137 $ 4,591
Research and development 396 184 1,033 1,246
-------- -------- -------- --------
4,974 2,956 12,170 5,837
Costs and operating expenses:
Cost of sales 3,342 2,022 8,304 3,445
Research and development 4,662 3,359 14,675 9,259
Selling and marketing 2,217 821 5,789 1,263
General and administrative 2,763 1,893 7,962 3,073
Amortization of intangible
assets and deferred compensation 614 403 1,694 700
Purchased research and development -- -- 2,399 --
Other (contract termination fee) -- -- 750 --
-------- -------- -------- --------
13,598 8,498 41,573 17,740
-------- -------- -------- --------
Loss from operations (8,624) (5,542) (29,403) (11,903)
Other income (expense):
Interest income 621 470 1,069 979
Interest expense (338) (71) (701) (189)
Other, net (12) (41) (77) (42)
-------- -------- -------- --------
Net loss $ (8,353) $ (5,184) $(29,112) $(11,155)
======== ======== ======== ========
Pro forma net loss per share $ (0.47) $ (1.93)
======== ========
Shares used to compute pro forma net loss
per share 17,807 15,097
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
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HESKA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
IN THOUSANDS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net cash used in operating activities $(23,320) $ (8,903)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of businesses, net of cash acquired (2,088) (478)
Cash deposited in escrow account related to Bloxham acquisition (241) --
Purchase of marketable securities (18,635) (32,462)
Proceeds from sale of marketable securities 18,227 6,000
Purchases of property and equipment (5,726) (3,396)
-------- --------
Net cash used in investing activities (8,463) (30,336)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 44,047 13
Proceeds from borrowings 4,574 1,066
Repayments of debt and capital lease obligations (1,579) (1,071)
Proceeds from issuance of preferred stock -- 36,000
-------- --------
Net cash provided by financing activities 47,042 36,008
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (6) --
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 15,253 (3,231)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 6,609 6,827
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 21,862 $ 3,596
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 649 $ 180
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Purchase of intangible assets through the issuance of debt -- 207
Issuance of preferred stock and options to purchase common stock
in exchange for the common stock of Diamond, net of cash received -- 7,058
Reduction in future payments on debt to customer in exchange for the
granting of certain rights -- 1,250
Purchase of assets under direct capital lease financing 281 --
Issuance of preferred stock in exchange for the capital stock of Bloxham,
net of cash received 648 --
Issuance of common and preferred stock in exchange for the capital stock
of Astarix, net of cash received 2,399 --
Purchase of the assets of Center through the issuance of debt 3,036 --
Issuance of common stock in exchange for the capital stock of CMG 538 --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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HESKA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 (UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
Heska Corporation (the "Company") discovers, develops, manufactures and
markets companion animal health products and services. The Company also
manufactures and sells animal health products and services and human
immunotherapy and diagnostic services in various locations in the United States,
Canada, Europe and Japan through Diamond Animal Health, Inc. ("Diamond"),
Bloxham Laboratories Limited ("Bloxham"), Center Laboratories, Inc. ("Center")
and CMG Centre Medical des Grands' Places SA ("CMG"), its wholly-owned
subsidiaries. In May 1997, the Company reincorporated in Delaware.
The Company continues to incur substantial operating losses due
principally to its research and development and sales and marketing activities.
Cumulative operating losses from inception of the Company in 1988 through
September 30, 1997 and December 31, 1996 have totaled $59,388,000 and
$30,276,000, respectively.
During 1996, the Company progressed from being primarily a research and
development company to a fully-integrated research, development, manufacturing
and marketing company. The Company's products are subject to long development
and regulatory approval cycles and there can be no assurance that the Company
will successfully develop, manufacture or market these products.
The Company's ability to achieve profitable operations will depend
primarily upon its ability to commercialize products that are currently under
development. There can be no assurance that the Company will successfully
develop, manufacture, or market these products. During the period required to
develop its products, the Company intends to finance operations with additional
equity and debt financing. There can be no assurance that such financing will be
available when required or will be obtained under favorable terms.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. The balance sheets as of September 30, 1997, the
statements of operations for the three and nine months ended September 30, 1997
and 1996 and the statements of cash flows for the nine months ended September
30, 1997 and 1996 are unaudited, but include all adjustments (consisting of
normal recurring adjustments) which the Company considers necessary for a fair
presentation of the financial position, operating results and cash flows for the
periods presented. The consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries since the dates of their
respective acquisitions. All material intercompany transactions and balances
have been eliminated in consolidation. Although the Company believes that the
disclosures in these financial statements are adequate to make the information
presented not misleading, certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission.
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Results for any interim period are not necessarily indicative of
results for any future interim period or for the entire year. The accompanying
financial statements and related disclosures have been prepared with the
presumption that users of the interim financial information have read or have
access to the audited financial statements for the preceding fiscal year.
Accordingly, these financial statements should be read in conjunction with the
audited financial statements and the related notes thereto for the year ended
December 31, 1996, included in the Company's Form S-1 filed with the Securities
and Exchange Commission.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
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.
Revenue Recognition
Revenues from products and services are recognized at the time goods
are shipped or services are provided to the customer, with an appropriate
provision for returns and allowances.
The Company recognizes revenue from sponsored research and development
as research activities are performed or as development milestones are completed
under the terms of the research and development agreements. Costs incurred in
connection with the performance of sponsored research and development are
expensed as incurred. The Company defers revenue recognition related to payments
received during the current period for research activities to be performed in
the following period.
2. UNAUDITED PRO FORMA NET LOSS PER SHARE
Due to the automatic conversion of all shares of convertible preferred
stock into common stock following the closing of the Company's initial public
offering (the "IPO"), historical net loss per common share is not considered
meaningful as it would differ materially from the pro forma net loss per common
share and common stock equivalent shares given the changes in the capital
structure of the Company.
Pro forma net loss per common share is computed using the weighted
average number of common shares outstanding during the period. Common equivalent
shares from stock options and warrants are excluded from the computation as
their effect is anti-dilutive, except as required by the SEC. Pursuant to
Securities and Exchange Commission Staff Accounting Bulletin No. 83, common
stock and common stock equivalent shares issued by the Company during the 12
months immediately preceding the filing of the IPO, plus shares which became
issuable during the same period as a result of the granting of options to
purchase common stock, have been included in the calculation of weighted average
number of shares of common stock as if they were outstanding for all periods
presented (using the treasury stock method). Accordingly, only those common
stock and common stock equivalent shares issued during the 12 months immediately
preceding the filing of the IPO have been included in the computation of pro
forma net loss per common share. In addition, the Company has assumed the
conversion of convertible preferred stock issued into common stock for all
periods presented.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share". The Company will be required to adopt these new rules effective December
15, 1997. Management does not anticipate any significant impact resulting from
the adoption of this new standard upon current or previously reported earnings
per share.
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3. BALANCE SHEET INFORMATION
Inventories are stated at the lower of cost or market using the
first-in, first-out method. If the cost of inventories exceeds fair market
value, provisions are made for the difference between cost and fair market
value.
Inventories, net of provisions, consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30 December 31,
1997 1996
------------ ------------
<S> <C> <C>
Raw materials ........ $ 1,209 $ 885
Work in process ...... 4,667 3,103
Finished goods ....... 2,583 442
-------- --------
$ 8,459 $ 4,430
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</TABLE>
4. BUSINESS ACQUISITIONS
The following acquisitions have been accounted for under the purchase
method of accounting and, accordingly, the operating results of these
acquisitions are included in the Company's consolidated results of operations
from the date of the acquisition.
Acquisition of Center Laboratories' Allergy Business ("Center") - In
July 1997 the Company purchased the allergy immunotherapy products business of
Center Laboratories, an FDA and USDA licensed manufacturer of allergy
immunotherapy products, including allergenic extracts, located in Port
Washington, NY. Center was purchased from EM Industries, Incorporated, a
subsidiary of Merck KGaA of Darmstadt, Germany, in a transaction valued at
approximately $3.4 million, the appraised fair market value of certain of the
tangible assets used in the business. EM Industries financed approximately $3.0
million of the purchase price pursuant to a note payable over three years. In
connection with this acquisition, the Company recorded an intangible asset in
the amount of $173,000, primarily related to the rights of Center to sell
certain finished goods inventories of EM Industries which were consigned to
Center at the date of acquisition.
Acquisition of CMG Centre Medical des Grands' Places SA ("CMG") - In
September 1997 the Company acquired all of the outstanding shares of capital
stock of CMG Centre Medical des Grands' Places SA, a corporation organized under
the laws of Switzerland which manufactures and markets allergy diagnostic
products for use in veterinary and human medicine primarily in Europe and Japan,
in a transaction valued at approximately $2.4 million. The Company issued an
aggregate of 59,905 shares of its Common Stock to two shareholders of CMG in
satisfaction of approximately $538,000 of the acquisition price, paid cash of
approximately $1.6 million and assumed liabilities of approximately $241,000 in
connection with the acquisition. The purchase agreement includes provisions
whereby the Company shall adjust the purchase price by making additional
payments to the former shareholders of CMG in the event that gross revenues from
CMG's diagnostic products exceed specified levels, limited to a total adjustment
of the purchase price of 2,000,000 Swiss Francs. In allocating the total
purchase price of the acquisition, the Company recorded an intangible asset in
the amount of $1,701,000, primarily related to customer lists and the
established presence of CMG in the European and Japanese markets for the
Company's diagnostic products and services.
6
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5. INITIAL PUBLIC OFFERING
In July 1997 the Company completed its IPO of 5,637,850 shares of
common stock (including an underwriters' over-allotment option exercised for
637,850 shares) at a price of $8.50 per share, providing the Company with net
proceeds of approximately $43.9 million. Upon closing of the IPO all of the
outstanding shares of Series A, B, C, D, E and F Preferred Stock were
automatically converted into 11,289,388 shares of common stock.
7
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PART I. FINANCIAL INFORMATION
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
When used in this Management's Discussion and Analysis of Financial
Condition and Results of Operations, the word "expects" and similar expressions
are intended to identify forward-looking statements. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors that
could cause actual results, performance, or achievements of Heska or its
subsidiaries to differ materially from any future results, performance or
achievements expressed or implied by such forward-looking statements. Heska's
ability to achieve these results is dependent on many factors, including among
others, the following: timely development, introduction and acceptance of new
products, delays in integration of acquired businesses, failure to receive or
delays in regulatory approvals; lack of enforceability of, or infringement upon,
patents and proprietary rights; quality of management; the impact of
competition; changes in business strategy or development plans; inability to
manufacture products at currently projected costs or in sufficient quantities to
meet demand and the other risks detailed below under "Factors that May Affect
Results" and throughout the Company's filings with the Securities and Exchange
Commission. These forward-looking statements represent the Company's judgment as
of the date of the filing of this Form 10-Q. The Company expressly disclaims any
obligation or undertaking to release publicly any updates or revisions to any
forward-looking statements contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any such statement is based.
OVERVIEW
Heska discovers, develops, manufactures and markets companion animal
health products, primarily for dogs, cats and horses. From the Company's
inception in 1988 until early 1996, the Company's operating activities related
primarily to research and development activities, entering into collaborative
agreements, raising capital and recruiting personnel. Prior to 1996, the Company
had not received any revenues from the sale of products, and it has incurred net
losses since inception. As of September 30, 1997, the Company's accumulated
deficit was $59.4 million.
During 1996, Heska grew from being primarily a research and development
concern to a fully-integrated research, development, manufacturing and marketing
company. The Company accomplished this through the acquisitions of Diamond
Animal Health, Inc. ("Diamond"), a licensed pharmaceutical and biological
manufacturing facility in Des Moines, Iowa, and the canine allergy business of
Bioproducts DVM, Inc. (the "Bioproducts Business"), hiring key employees and
support staff, establishing marketing and sales operations to support the
Bioproducts Business and other Heska products introduced in 1996, and the design
and implementation of more sophisticated operating and information systems. The
Company also expanded the scope and level of its scientific and business
development activities, increasing the opportunities for new products. In 1997,
the Company launched additional products and expanded in the United States
through the acquisition of Center Laboratories ("Center"), an FDA and USDA
licensed manufacturer of allergy immunotherapy products, including allergenic
extracts, located in Port Washington, NY, and internationally through the
acquisitions of Bloxham Laboratories Limited ("Bloxham"), a veterinary
diagnostic laboratory in Teignmouth, England and CMG Centre Medical des Grands'
Places SA ("CMG") in Fribourg, Switzerland, which manufactures and markets
allergy diagnostic products for use in veterinary and human medicine primarily
in Europe and Japan. Each of the acquisitions of Diamond, the Bioproducts
Business, Bloxham, Center and CMG was accounted for
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under the purchase method of accounting and accordingly, the Company's financial
statements reflect the operations of these businesses only for the periods
subsequent to the acquisitions. In May 1997, the Company acquired Astarix
Institute, Inc. ("Astarix"), a privately held development stage company
specializing in allergy research. The entire purchase price of Astarix was
allocated to unfinished research and development projects, and the costs
expensed as of the acquisition date, as development of these projects had not
yet reached technological feasibility. In July 1997 the Company established a
new subsidiary, Heska AG, located near Basel, Switzerland, for the purpose of
managing its European operations.
The Company anticipates that it will continue to incur additional
operating losses for the next several years as it introduces new products,
continues its research and development activities for products under development
and acquires new businesses. There can be no assurance that the Company will
attain profitability or, if achieved, will remain profitable on a quarterly or
annual basis in the future.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1997 and 1996
Total revenues, which includes product and service revenues and
research and development revenues, increased to $5.0 million for the quarter
ended September 30, 1997 compared to $3.0 million for the third quarter of 1996.
Product and service revenues were $4.6 million for the three months ended
September 30, 1997 as compared to $2.8 million for the corresponding period in
1996. Revenues from one customer comprised 23% of total revenues for the three
months ended September 30, 1997. This customer purchases animal health products
from Diamond under the terms of a take-or-pay contract which expires in June
1999.
Revenues from sponsored research and development increased to $396,000
in the three months ended September 30, 1997 from $184,000 in the corresponding
period in 1996. Fluctuations in revenues from sponsored research and development
are generally the result of changes in the number of funded research projects as
well as the timing and performance of contract milestones.
Cost of goods sold was $3.3 million for the three months ended
September 30, 1997 as compared to $2.0 million for the comparable period in
1996. The Company expects that its gross margins will improve as sales volumes
increase and manufacturing capacity is more fully utilized. Future Heska
products are expected to be manufactured by Diamond, Center or contract
manufacturers.
Research and development expenses increased to $4.7 million for the
three months ended September 30, 1997 from $3.4 million in the comparable period
of 1996, due to a substantial increase in the level and scope of research and
development activities. Research and development expenses include expenses both
for development of products to be marketed by the Company and development under
sponsored research and development agreements, and consist primarily of salaries
and benefits for research, development and regulatory personnel, intellectual
property costs, license fees, contract research, supplies and materials,
depreciation and rental of lab equipment and facility costs. The Company expects
research and development expenses to increase slightly over the next few
quarters.
Selling and marketing expenses increased to $2.2 million for the three
months ended September 30, 1997 from $821,000 in the comparable period of 1996
and consist primarily of salaries and benefits for sales and marketing
personnel, commissions, market research, product promotion, consulting fees and
trade show costs. The Company added senior sales management and 22 field sales
persons late in the first quarter of 1997 to support planned product
introductions. The Company expects that these costs will continue to increase as
the
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Company continues to launch and market new products and incurs commission
expense on increasing product sales.
General and administrative expenses increased to $2.8 million for the
three months ended September 30, 1997 from $1.9 million for the comparable
period in 1996 as a result of significant growth in the Company's accounting and
finance, human resources, legal, administrative, information systems, business
development and facilities operations.
Amortization of intangible assets increased to $474,000 for the three
months ended September 30, 1997, compared to $403,000 for the third quarter of
1996 as a result of the acquisitions of Bloxham, Center and CMG. Net intangible
assets at September 30, 1997 totaled $5.2 million as a result of the
acquisitions of Diamond ($2.1 million) and the Bioproducts Business ($.2
million) in 1996, and Bloxham ($1.1 million), Center ($.1) and CMG ($1.7) in
1997.
Amortization of deferred compensation resulted in a non-cash charge to
operations in the three months ended September 30, 1997 of $140,000. In
connection with options granted through September 30, 1997, the Company will
incur a non-cash charge to operations of approximately $140,000 per quarter
through the second quarter of 2001 for amortization of deferred compensation.
Interest income increased to $621,000 for the three months ended
September 30, 1997 compared to $470,000 for the three months ended September 30,
1996 due to increased cash balances resulting from the proceeds from Company's
initial public offering. Interest expense increased to $338,000 for the three
months ended September 30, 1997 compared to $71,000 for the comparable period in
1996 due to increases in debt financing for laboratory and manufacturing
equipment acquired during 1996 and the first nine months of 1997.
The Company reported a net loss of $8.4 million for the three months
ended September 30, 1997 as compared to a net loss of $5.2 million for the three
months ended September 30, 1996. The Company expects to incur additional
operating losses for the next several years.
Nine months ended September 30, 1997 and 1996
Total revenues for the nine months ended September 30, 1997 increased
to $12.2 million from $5.8 million in the first nine months of 1996. Product and
service revenues were $11.1 million for the nine months ended September 30, 1997
as compared to $4.6 million for the corresponding period in 1996. Revenues from
one customer comprised 34% of total revenues for the nine months ended September
30, 1997. This customer purchases animal health products from Diamond under the
terms of a take-or-pay contract which expires in June 1999.
Revenues from sponsored research and development decreased to $1.0
million for the nine months ended September 30, 1997 from $1.2 million in the
nine months ended September 30, 1996. Fluctuations in revenues from sponsored
research and development are generally the result of changes in the number of
funded research projects as well as the timing and performance of contract
milestones.
Cost of goods sold totaled approximately $8.3 million in the nine
months ended September 30, 1997. The gross margin for the nine months ended
September 30, 1997 increased to $2.8 million from $1.1 million for the
comparable period in 1996. The Company expects that its gross margins will
improve as sales volumes increase and manufacturing capacity is more fully
utilized. Future Heska products are expected to be manufactured by Diamond,
Center or contract manufacturers.
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Research and development expenses increased to $14.7 million in the
nine months ended September 30, 1997, from $9.3 million for the corresponding
period in 1996. The increase in 1997 is due primarily to substantial increases
in the level and scope of research and development activities for products to be
marketed by the Company and increases in intellectual property costs.
Selling and marketing expenses totaled $5.8 million for the nine months
ended September 30, 1997, as compared to $1.3 million in the comparable period
of 1996. The increase in 1997 reflects the Company's establishment of a sales
and marketing organization to support Heska's launch and sale of products in
early 1997.
General and administrative expenses increased to $8.0 million in the
nine months ended September 30, 1997 from $3.1 million in 1996. The increase in
1997 resulted from the significant growth of accounting and finance, human
resources, legal, administrative, information systems, business development and
facilities operations to support the Company's increased business and financing
activities.
Amortization of intangible assets increased to $1.3 million for the
nine months ended September 30, 1997 from $700,000 for the nine months ended
September 30, 1996, as a result of the acquisitions of Diamond and the
Bioproducts Business in 1996 and Bloxham, Center and CMG in 1997.
In connection with the grant of certain stock options in the nine
months ended September 30, 1997, the Company recorded deferred compensation in
its stockholders' equity accounts of $1.8 million, representing the difference
between the deemed value of the Common Stock for accounting purposes and the
exercise price of such options at the date of grant. The amortization of
deferred compensation resulted in a non-cash charge to operations in the nine
months ended September 30, 1997 of $384,000.
Interest income increased to $1.1 million for the nine months ended
September 30, 1997 from $1.0 million in 1996 due to increased cash balances
available for investment resulting from the proceeds from Company's IPO.
Interest expense increased to $701,000 in the nine months ended September 30,
1997 from $189,000 in the comparable period for 1996 due to the assumption of
debt in connection with the acquisitions of Diamond in April 1996 and Center in
July 1997, and an increase in debt financing for laboratory and manufacturing
equipment.
The Company reported a net loss in the nine months ended September 30,
1997 of $29.1 million as compared to a net loss of $11.2 million for 1996. The
increase in losses between the periods reflects the increases in research and
development, selling and marketing activities, and general and administrative
expenses as the Company built a management and systems infrastructure to support
growing business operations in 1997 and beyond. Expenses in the first nine
months of 1997 also include one-time charges of $2.4 million resulting from
Heska's purchase of Astarix and $750,000 for the termination of a supply
agreement for allergy immunotherapy products which Heska will now obtain from
its subsidiary, Center.
LIQUIDITY AND CAPITAL RESOURCES
In July 1997 the Company completed its initial public offering of
5,637,850 shares of common stock (including an underwriters' over-allotment
option exercised for 637,850 shares) at a price of $8.50 per share, providing
the Company with net proceeds of approximately $43.9 million. Additionally all
outstanding shares of preferred stock were converted into 11,289,388 shares of
common stock upon the completion of the IPO.
Prior to the IPO, the Company had financed its operations since
inception primarily with the net proceeds received from private placements of
equity securities and from revenues from sponsored research and development. As
of September 30, 1997, the Company had received aggregate proceeds of $55.8
million from
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equity transactions, including $36.0 million received in April 1996 in
connection with an equity investment by Novartis and $10.0 million received in
1995 from equity investments by Volendam Investeringen N.V. The Company has also
received funds totaling $11.4 million through September 30, 1997 under
collaborative agreements, of which $11.3 million has been recognized as revenue
from sponsored research and development.
In addition, the Company has received proceeds from equipment financing
totaling $7.8 million through September 30, 1997. The Company also assumed $4.3
million in short and long-term debt in connection with the acquisition of
Diamond and $3.0 million in long-term debt in connection with the acquisition of
Center. Capital lease obligations and term debt owed by the Company totaled
$12.7 million as of September 30, 1997, with installments payable through 2002.
Expenditures for property and equipment totaled $5.7 million and $3.4 million
for the nine months ended September 30, 1997 and 1996, respectively, and are
expected to be approximately $1.0 million for the remainder of 1997. The Company
anticipates that it will continue to use capital equipment lease and debt
facilities to finance equipment purchases and, if possible, leasehold
improvements. The Company has secured lines of credit for its subsidiaries
totaling approximately $1.6 million. These financing facilities are secured by
certain assets of the respective subsidiaries and corporate guarantees by Heska
Corporation. The Company expects to seek additional asset based borrowing
facilities.
Net cash used for operating activities was $23.3 million and $8.9
million for the nine months ended September 30, 1997 and 1996, respectively.
Cash was used for operations primarily to fund research and development
activities along with the expansion of sales and marketing operations and
administrative infrastructure.
The Company currently expects to spend approximately $5.0 million over
the next twelve months for capital equipment, including expenditures for the
upgrading of certain manufacturing operations to improve efficiencies as well as
various enhancements to assure ongoing compliance with certain regulatory
requirements. The Company expects to finance these expenditures through debt
facilities, where possible. In addition, the Company is in discussions to
provide manufacturing services to new customers that may require the
construction of specialized facilities and the purchase of specialized equipment
at Diamond, and the Company would, to the extent possible, ask such customers to
bear or share these costs.
Prior to the IPO, the Company financed its acquisition activities
through the issuance of Preferred Stock and in connection therewith issued
Preferred Stock valued at $7.1 million in April 1996 to acquire Diamond,
$648,000 in February 1997 to acquire Bloxham, and $588,000 in May 1997 to
acquire Astarix. In addition, the Company issued Common Stock valued at $1.9
million as part of the Astarix acquisition. Subsequent to the IPO, the Company
has financed its acquisition activities through the issuance of common stock,
the assumption of debt and the use of cash. Center was acquired in July 1997
with $337,000 in cash and a $3.0 million note payable to the seller, with
interest payable quarterly and the principal due in July 2000. CMG was acquired
in September 1997 with $1.6 million in cash and the issuance of Common Stock
valued at $538,000. Cash used for acquisition activities, net of cash received
and including funds deposited in a restricted cash account, totaled $2.3 million
for the nine months ended September 30, 1997 relating to Bloxham, Astarix,
Center and CMG, and $478,000 in the nine months ended September 30, 1996
relating to the Bioproducts Business and Diamond.
The Company's primary short-term needs for capital, which are subject
to change, are for continuing research and development efforts, its sales and
marketing activities and capital expenditures relating to developing and
expanding the Company's manufacturing operations. At September 30, 1997, the
Company's principal source of liquidity was $39.9 million in cash, cash
equivalents and short-term investments. The Company expects its working capital
requirements to increase over the next several years as it introduces new
products, expands its sales and marketing capabilities, improves its
manufacturing capabilities and facilities and acquires businesses, technologies
or products complementary to the Company's business. The Company's future
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liquidity and capital funding requirements will depend on numerous factors,
including the extent to which the Company's products under development are
successfully developed and gain market acceptance, the timing of regulatory
actions regarding the Company's potential products, the costs and the timing of
expansion of sales, marketing and manufacturing activities, the cost, timing and
business management of current and potential acquisitions, the procurement and
enforcement of patents important to the Company's business and the results of
product trials and competition.
The Company believes that its available cash and cash from operations
will be sufficient to satisfy its funding requirements for current operations
for the next nine months, assuming no significant uses of cash in acquisition
activities. The Company will need to raise additional capital to continue
funding its research and development programs, scaling up manufacturing
activities and expanding its sales and marketing force. The Company continues to
evaluate its financing alternatives and intends to raise capital to fund future
operations as market opportunities arise. There can be no assurance that such
additional capital will be available on terms acceptable to the Company, if at
all. Furthermore, any additional equity financing may be dilutive to
stockholders and debt financing, if available, may include restrictive
covenants. If adequate funds are not available, the Company may be required to
curtail its operations significantly or to obtain funds through entering into
collaborative agreements or other arrangements on unfavorable terms. The failure
by the Company to raise capital on acceptable terms when needed could have a
material adverse effect on the Company's business, financial condition or
results of operations.
NET OPERATING LOSS CARRYFORWARDS
As of December 31, 1996, the Company had a net operating loss ("NOL")
carryforward of approximately $26.9 million and approximately $731,000 of
research and development ("R&D") tax credits available to offset future federal
income taxes. The NOL and tax credit carryforwards, which are subject to
alternative minimum tax limitations and to examination by the tax authorities,
expire from 2003 to 2010. The Company's acquisition of Diamond resulted in a
"change of ownership" under the provisions of Section 382 of the Internal
Revenue Code of 1986, as amended. As such, the Company will be limited in the
amount of NOLs incurred prior to the merger that it may utilize to offset future
taxable income. This limitation will total approximately $4.3 million per year
for periods subsequent to the Diamond acquisition. Similar limitations also
apply to utilization of R&D tax credits to offset taxes payable.
FACTORS THAT MAY AFFECT RESULTS
This report includes certain forward looking statements about the
Company's business and results of operations which are subject to risks and
uncertainties that could cause the Company's actual results to vary materially
from those indicated from such forward-looking statements. Factors that could
cause such differences include those discussed below, as well as those discussed
elsewhere herein and in the Company's Form S-1 as filed with the Securities and
Exchange Commission. The factors discussed below should be read in conjunction
with the risk factors discussed in the Company's Form S-1 and other SEC filings,
which are incorporated by reference.
Dependence on Development and Introduction of New Products
Most of the Company's products are still under development and there
can be no assurance such products will be successfully developed or
commercialized on a timely basis, or at all. The Company believes that its
revenue growth and profitability, if any, will substantially depend upon its
ability to complete development of and successfully introduce its new products.
The Company will be required to undertake time-consuming and costly development
activities and seek regulatory approval for these new products. There can be no
assurance
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that the Company will not experience difficulties that could delay or prevent
successfully developing, obtaining regulatory approvals to market or introducing
these new products, that regulatory clearance or approval of any new products
will be granted by the United States Department of Agriculture ("USDA"), the
United States Food and Drug Administration ("FDA"), the Environmental Protection
Agency ("EPA") or foreign regulatory authorities on a timely basis, or at all,
or that the new products will be successfully commercialized. The Company's
strategy is to develop a broad range of products addressing different disease
indications. The Company has limited resources to devote to the development of
all its products and consequently a delay in the development of one product or
the use of resources for product development efforts that prove unsuccessful may
delay or jeopardize the development of its other products. Further, to a certain
extent, the Company is dependent on collaborative partners to successfully and
timely perform research and development activities on behalf of the Company. In
order to successfully commercialize any new products, the Company will be
required to establish and maintain a reliable, cost-efficient source of
manufacturing for such products. If the Company is unable, for technological or
other reasons, to complete the development, introduction or scale up of
manufacturing of any new product or if any new product is not approved for
marketing or does not achieve a significant level of market acceptance, the
Company could be materially and adversely affected. Following the introduction
of a product, adverse side effects may be discovered that make the product no
longer commercially viable. Publicity regarding such adverse effects could
affect sales of the Company's other products for an indeterminate time period.
The Company is dependent on the acceptance of its products by both veterinarians
and pet owners. The failure of the Company to engender confidence in its
products and services could affect the Company's ability to attain sustained
market acceptance of its products.
Loss History and Accumulated Deficit; Uncertainty of Future Profitability;
Quarterly Fluctuations and Customer Concentration
Heska has incurred net losses since its inception. At September 30,
1997, the Company's accumulated deficit was $59.4 million. The Company
anticipates that it will continue to incur additional operating losses for the
next several years. Such losses have resulted principally from expenses incurred
in the Company's research and development programs and, to a lesser extent, from
general and administrative and sales and marketing expenses. Currently, a
substantial portion of the Company's revenues are from Diamond, which
manufactures veterinary biologicals and pharmaceuticals on a contract basis for
major companies in the animal health industry. Revenues from one Diamond
customer comprised approximately 64% of total revenues in 1996 and 34% for the
first nine months of 1997 under the terms of a take-or-pay contract which
expires in June 1999. If this customer does not continue to purchase from
Diamond and if the lost revenues are not replaced by other customers or
products, the Company's financial condition and results of operations could be
adversely affected.
There can be no assurance that the Company will attain profitability
or, if achieved, will remain profitable on a quarterly or annual basis in the
future. The Company believes that future operating results will be subject to
quarterly fluctuations due to a variety of factors, including whether and when
new products are successfully developed and introduced by the Company or its
competitors, market acceptance of current or new products, regulatory delays,
product recalls, competition and pricing pressures from competitive products,
manufacturing delays, shipment problems, product seasonality, and changes in the
mix of products sold. Because the Company is continuing to increase its
operating expenses for personnel and new product development and marketing, the
Company's operating results will be adversely affected if its sales do not
correspondingly increase or if its product development efforts are unsuccessful
or subject to delays.
Limited Sales and Marketing Experience; Dependence on Others
In 1996 Heska began to build a sales force and commenced initial sales
of its products. To be successful, Heska will have to develop and train its
direct sales force or rely on marketing partners or other arrangements
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with third parties for the marketing, distribution and sale of its products. The
Company is currently marketing its products to veterinarians through a direct
sales force and certain third parties. There can be no assurance that the
Company will be able to successfully establish and maintain marketing,
distribution or sales capabilities or make arrangements with third parties to
perform those activities on terms satisfactory to the Company.
In addition, the Company has granted marketing rights to certain
products under development to third parties, including Novartis AG ("Novartis"),
Bayer AG ("Bayer") and Eisai Co., Ltd. ("Eisai"). Novartis has the right to
manufacture and market throughout the world (except in countries where Eisai has
such rights) under Novartis trade names any flea control vaccine or feline
heartworm vaccine developed by the Company on or before December 31, 2005. The
Company retained the right to co-exclusively manufacture and market these
products throughout the world under its own trade names. Accordingly, if both
elect to market these products, the Company and Novartis will be direct
competitors, with each party sharing revenues on the other's sales. Heska also
granted Novartis a right of first refusal pursuant to which, prior to granting
rights to any third party for any products or technology developed or acquired
by the Company for either companion animal or food animal applications, Heska
must first offer Novartis such rights. Bayer has exclusive marketing rights to
the Company's canine heartworm vaccine and its feline toxoplasmosis vaccine
(except in countries where Eisai has such rights). Eisai has exclusive rights in
Japan and most countries in East Asia to market the Company's feline and canine
heartworm vaccines, feline and canine flea control vaccines and feline
toxoplasmosis vaccine. The Company's agreements with its marketing partners
contain no minimum purchase requirements in order for such parties to maintain
their exclusive or co-exclusive marketing rights. There can be no assurance that
Novartis, Bayer or Eisai or any other collaborative party will devote sufficient
resources to marketing the Company's products. Furthermore, there is nothing to
prevent Novartis, Bayer or Eisai or any other collaborative party from pursuing
alternative technologies or products that may compete with the Company's
products.
Highly Competitive Industry
The market in which the Company competes is intensely competitive.
Heska's competitors include companion animal health companies and major
pharmaceutical companies that have animal health divisions. Companies with a
significant presence in the animal health market, such as American Home
Products, Bayer, Merck & Co., Inc., Novartis, Pfizer Inc. and IDEXX
Laboratories, Inc., have developed or are developing products that do or would
compete with the Company's products. Novartis and Bayer are marketing partners
of the Company, and their agreements with the Company do not restrict their
ability to develop and market competing products. These competitors have
substantially greater financial, technical, research and other resources and
larger, more established marketing, sales, distribution and service
organizations than the Company. Moreover, such competitors may offer broader
product lines and have greater name recognition than the Company. Additionally,
the market for companion animal health care products is highly fragmented, with
discount stores and specialty pet stores accounting for a substantial percentage
of such sales. As Heska intends to distribute its products only through
veterinarians, a substantial segment of the potential market may not be reached,
and the Company may not be able to offer its products at prices which are
competitive with those of companies that distribute their products through
retail channels. There can be no assurance that the Company's competitors will
not develop or market technologies or products that are more effective or
commercially attractive than the Company's current or future products or that
would render the Company's technologies and products obsolete. Moreover, there
can be no assurance that the Company will have the financial resources,
technical expertise or marketing, distribution or support capabilities to
compete successfully.
Uncertainty of Patent and Proprietary Technology Protection; License of
Technology of Third Parties
The Company's ability to compete effectively will depend in part on its
ability to develop and maintain proprietary aspects of its technology and either
to operate without infringing the proprietary rights of others or to
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obtain rights to such technology. Heska has United States and foreign issued
patents and is currently prosecuting patent applications in the United States
and with certain foreign patent offices. There can be no assurance that any of
the Company's pending patent applications will result in the issuance of any
patents or that, if issued, any such patents will offer protection against
competitors with similar technology. There can be no assurance that any patents
issued to the Company will not be challenged, invalidated or circumvented in the
future or that the rights created thereunder will provide a competitive
advantage.
The biotechnology and pharmaceutical industries have been characterized
by extensive litigation regarding patents and other intellectual property
rights. There can be no assurance that the Company will not in the future become
subject to patent infringement claims and litigation in the United States or
other countries or interference proceedings conducted in the United States
Patent and Trademark Office ("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 both costly
and time consuming. Litigation may be necessary to enforce any patents issued to
the Company or its collaborative partners, to protect trade secrets or know-how
owned by the Company or its collaborative partners, or to determine the
enforceability, scope and validity of the proprietary rights of others. Any
litigation or interference proceeding will result in substantial expense to the
Company and significant diversion of effort by the Company's technical and
management personnel. An adverse determination in litigation or interference
proceedings to which the Company may become a party could subject the Company to
significant liabilities to third parties. Further, either as the result of such
litigation or proceedings or otherwise, the Company may be required to seek
licenses from third parties which may not be available on commercially
reasonable terms, if at all.
The Company licenses technology from a number of third parties. The
majority of such license agreements impose due diligence or milestone
obligations and in some cases impose minimum royalty or sales obligations upon
the Company in order for the Company to maintain its rights thereunder. The
Company believes it is in compliance with the terms of each of these agreements.
The Company's products may incorporate technologies that are the
subject of patents issued to, and patent applications filed by, others. As is
typical in its industry, from time to time the Company and its collaborators
have received and may in the future receive notices claiming infringement from
third parties as well as invitations to take licenses under third party patents.
It is the Company's policy when it receives such notices to conduct
investigations of the claims asserted. With respect to notices the Company has
received to date, the Company believes, after due investigation, that it has
meritorious defenses to the infringement claims asserted. Any legal action
against the Company or its collaborators may require the Company or its
collaborators to obtain a license in order to market or manufacture affected
products or services. However, there can be no assurance that the Company or its
collaborators will be able to obtain licenses for technology patented by others
on commercially reasonable terms, that they will be able to develop alternative
approaches if unable to obtain licenses, or that the current and future licenses
will be adequate for the operation of their businesses. The failure to obtain
necessary licenses or to identify and implement alternative approaches could
prevent the Company and its collaborators from commercializing certain of their
products under development and could have a material adverse effect on the
Company's business, financial condition or results of operations.
The Company also relies upon trade secrets, technical know-how and
continuing invention to develop and maintain its competitive position. There can
be no assurance that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to
the Company's trade secrets or disclose such technology, that the Company can
meaningfully protect its rights to its trade secrets, or that the Company will
be capable of protecting its rights to its trade secrets.
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Limited Manufacturing Experience and Capacity; Reliance on Contract
Manufacturers
To be successful, the Company must manufacture, or contract for the
manufacture of, its current and future products in compliance with regulatory
requirements, in sufficient quantities and on a timely basis, while maintaining
product quality and acceptable manufacturing costs. In order to provide for
manufacturing of biological products, the Company acquired Diamond in April 1996
and certain assets of Center in July 1997. Significant work will be required for
the scaling up of each potential product prior to commercialization, and there
can be no assurance that such work can be completed successfully or on a timely
basis.
In addition to Diamond and Center, the Company intends to rely on
contract manufacturers for certain of its products. The Company currently has a
supply agreement with Atrix Laboratories ("Atrix") for its canine periodontal
disease therapeutic and a supply agreement with Quidel Corporation ("Quidel")
for certain manufacturing services relating to its point-of-care canine and
feline heartworm diagnostic tests. These agreements all require the
manufacturing partner to supply the Company's requirements, within certain
parameters. Certain of these partners do not have substantial manufacturing
experience on a commercial scale. There can be no assurance that these partners
will be able to manufacture products to regulatory standards, to the Company's
specifications or in a cost-effective and timely manner. If any supplier were to
be delayed in scaling up commercial manufacturing, were to be unable to produce
a sufficient quantity of products to meet market demand, or were to request
renegotiation of contract prices, the Company's business would be materially and
adversely affected. While the Company typically retains the right to manufacture
products itself or contract with an alternative supplier in the event of the
manufacturer's breach, any transfer of production would necessarily involve
significant delays in production and additional expense to the Company to scale
up production at a new facility and to apply for regulatory licensure for the
production of products at that new facility. In addition, there can be no
assurance that the Company will be able to locate suitable manufacturing
partners for its products under development or alternative suppliers if present
arrangements are not satisfactory.
Government Regulation; No Assurance of Obtaining Regulatory Approvals
The development, manufacture and marketing of most of the Company's
products are subject to regulation by various governmental authorities,
consisting principally of the USDA and the FDA in the United States and various
regulatory agencies outside the United States. Delays in obtaining, or failure
to obtain any necessary regulatory approvals would have a material adverse
effect on the Company's future product sales and operations. Any acquisitions of
new products and technologies may subject the Company to additional government
regulation.
The Company's manufacturing facilities and those of any contract
manufacturers the Company may use are subject to the requirements of and subject
to periodic regulatory inspections by the FDA, USDA and other federal, state and
foreign regulatory agencies. There can be no assurance that the Company or its
contractors will satisfy such regulatory requirements, and any failure to do so
would have a material adverse effect on the Company's business, financial
condition or results of operations.
There can be no assurance that the Company will not incur significant
costs to comply with laws and regulations in the future or that laws and
regulations will not have a material adverse effect upon the Company's business,
financial condition or results of operation.
Future Capital Requirements; Uncertainty of Additional Funding
While the Company believes that its available cash, together with the
proceeds of its IPO, will be sufficient to satisfy its funding needs for current
operations for the next nine months, assuming no significant uses of cash in
acquisition activities, the Company has incurred negative cash flow from
operations since
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inception and does not expect to generate positive cash flow to
fund its operations for the next several years. Thus, the Company will need to
raise additional capital to fund its research and development programs, to scale
up manufacturing capabilities and for its sales and marketing activities. The
Company's future liquidity and capital funding requirements will depend on
numerous factors, including the extent to which the Company's products under
development are successfully developed and gain market acceptance, the timing of
regulatory actions regarding the Company's potential products, the costs and
timing of expansion of sales, marketing and manufacturing activities,
procurement, enforcement and defense of patents important to the Company's
business, results of product trials and competition. There can be no assurance
that such additional capital will be available on terms acceptable to the
Company, if at all. Furthermore, any additional equity financing may be dilutive
to stockholders, and debt financing, if available, may include restrictive
covenants. If adequate funds are not available, the Company may be required to
curtail its operations significantly or to obtain funds through entering into
collaborative agreements or other arrangements on unfavorable terms. The failure
by the Company to raise capital on acceptable terms when needed could have a
material adverse effect on the Company's business, financial condition or
results of operations.
Dependence on Key Personnel
The Company is highly dependent on the efforts of its senior management
and scientific team, including its Chief Executive Officer and Chief Scientific
Officer. The loss of the services of any member of its senior management or
scientific staff may significantly delay or prevent the achievement of product
development and other business objectives. Because of the specialized scientific
nature of the Company's business, the Company is highly dependent on its ability
to attract and retain qualified scientific and technical personnel. There is
intense competition among major pharmaceutical and chemical companies,
specialized biotechnology firms and universities and other research institutions
for qualified personnel in the areas of the Company's activities. Loss of the
services of, or failure to recruit, key scientific and technical personnel could
adversely affect the Company's business, financial condition or results of
operations.
Potential Difficulties in Management of Growth; Identification and Integration
of Acquisitions
The Company anticipates additional growth in the number of its
employees, the scope of its operating and financial systems and the geographic
area of its operations as new products are developed and commercialized. This
growth will result in an increase in responsibilities for both existing and new
management personnel. The Company's ability to manage growth effectively will
require it to continue to implement and improve its operational, financial and
management information systems and to train, motivate and manage its employees.
There can be no assurance that the Company will be able to manage its expansion,
and a failure to do so could have a material adverse effect on the Company's
business, financial condition or results of operations.
In 1996, Heska consummated the acquisitions of Diamond and the canine
allergy business of Bioproducts DVM, Inc. The Company's recent acquisitions
include: the February 1997 purchase of Bloxham Laboratories Limited, a
veterinary diagnostic laboratory in the United Kingdom; the May 1997 purchase of
Astarix Institute, Inc., a development stage company which has discovered
certain compounds and associated technologies that have the potential for
treating allergic diseases in both humans and animals; the July 1997 purchase of
the allergy immunotherapy products business of Center Laboratories,
Incorporated, an FDA and USDA licensed manufacturer of allergy immunotherapy
products; and the September 1997 purchase of CMG Centre Medical des Grands'
Places SA, a Swiss corporation which manufactures and markets allergy diagnostic
products for use in veterinary and human medicine primarily in Europe and Japan.
Moreover, the Company anticipates that it will make additional acquisitions.
Identifying and pursuing acquisition opportunities, integrating acquired
products and businesses and managing growth requires a significant amount of
management
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time and skill. There can be no assurance that the Company will be effective in
identifying and effecting attractive acquisitions, integrating acquisitions or
managing future growth. The failure to do so may have a material adverse effect
on the Company's business, financial condition or results of operations.
Potential Product Liability; Limited Insurance Coverage
The testing, manufacturing and marketing of the Company's current
products as well as those currently under development entail an inherent risk of
product liability claims and associated adverse publicity. To date, the Company
has not experienced any material product liability claims, but any such claims
arising in the future could have a material adverse effect on the Company's
business, financial condition or results of operations. Potential product
liability claims may exceed the amount of the Company's insurance coverage or
may be excluded from coverage under the terms of the policy. There can be no
assurance that the Company's existing insurance can be renewed at a cost and
level of coverage comparable to that presently in effect, if at all. In the
event that the Company is held liable for a claim against which it is not
indemnified or for damages exceeding the limits of its insurance coverage or
which results in significant adverse publicity against the Company, such claim
could have a material adverse effect on the Company's business, financial
condition or results of operations.
Risk of Liability from Release of Hazardous Materials
The Company's products and development programs involve the controlled
use of hazardous and biohazardous materials, including chemicals, infectious
disease agents and various radioactive compounds. Although the Company believes
that its safety procedures for handling and disposing of such materials comply
with the standards prescribed by applicable local, state and federal
regulations, the risk of accidental contamination or injury from these materials
cannot be completely eliminated. In the event of such an accident, the Company
could be held liable for any damages or fines that result and any such liability
could exceed the resources of the Company. The Company may incur substantial
costs to comply with environmental regulations as the Company expands its
manufacturing capacity.
Pending Governmental Proceeding
The Company has been notified that the staff of the United States
Federal Trade Commission ("FTC") is conducting an investigation of Novartis, a
principal stockholder of Heska, with respect to Novartis' relationship with
Heska. The Company and Novartis have responded to the FTC requests for
information with respect to competition for feline heartworm prevention products
and canine and feline flea control products. The Company believes that the FTC
staff is investigating Novartis' actions in acquiring an equity interest in
Heska and representation on its board of directors and certain rights to market
Heska products to determine whether these actions violate federal antitrust
laws. At this time it is not known whether the investigation will result in the
initiation of formal proceedings before the FTC, or if such proceedings are
initiated, what relief will be sought or obtained. Such relief may include
limitation of Novartis' voting rights with respect to its Heska stock,
limitation of Novartis' representation on the Company's board of directors, an
orderly divestiture of Novartis' equity investment in Heska or reformation of
Novartis' collaborative agreements with the Company. There can be no assurance
that if the FTC were to initiate a proceeding and be successful, that such
relief would not have a material adverse effect on the Company's business,
operating results and financial condition.
Possible Volatility of Stock Price
The securities markets have from time to time experienced significant
price and volume fluctuations that are unrelated to the operating performance of
particular companies. The market prices of the common stock of
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many publicly-held biotechnology companies have in the past been, and can in the
future be, especially volatile. Announcements of technological innovations or
new products by the Company or its competitors, release of reports by securities
analysts, developments or disputes concerning patents or proprietary rights,
regulatory developments, changes in regulatory policies, economic and other
external factors, as well as quarterly fluctuations in the Company's financial
results, may have a significant impact on the market price of the Common Stock.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(d) The Company sold 5,637,850 shares of common stock, par value $.001,
pursuant to a Registration Statement on Form S-1 (File No. 333-25767),
declared effective on June 23, 1997 (as amended by a post-effective
amendment dated June 27, 1997). The managing underwriters of the
offering were Credit Suisse First Boston and Merrill Lynch & Co. and
the offering commenced on June 30, 1997. The aggregate gross proceeds
of the offering were approximately $47.9 million. The Company's net
proceeds from the offering were approximately $43.9 million, after
giving effect to underwriting discounts and commissions of
approximately $3.1 million and offering expenses of approximately $1.0
million. As of September 30, 1997, the Company had used approximately
$4.1 million for research and development efforts, $2.2 million for
its sales and marketing efforts, $1.9 million for the acquisitions of
Center and CMG, $1.4 million for working capital and other general
corporate purposes and $18.6 million for temporary investments in U.S.
government obligations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit Index on Page 23
(b) Reports on Form 8-K
The Company filed a Form 8-K dated September 1, 1997 reporting the
issuance of 59,905 shares of its Common Stock in connection with the
acquisition of all of the outstanding shares of capital stock of CMG.
21
<PAGE> 24
HESKA CORPORATION
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HESKA CORPORATION
Date: November 13, 1997 By: /s/ William G. Skolout
----------------------
WILLIAM G. SKOLOUT
Chief Financial Officer
(on behalf of the Registrant and as
the Registrant's Principal
Financial and Accounting Officer)
22
<PAGE> 25
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<S> <C>
10.14(+) Supply agreement between the Company and Quidel Corporation dated
July 3, 1997.
27 Financial Data Schedule
</TABLE>
- ---------
(+) Confidential treatment has been requested for certain portions of this
agreement.
23
<PAGE> 1
EXHIBIT 10.14
[CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTIONS OF THIS DOCUMENT
HAVE BEEN REDACTED AND HAVE BEEN SEPARATELY FILED WITH THE COMMISSION]
PRODUCT SUPPLY AGREEMENT
This Agreement is entered into as of July 3, 1997 by and between
Quidel Corporation, a Delaware corporation having a place of business at 10165
McKellar Court, San Diego, California 92121 ("QUIDEL") and Heska Corporation, a
California corporation having a place of business at 1825 Sharp Point Drive,
Fort Collins, Colorado 80525 ("HESKA").
RECITALS
A. QUIDEL has developed diagnostic tests for HESKA and desires to
manufacture such tests in commercial quantities for sale and distribution by
HESKA.
B. HESKA desires to have the diagnostic tests developed by QUIDEL
manufactured by QUIDEL exclusively for sale to HESKA.
NOW, THEREFORE, in consideration of the mutual promises in this
Agreement, the parties agree as follows:
1. DEFINITIONS
1.1 "Affiliate" shall mean any company,
corporation, or business in which a party owns or controls at least a fifty
percent (50%) ownership interest or which owns or controls such an interest in
such party.
1.2 "Development Agreement" shall mean the
Restated Product Development Agreement between the parties effective as of July
3, 1997.
1.3 "Effective Date" shall mean the date on which
this Agreement has been signed by authorized representatives of both parties.
This date shall be inserted in the opening paragraph of this Agreement.
1.4 "Event of Default" shall have the meaning
given in Section 7.1 below.
1.5 "Product" shall mean a diagnostic test as set
forth on Exhibit A hereto, as such Exhibit may be amended from time to time as
provided in Section 2.1 below.
<PAGE> 2
1.6 "Specifications" shall mean the detailed
technical specifications for a Product as described in Section 2.1 below.
1.7 "USDA" shall mean the United States
Department of Agriculture and any successor agency regulating manufacture and
sale of the Products.
2. PURCHASE OF PRODUCTS.
2.1 Products Subject to Agreement. HESKA may
purchase from QUIDEL those products listed and described on Exhibit A attached
hereto (the "Products") meeting the respective specifications for such Products
set forth on Exhibit B (the "Specifications"). Additional products may be
added to this Agreement upon mutual agreement of the parties and by
substituting a revised Exhibit A and adding an additional schedule to Exhibit B
relating to such new product.
2.2 Order of Precedence. All purchases of
Products by HESKA shall be made on the terms of this Agreement; provided,
however, that in the event of any conflict between the terms of this Agreement
and the typewritten terms of any of HESKA's accepted purchase orders, the order
of precedence shall be (i) any typewritten specially negotiated terms of any
of HESKA's accepted purchase orders set forth on the face of such purchase
order and (ii) this Agreement. All other terms and conditions contained in
HESKA's or QUIDEL's standard form purchasing and selling documents shall be
disregarded.
2.3 Purchase Orders. HESKA shall submit firm
purchase written orders for Products at least 90 days prior to the date of
shipment specified therein. HESKA's purchase orders shall (1) state the
quantity of each Product, (b) specify the delivery location, and (c) state the
desired date of delivery. Any purchase orders submitted by HESKA shall be
subject to acceptance as to quantities and delivery dates by an authorized
representative of QUIDEL at QUIDEL's principal sales office. Any order not
rejected within five (5) business days shall be deemed accepted. Once so
accepted, QUIDEL shall use commercially reasonable efforts to meet the delivery
dates and quantities set forth on such purchase orders.
2.4 Forecasts. No later than the tenth day of
each month after the Effective Date, HESKA will provide QUIDEL with a twelve
month rolling forecast (each, a "Product Forecast") which will state: (a) the
number of each type of Product which HESKA forecasts that it will order in each
month, and (b) the month in which HESKA forecasts it will request delivery.
QUIDEL's lead time for Products is six weeks, and the forecasted delivery date
for each order will conform to such lead time requirements. HESKA will be
bound by each of its then current Product Forecasts, but only as follows:
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<PAGE> 3
(a) All forecasts within the
first three months of the then current Product Forecast are firm and may not be
decreased in any subsequent Product Forecast, although with respect to the
third month HESKA may increase the number of any particular Product to be
delivered in that third month by up to twenty- five percent (25%).
(b) In any subsequent Product
Forecast, HESKA may increase or decrease freely the number of any particular
type of Products it would order during the fourth and any subsequent months.
(c) Any changes in forecast
greater than those allowed by Section 2.4(a) require the written consent of
QUIDEL. Any decrease in the number of units which HESKA has committed to
purchase under Section 2.4(a), including any failure to deliver a purchase
order for such number of units, shall be treated as a cancellation under
Section 2.5 below.
2.5 Cancellation. HESKA may cancel accepted
purchase orders as follows. To the extent that any canceled order relates to
Products scheduled for delivery more than three (3) months from the
cancellation date, HESKA shall have no obligation to QUIDEL. To the extent
that any canceled order relates to Products scheduled for delivery within three
(3) months from the cancellation date, HESKA shall pay to QUIDEL an amount
equal to the price set forth on Exhibit A for the canceled Products.
2.6 Obsolete and Surplus Supplies. QUIDEL agrees
that it shall order chemicals, packaging components and other supplies for use
in HESKA's Products only in prudent quantities to meet the current portion of
HESKA's Product Forecasts or to meet minimum quantity packaging material as
stated in Exhibit A. HESKA shall purchase from QUIDEL all chemicals, packaging
components and other supplies acquired specifically for HESKA's products to the
extent that such supplies either (a) have become obsolete due to changes in the
Specifications requested by HESKA or (b) are in excess of 150% of twelve
months' requirements based upon the then current Product Forecast. Within
thirty (30) days after QUIDEL's written request to HESKA therefor, with
reasonable supporting detail in such request, HESKA will pay QUIDEL at QUIDEL's
cost for such supplies which QUIDEL is not able to use in its manufacturing
process or resell at its cost. QUIDEL will use commercially reasonable efforts
to minimize the amount of HESKA's liability for compensation under this Section
2.6.
2.7 Artwork. HESKA shall provide all necessary
artwork for labeling and packaging. All such artwork shall remain the property
of HESKA.
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<PAGE> 4
2.8 [
]
3. PRICES AND PAYMENT.
3.1 Prices. HESKA shall pay the unit price for
each accepted Product as set forth on Exhibit A. The prices on Exhibit A
include manufacturing, packaging and such other services as are indicated on
Exhibit A. The prices set forth on Exhibit A shall be in effect for twelve
(12) months from the effective date (or for new Products, twelve (12) months
from the date such Product is added to Exhibit A). At any time after the
initial twelve (12) month period, either QUIDEL or HESKA shall have the right
to request renegotiation of prices, based upon increases or reductions of cost,
increases in HESKA volume and other relevant factors. The parties agree to
negotiate any such price changes in good faith and to provide any reasonably
necessary supporting documentation. All orders placed prior to the effective
date of any increase shall be billed at the pre-increase net prices. All
prices are F.O.B. QUIDEL's manufacturing facility, and are exclusive of taxes,
freight and insurance, which shall be stated separately on the invoice to and
paid by HESKA.
3.2 Payment. QUIDEL shall invoice upon shipment.
Terms of payment are net thirty (30) days from the invoice date.
4. DELIVERY.
4.1 Transportation and Risk of Loss. QUIDEL
shall arrange transportation of the Products by carrier acceptable to HESKA to
HESKA's specified delivery destination. Title to and risk of loss of the
Products shall pass to HESKA at the time of delivery to the specified carrier.
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<PAGE> 5
4.2 Delivery Delay. HESKA may, at no additional
charge, request a one time delivery delay under an individual purchase order,
provided such request is submitted to QUIDEL not fewer than ten (10) days prior
to the accepted delivery date and delivery is to be delayed not more than sixty
(60) days from the accepted delivery date. If HESKA requests a delivery delay,
HESKA agrees to accept the Product with any reduction in shelf life up to the
amount of days covered by the delay request. A request to reschedule a
shipment except as permitted in this Section 4.2 shall be treated as a
cancellation.
4.3 Inspection. HESKA shall have a period of
thirty (30) business days from the date of receipt of any shipment to inspect
and reject any shipment. Within forty-five (45) business days, HESKA shall
return any rejected Product to QUIDEL, freight prepaid, together with a written
statement as to the grounds for rejection and identifying the exact quantity
rejected. QUIDEL shall, within twenty (20) business days, deliver to HESKA
replacement Products meeting the Specifications and shall credit HESKA with
HESKA's freight charges in returning rejected Products.
5. QUALITY CONTROL AND REGULATORY COMPLIANCE.
5.1 Quality Control Procedures. QUIDEL shall
manufacture the Products to meet the Specifications and in accordance with the
USDA approved Outline of Production. QUIDEL agrees that its quality control
procedures shall be applied in the same rigorous manner as those procedures and
checks which are applied to products for its own use and sale.
5.2 Notification. Each party agrees to notify
the other within two (2) business days of learning of the failure of any batch
of Products to meet the Specifications or QUIDEL's quality control procedures.
5.3 Changes to Specifications. HESKA may request
that QUIDEL make changes to the Specifications for any Product. QUIDEL shall
evaluate each such request and shall notify HESKA within thirty (30) days of
the expected impact upon pricing, delivery and quality of such changes and of
any regulatory issues arising out of such changes. QUIDEL may, but shall not
be obligated, to implement any such changes. QUIDEL shall not make any
revisions or changes to the Specifications without the prior written consent of
HESKA.
5.4 Regulatory Compliance. QUIDEL shall be
responsible for obtaining and maintaining at its expense any regulatory
approvals required to be a licensed establishment for manufacture of the
Products and required for each Product for further manufacture. HESKA shall be
responsible for obtaining and maintaining at
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<PAGE> 6
its expense all federal and state registrations and approvals required for the
final Products. The parties agree to cooperate reasonably to enable each party
to obtain such registrations and approvals.
5.5 Documentation and Audit Procedures. Each
party shall maintain the originals of all required regulatory documentation to
be kept by the manufacturer, the product license holder or the seller, as the
case may be. Each party shall allow representatives of the other party, upon
reasonable notice and at reasonable intervals, to examine, audit and copy such
documentation during regular business hours for product liability, regulatory
and quality control purposes.
5.6 Maintenance of Licenses. QUIDEL agrees to
maintain a package of documentation as directed by HESKA regarding QUIDEL's
compliance with USDA manufacturing Practices that relates to the Products being
sold to HESKA and that complies with USDA regulations. QUIDEL will update this
package promptly to reflect any material changes in a Product's manufacturing
process or any changes in USDA requirements. QUIDEL agrees to provide this
package to HESKA as reasonably requested by HESKA.
5.7 Notifications.
(a) Of QUIDEL. QUIDEL agrees
that it will promptly (and in any event within one (1) business day) notify
HESKA of any contact, claim or other communication initiated by the USDA or any
foreign counterparts that relates to, or may relate to, any Products and a copy
of such communication, to the extent that it relates to a Product, shall be
provided to HESKA. In addition, prior to initiating any contact with the USDA
or any foreign counterparts relating to any Product, QUIDEL will provide HESKA
with the opportunity to review and approve the substance of any such
communication. QUIDEL will provide HESKA with copies of any such
communications actually sent to the extent that they relate to a Product. Any
communication relating to routine regulatory filings, notices and reports and
other non-adverse communications, either initiated by QUIDEL or by any
regulatory agency, that does not relate to a Product need not be provided. In
addition, QUIDEL will notify HESKA the same business day of any inspection of
QUIDEL's facilities by the USDA or any foreign counterpart and will provide a
copy of any reports or other communications relating to such inspection to the
extent that they relate to QUIDEL's manufacture of the Products.
(b) Of HESKA. HESKA agrees that
it will promptly notify QUIDEL of any contact, claim or other communication by
any entity or agency that relates to, or may relate to, HESKA's ability to
perform its responsibilities herein. Any communication (other than routine
regulatory filings, notices and reports and other
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<PAGE> 7
non-adverse communications), either initiated by HESKA or by any regulatory
agency that references a Product in this Agreement or the submission of any
such Product will immediately be brought to the attention of QUIDEL and a copy
of such communication, to the extent that it relates to a Product, shall be
provided to QUIDEL.
5.8 Insurance. Each party will maintain product
liability insurance covering its performance of its obligations hereunder with
a minimum limit of liability of $1,000,000 in the aggregate. Each party will
also maintain insurance to protect both parties from claims under any Worker's
Compensation Acts and from any other damages from personal injury including
death, which may be sustained by their respective agents, servants or employees
and the general public and/or claims of property damage which might be
sustained from any one of them due to the negligence of a party, in amounts
mutually determined. Each party shall, upon request, furnish the other a
certificate of insurance.
6. WARRANTIES.
6.1 Product Warranty. QUIDEL warrants to HESKA
that the Products will conform to their applicable Specifications through their
respective expiration dates and will be manufactured in accordance with all
applicable governmental statutes and regulations and with the outline of
production applicable to such Products. Upon failure of any unit of Product to
comply with the foregoing warranty, QUIDEL will promptly replace such unit with
a unit that does comply or, if unable to replace it, promptly refund in cash to
HESKA the amount paid by HESKA for such unit. QUIDEL will pay all shipping
costs associated with the replacement of Products.
6.2 Exclusions. The foregoing warranties will
not apply to the extent of any defects caused by improper or inadequate
handling or storage of Products by HESKA.
6.3 No Other Warranties. THE FOREGOING
WARRANTIES ARE IN LIEU OF ALL OTHER WARRANTIES EITHER EXPRESS OR IMPLIED
INCLUDING WITHOUT LIMITATION IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS
FOR A PARTICULAR PURPOSE.
6.4 Product Recall. QUIDEL shall substitute
Product at no cost to HESKA to complete any Product recall required under
applicable regulations by subsequent determination that the Product was not
produced in accordance with its Specifications when released to HESKA or was
not produced in compliance with applicable regulations or the approved outline
of production. HESKA shall be responsible for all other recalls.
-7-
<PAGE> 8
7. CONTINGENT MANUFACTURING LICENSE
7.1 Event of Default. The term "Event of
Default" shall mean (a) failure of QUIDEL to deliver Products within fifteen
(15) days after the delivery date on the accepted purchase order, (b) failure
of QUIDEL to deliver Products conforming to QUIDEL's warranties herein, (c)
QUIDEL's failure to comply with material regulatory standards and requirements
applicable to the manufacture and sale of the Products, (d) QUIDEL's general
inability to pay its debts as they become due, admission in writing of
inability to pay its debts generally or assignment for the benefit of creditors
or the filing by or against QUIDEL of any bankruptcy insolvency, liquidation,
winding up, reorganization, arrangement or similar proceeding, which proceeding
is not stayed or dismissed within sixty (60) days or entry of an order for
relief or the appointment of a receiver, trustee or similar official, (e)
HESKA's having a reasonable basis to believe that QUIDEL will be unable to
deliver Products conforming to QUIDEL's warranties herein, and (f) QUIDEL's
breach of any covenant or obligation under this Agreement. Notwithstanding the
foregoing, no Event of Default shall be deemed to exist under subsections (a),
(b), (c), (e) or (f) above until sixty (60) days after written notice from
HESKA to QUIDEL specifying the condition or event giving rise to such Event of
Default, if such condition or event is capable of cure and QUIDEL promptly
commences and prosecutes such cure to completion in all material respects
within such sixty (60) day period.
7.2 Grant of Manufacturing License. Upon an
Event of Default as specified above and expiration of the applicable cure
period, HESKA shall immediately have the right and license upon written notice
to QUIDEL to manufacture and have manufactured Products and to use, modify,
market, sell, license and sublicense such Products. QUIDEL agrees, upon
receipt of such written notice from HESKA, to use its best efforts to cooperate
promptly (and in any event within ten (10) business days) with HESKA to
transfer to an alternative manufacturer specified by HESKA all manufacturing
documentation relating to the production of the Products, including, but not
limited to, standard operating procedures, bill of materials, designs,
drawings, lists of tooling and materials required for the creation of new
tooling, quality assurance protocols and other test materials and all computer
programs reasonably necessary to enable such other manufacturer to manufacture
the Products.
7.3 Scope of License. The license granted under
Section 7.2 shall be a perpetual, worldwide, paid-up, assignable, royalty-free
(subject to any royalty obligations to third parties), exclusive license.
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<PAGE> 9
8. LIMITATION OF LIABILITY
IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY
FOR COSTS OF PROCUREMENT OF SUBSTITUTE PRODUCTS OR SERVICES, LOST PROFITS, LOSS
OF GOODWILL, OR ANY SPECIAL, INDIRECT, CONSEQUENTIAL OR INCIDENTAL DAMAGES,
HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY, ARISING IN ANY WAY OUT OF THE
SALE OF, OR AGREEMENT TO SELL, PRODUCTS TO HESKA. THIS LIMITATION SHALL APPLY
EVEN IF A PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, AND
NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY.
9. CONFIDENTIALITY
9.1 Basic Obligations. Each party agrees, both
during the term of this Agreement and for a period of five years thereafter, to
hold all information given to it by the other party that is identified as
confidential (the "Confidential Information"), in confidence, and not to make
the Confidential Information available in any form to any third party or to use
the Confidential Information for any purpose other than the purposes described
in this Agreement. Each party agrees to take all reasonable steps to ensure
that Confidential Information is not disclosed or distributed by its employees
or agents in violation of this Agreement, including limiting disclosure to
employees or other persons who have a need to know and who have signed
appropriate confidentiality agreements. This restriction on disclosure shall
not apply to the extent that any Confidential Information (a) is or becomes a
part of the public domain through no act or omission of the receiving party;
(b) was in the receiving party's lawful possession prior to the disclosure and
had not been obtained by the receiving party from the disclosing party; (c) is
lawfully disclosed to the receiving party by a third party without restriction
on disclosure; or (d) is independently developed by the receiving party by
personnel not having access to the Confidential Information.
9.2 Attorney-Client Protected Information. In
the event that a party should reasonably request from the other party, for
purposes of evaluating any claim or potential claim of infringement of
proprietary rights or any other claim relevant to this Agreement, any
Confidential Information that is protected by the attorney- client and/or
attorney work product privileges, including notes and work papers, opinion
letters and any other information in whatever form generated by an attorney or
exchanged between an attorney and his client ("Attorney-Client Protected
Information"), the receiving party agrees that, notwithstanding Section 9.1
above, (a) the receiving party shall not duplicate, copy or otherwise reproduce
such Attorney-Client Protected Information for any purpose whatsoever; (b)
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<PAGE> 10
Attorney-Client Protected Information shall neither be used by nor disclosed to
any employees or representatives of the receiving party except for attorneys
representing the receiving party and employees who will participate in
evaluating the merits of any such claim, and (c) the receiving party shall
return all Attorney-Client Protected Information to the disclosing party upon
its completion of the evaluation referenced above.
10. TERM AND TERMINATION
10.1 Term. The initial term of this Agreement
shall be for a period of five (5) years, commencing on the Effective Date, and
shall automatically renew thereafter for additional renewal terms of twelve
(12) months each, unless either party gives at least twelve (12) months prior
written notice to the other that it does not wish to renew this Agreement.
10.2 Termination for Breach. This Agreement may
be terminated by either party immediately if the other party commits any
material breach of this Agreement which has not been remedied within sixty (60)
days of written notice thereof.
10.3 Performance on Termination. Upon termination
of this Agreement for any reason: (a) QUIDEL shall fill any confirmed purchase
orders for delivery on the order delivery dates (unless QUIDEL terminates this
Agreement for non-payment by HESKA) and HESKA shall pay QUIDEL for all such
Products not later than ten (10) days after receipt of the invoice therefor;
(b) all raw materials and bulk antigen furnished by HESKA shall be returned;
(c) all costs of unused raw materials and packaging shall be paid by HESKA as
provided in Section 2.6. QUIDEL acknowledges that the Products contain
intellectual property of HESKA and, except for Products manufactured as
provided in subsection (a) above, upon the expiration or termination of this
Agreement for any reason QUIDEL shall cease manufacture of the Products and
shall not sell Products to any party.
10.4 Survival. The obligations of the parties
under Sections 6, 8, 9, 11, 12 and 13 shall survive the termination or
expiration of this Agreement.
11. RECORDS AND INSPECTION
11.1 Record Retention. Both parties shall
maintain records with respect to obligations to itself and the other party
under this Agreement. The records shall be retained for a period of not less
than two (2) years or such longer period as required by law or regulation. All
records relating to the manufacture, stability and quality control of all
Products shall be retained for a period of not less than two (2) years
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<PAGE> 11
from the date of expiration of each batch of each Product to which such records
pertain.
11.2 Records Inspection. Each party may request
to inspect and reproduce during normal business hours any records of the other
party for any purpose reasonably related to the proper purposes of this
Agreement. Such request shall be given at least ten (10) business days prior
to the requested inspection date.
12. INDEMNIFICATION.
12.1 Intellectual Property Indemnification.
QUIDEL shall defend and indemnify HESKA against any claim that any Products
furnished and used as provided in this Agreement infringes a patent or
copyright owned by a third party, and shall pay any costs and damages incurred
by HESKA in such action, including reasonable attorneys' fees. This obligation
shall not apply to the extent any such claim is based upon any biological
materials supplied by HESKA. This obligation is contingent upon HESKA
notifying QUIDEL promptly in writing of such claim, giving QUIDEL sole control
of the defense and all related settlement negotiations, and providing QUIDEL
with all assistance and information necessary for the defense. If any Product
is held to infringe, or QUIDEL believes it may infringe, QUIDEL shall at its
sole option either modify such Product to be non-infringing, or obtain a
license for HESKA to continue using the Product. QUIDEL shall have no
obligation hereunder for the modification of the Products or combination,
operation or use of the Products with materials not furnished by QUIDEL if such
infringement would have been avoided without such modification or combination.
12.2 HESKA Indemnity. HESKA shall indemnify and
hold QUIDEL harmless from all claims, losses and damages which arise from any
failure by HESKA to comply with any of the requirements of this Agreement,
including export and governmental requirements, any actions taken by HESKA or
its employees and agents in marketing its products, and any other act or
omission of HESKA, its agents and employees.
13. INTELLECTUAL PROPERTY RIGHTS.
13.1 Trademarks and Trade names. HESKA
acknowledges that it does not have, nor shall it acquire, any interest in any
QUIDEL trademark or trade name by virtue of this Agreement. The Products
distributed by HESKA under this Agreement shall bear trademarks or trade names
different than those used by QUIDEL for its own products. HESKA shall own
rights in such trademarks or trade names and QUIDEL shall not acquire any
rights in such trademarks and trade names by virtue of this Agreement.
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<PAGE> 12
13.2 Ownership of Intellectual Property. Each
party acknowledges that no transfer of ownership of or license to any
intellectual property is contemplated by this Agreement except as specifically
provided herein.
14. GENERAL PROVISIONS
14.1 Entire Agreement. This Agreement, including
its exhibits, embodies the entire understanding of the parties, there being no
promises, terms, conditions or obligations, oral or written, express or
implied, other than those contained herein. This Agreement may only be amended
by a written document signed by authorized representatives of both parties.
14.2 Notice. Any notice required to be given
hereunder shall be in writing and may be given by facsimile transmission to the
facsimile number for such party set forth below or personal delivery (including
by professional courier) at, or mailing (by first class receipted prepaid mail)
to, the address of the party contained in this Agreement, or such other
facsimile number or address as such party may have notified the other of
pursuant to this Section. In the case of facsimile transmission or personal
delivery, such notice shall be deemed to have been given upon the date of such
transmission or delivery. In the case of mailing, such notice shall be deemed
to have been given seven days after such mailing. Notices shall be addressed
to the attention of the President.
14.3 Relationship of the Parties. Nothing in this
Agreement shall constitute or be deemed to constitute a joint venture or
partnership between the parties. The relationship between QUIDEL and HESKA
shall be that of independent contractors.
14.4 Transfer and Assignment. Neither party may
assign or sublicense any of its rights or obligations hereunder to any person,
including any affiliate, without the prior written consent of the other party,
provided, however, that a party may assign this Agreement without the other
party's consent in connection with the sale, by merger of otherwise, of
substantially all of a party's business relating to the subject matter hereof.
Subject to the foregoing, this Agreement shall accrue to the benefit of and be
binding upon the successors and assigns of the parties.
14.5 Force Majeure. Neither party shall be liable
for any failure to perform any of its obligations hereunder (other than the
payment of money) which results from act of God, the elements, fire, flood,
component shortages, force majeure, riot, insurrection, industrial dispute,
accident, war, embargoes, legal restrictions or any other cause beyond the
reasonable control of the party, provided, however,
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<PAGE> 13
that if such inability extends for more than ninety (90) days, the other party
shall have the right to terminate this Agreement immediately upon written
notice.
14.6 Severability. If any provision in this
Agreement is found or held to be invalid or unenforceable, then the meaning of
said provision shall be construed, to the extent feasible, so as to render the
provision enforceable, and if no feasible interpretation would save such
provision, it shall be severed from the remainder of this Agreement which shall
remain in full force and effect unless the severed provision is essential and
material to the rights or benefits received by either Party. In such event,
the parties shall use their best efforts to negotiate, in good faith, a
substitute, valid and enforceable provision or agreement which most nearly
effects their intent in entering into this Agreement.
14.7 No Waiver. No waiver of any term or
condition of this Agreement shall be valid or binding on a party unless the
same has been mutually assented to in writing by both parties. The failure of
a party to enforce at any time any of the provisions of this Agreement, or the
failure to require at any time performance by the other party of any of the
provisions of this Agreement, shall in no way be construed to be a present or
future waiver of such provisions, nor in any way affect the ability of a party
to enforce each and every such provision thereafter.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
as of the date first above written by their duly authorized representatives.
QUIDEL CORPORATION HESKA CORPORATION
By /s/ Steven T. Frankel By /s/ Fred M. Schwarzer
----------------------- -----------------------------------------
Name Steven T. Frankel Name Fred M. Schwarzer
--------------------- ---------------------------------------
Title President and CEO Title President & CEO
-------------------- --------------------------------------
Facsimile 619 546-8955 Facsimile 970 484 9505
---------------- ----------------------------------
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EXHIBIT A
Products and Pricing
Products
1. Feline Heartworm Antigen Test Kit having the specifications attached
as Exhibit B-1.
2. Canine Heartworm Antibody Test Kit having the specifications attached
as Exhibit B-2.
Pricing.
QUIDEL will supply units of Products to HESKA at a price per unit of [ ] for
tests in strip format and [ ] for tests in cassette format. Price is FOB
QUIDEL packaged as described in Exhibit C.
<PAGE> 15
EXHIBIT B-1
Specifications for Feline Heartworm Antigen Test Kit
NEW PRODUCT DESIGN SPECIFICATIONS
Feline Heartworm Antibody Test Kit
<TABLE>
<CAPTION>
HESKA/QUIDEL TEST
- --------------------------------------------------------------------------------
<S> <C>
SPECIFICATION SPECIFICATION
========================================= ======================================
1. MARKET/SEGMENT In-clinic
- ----------------------------------------- --------------------------------------
2. FORMAT One-step
- ----------------------------------------- --------------------------------------
3. TECHNOLOGY Lateral flow antibody detection
- ----------------------------------------- --------------------------------------
4. TYPE OF SPECIMEN [ ] anticoagulated whole blood,
serum or plasma, cat
- ----------------------------------------- --------------------------------------
5. STORAGE OF SPECIMEN Uncoagulated whole blood fresh or
stored at 2(degree)-7(degree) C [
]
- ----------------------------------------- --------------------------------------
6. [ ] [ ]
- ----------------------------------------- --------------------------------------
7. [ ] [ ]
- ----------------------------------------- --------------------------------------
8. [ ] [ ]
- ----------------------------------------- --------------------------------------
9. [ ] [ ]
- ----------------------------------------- --------------------------------------
10. [ ] [ ]
- ----------------------------------------- --------------------------------------
11. END OF TEST INDICATOR yes or no
- ----------------------------------------- --------------------------------------
12. [ ] [ ]
- ----------------------------------------- --------------------------------------
13. [ ] [ ]
- ----------------------------------------- --------------------------------------
14. [ ] [ ]
- ----------------------------------------- --------------------------------------
15. TOTAL ASSAY TIME (RUN TIME) 5 min or less
- ----------------------------------------- --------------------------------------
16. [ ] [ ]
- ----------------------------------------- --------------------------------------
17. [ ] [ ]
- ----------------------------------------- --------------------------------------
18. [ ] [ ]
- ----------------------------------------- --------------------------------------
19. [ ] [ ]
- ----------------------------------------- --------------------------------------
20. KIT SIZE 25, 10 and 1
- ----------------------------------------- --------------------------------------
21. [ ] [ ]
- ----------------------------------------- --------------------------------------
</TABLE>
21 April 1997
Page 1 of 1
<PAGE> 16
EXHIBIT B-2
Specifications for Canine Heartworm Antibody Test Kit
NEW PRODUCT DESIGN SPECIFICATIONS
Canine Heartworm Antigen Test Kit
<TABLE>
<CAPTION>
HESKA/QUIDEL TEST
- --------------------------------------------------------------------------------
<S> <C>
SPECIFICATION SPECIFICATION
========================================= ======================================
1. MARKET/SEGMENT In-clinic
- ----------------------------------------- --------------------------------------
2. FORMAT One-step
- ----------------------------------------- --------------------------------------
3. TECHNOLOGY Lateral flow antibody detection
- ----------------------------------------- --------------------------------------
4. TYPE OF SPECIMEN [ ] anticoagulated whole blood,
serum or plasma, cat
- ----------------------------------------- --------------------------------------
5. STORAGE OF SPECIMEN Uncoagulated whole blood fresh or
stored at 2(degree)-7(degree) C [
]
- ----------------------------------------- --------------------------------------
6. [ ] [ ]
- ----------------------------------------- --------------------------------------
7. [ ] [ ]
- ----------------------------------------- --------------------------------------
8. [ ] [ ]
- ----------------------------------------- --------------------------------------
9. [ ] [ ]
- ----------------------------------------- --------------------------------------
10. [ ] [ ]
- ----------------------------------------- --------------------------------------
11. END OF TEST INDICATOR yes or no
- ----------------------------------------- --------------------------------------
12. [ ] [ ]
- ----------------------------------------- --------------------------------------
13. [ ] [ ]
- ----------------------------------------- --------------------------------------
14. [ ] [ ]
- ----------------------------------------- --------------------------------------
15. TOTAL ASSAY TIME (RUN TIME) 5 min or less
- ----------------------------------------- --------------------------------------
16. [ ] [ ]
- ----------------------------------------- --------------------------------------
17. [ ] [ ]
- ----------------------------------------- --------------------------------------
18. [ ] [ ]
- ----------------------------------------- --------------------------------------
19. [ ] [ ]
- ----------------------------------------- --------------------------------------
20. KIT SIZE 25, 10 and 1
- ----------------------------------------- --------------------------------------
21. [ ] [ ]
- ----------------------------------------- --------------------------------------
</TABLE>
21 April 1997
Page 1 of 1
<PAGE> 17
EXHIBIT C
Specifications for Packaging and Kit Configuration
PACKAGING CONFIGURATION
Ten or twenty-five foil pouched cassettes in unit tray
One directional insert packaged in unit carton
Ten unit cartons per shipper
Description of Packaging Components
Unit Carton Notched tuck top style
0.024 clay coated solid bleached sulphate
Automatic bottom
Printed four colors
Ten cassette configuration includes insert for holding
cassettes
Package Insert 40 # opaque smooth
printed two color
At least one page with one fold (or as needed to meet
regulatory or licensing requirements)
Shipper #200, C Craft carton
shipper will contain ten kits
Pipettes Ten or twenty-five calibrated pipettes in sealable plastic
bag
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE REGISTRANT'S
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) AS OF AND FOR THE
QUARTER ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) INCLUDED IN THE
COMPANY'S REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 21,862
<SECURITIES> 18,021
<RECEIVABLES> 2,038
<ALLOWANCES> (13)
<INVENTORY> 8,459
<CURRENT-ASSETS> 50,794
<PP&E> 18,351
<DEPRECIATION> (3,029)
<TOTAL-ASSETS> 72,573
<CURRENT-LIABILITIES> 11,057
<BONDS> 0
0
0
<COMMON> 112,746
<OTHER-SE> (61,401)
<TOTAL-LIABILITY-AND-EQUITY> 72,573
<SALES> 11,137
<TOTAL-REVENUES> 12,170
<CGS> 8,304
<TOTAL-COSTS> 8,304
<OTHER-EXPENSES> 33,269
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 701
<INCOME-PRETAX> (29,112)
<INCOME-TAX> 0
<INCOME-CONTINUING> (29,112)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (29,112)
<EPS-PRIMARY> (1.93)
<EPS-DILUTED> (1.93)
</TABLE>
