<PAGE>
================================================================================
================================================================================
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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ____________
Commission file number 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 11, 1998 was 26,530,655
================================================================================
================================================================================
<PAGE>
HESKA CORPORATION
FORM 10-Q
QUARTERLY REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
<S> <C> <C>
Condensed Consolidated Balance Sheets (Unaudited) as of September 30, 1998 and
December 31, 1997 (Restated)................................................................. 1
Condensed Consolidated Statements of Operations (Unaudited) for the three months and
nine months ended September 30, 1998 and 1997 (Restated)..................................... 2
Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended
September 30, 1998 and 1997 (Restated)....................................................... 3
Notes to Condensed Consolidated Financial Statements (Unaudited) ............................ 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk .................................. Not Applicable
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................ Not Applicable
Item 2. Changes in Securities and Use of Proceeds.................................................... 26
Item 3. Defaults Upon Senior Securities.............................................................. Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders.......................................... Not Applicable
Item 5. Other Not Applicable......................................................................... Not Applicable
Item 6. Exhibits and Reports on Form 8-K............................................................. 26
Exhibit Index............................................................................................ 27
Signatures............................................................................................... 28
</TABLE>
i
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HESKA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
(unaudited)
ASSETS
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
<S> <C> <C>
--------------- -------------
Current assets: (restated)
Cash and cash equivalents $ 6,574 $ 10,679
Marketable securities 54,595 18,073
Accounts receivable, net 5,999 5,327
Inventories, net 13,852 10,562
Other current assets 1,593 1,236
---------- ---------
Total current assets 82,613 45,877
Property and equipment, net 20,558 15,979
Intangible assets, net 5,180 6,009
Restricted marketable securities and other assets 751 1,155
---------- ---------
Total assets $ 109,102 $ 69,020
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,590 $ 6,425
Accrued liabilities 2,663 2,968
Deferred revenue 1,658 284
Current portion of capital lease obligations 586 600
Current portion of long-term debt 5,538 4,137
---------- ---------
Total current liabilities 16,035 14,414
Capital lease obligations, less current portion 1,254 1,620
Long-term debt, less current portion 10,527 9,021
Accrued pension liability 113 113
---------- ---------
Total liabilities 27,929 25,168
---------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock, $.001 par value, 40,000,000 shares authorized; 26,492,344
and 18,854,015 shares issued and outstanding, respectively 26 19
Additional paid-in capital 185,327 118,448
Deferred compensation (1,444) (1,967)
Stock subscription receivable from officers (118) (158)
Accumulated other comprehensive income 499 1
Accumulated deficit (103,117) (72,491)
---------- ---------
Total stockholders' equity 81,173 43,852
---------- ---------
Total liabilities and stockholders' equity $ 109,102 $ 69,020
========== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
1
<PAGE>
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,
------------------------------- -------------------------------
1998 1997 1998 1997
------------ ---------- ------------ -----------
(restated) (restated)
<S> <C> <C> <C> <C>
Revenues:
Products, net $ 9,823 $ 6,834 $ 26,313 $ 17,211
Research and development 38 396 677 1,033
------------ ---------- ------------ -----------
9,861 7,230 26,990 18,244
Costs and operating expenses:
Cost of goods sold 8,034 4,877 19,596 12,465
Research and development 6,311 4,747 18,991 14,942
Selling and marketing 3,159 2,526 9,117 6,757
General and administrative 3,065 2,987 8,891 9,411
Amortization of intangible assets and deferred
compensation 650 631 2,087 1,746
Purchased research and development -- -- -- 2,399
------------ ---------- ------------ -----------
21,219 15,768 58,682 47,720
------------ ---------- ------------ -----------
Loss from operations (11,358) (8,538) (31,692) (29,476)
Other income (expense):
Interest income 879 621 2,351 1,069
Interest expense (521) (371) (1,459) (821)
Other, net 147 (11) 175 (100)
------------ ---------- ------------ -----------
Net loss $ (10,853) $ (8,299) $ (30,625) $ (29,328)
============ ========== ============= ===========
Basic net loss per share $ (0.42) $ (1.27)
============ ============
Unaudited pro forma basic net loss per share $ (0.45) $ (1.97)
========== ===========
Shares used to compute basic net loss per share and
unaudited pro forma basic net loss per share 26,023 18,413 24,077 14,897
============ ========== ============ ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE>
HESKA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
------------------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES: (restated)
Net cash used in operating activities $ (29,875) $ (23,942)
CASH FLOWS FROM INVESTING ACTIVITIES: --------- ---------
Acquisitions of businesses, net of cash acquired (13) (2,088)
Cash deposited in restricted cash account related to Bloxham
acquisition -- (241)
Additions to intangible assets (687) (110)
Purchase of marketable securities (116,062) (18,635)
Proceeds from sale of marketable securities 80,363 18,227
Purchases of property and equipment (4,785) (5,757)
--------- ---------
Net cash used in investing activities (41,184) (8,604)
--------- ---------
Proceeds from issuance of common stock 64,591 45,325
Proceeds from stock subscription receivable 51 --
Proceeds from borrowings 8,068 4,574
Repayment of debt and capital lease obligations (5,758) (2,103)
--------- ---------
Net cash provided by financing activities 66,952 47,796
--------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 2 (6)
--------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,105) 15,244
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 10,679 6,630
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 6,574 $ 21,874
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 1,434 $ 769
Non-cash investing and financing activities
Issuance of debt related to acquisitions -- 3,036
Issuance of common and preferred stock related to acquisitions,
net of cash acquired 7,191 3,047
Issuance of common stock in exchange for assets and as repayment of debt 2,262 --
Purchase of assets under direct capital lease financing 84 281
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
<PAGE>
HESKA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 (UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
Heska Corporation (the "Company", or "Heska") discovers, develops,
manufactures and markets companion animal health products, primarily for dogs,
cats and horses. The Company operates two United States Department of
Agriculture and Food and Drug Administration licensed facilities which
manufacture products for Heska and other companies. The Company also offers
diagnostic products to veterinarians at its Fort Collins, Colorado location and
in the United Kingdom through a wholly-owned subsidiary. In May 1997, the
Company reincorporated in Delaware.
In the first quarter of 1998 the Company added patient monitoring equipment
to its product lines through its acquisition of Sensor Devices, Inc. ("SDI")(See
Note 4). The acquisition of SDI has been accounted for using the pooling-of-
interests accounting method and, accordingly, the accompanying consolidated
financial statements of the Company have been restated to include the accounts
of SDI for all periods presented.
The Company continues to incur substantial net losses due principally to
expenses associated with its research and development and sales and marketing
activities and, more recently, to slow sales of its proprietary pharmaceutical
and diagnostic products. Cumulative net losses from inception of the Company in
1988 through September 30, 1998 have totaled $103.1 million.
The Company's ability to achieve profitable operations will depend
primarily upon its ability to successfully market its products, commercialize
products that are currently under development, develop new products and
efficiently integrate acquired businesses. Most of 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. There also can be no assurance that the Company's existing or
future products will achieve market acceptance. Until the Company attains
positive cash flow, the Company may continue 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, 1998 and December
31, 1997, the statements of operations for the three months and nine months
ended September 30, 1998 and 1997 and the statements of cash flows for the nine
months ended September 30, 1998 and 1997 are unaudited, but include, in the
opinion of management, all adjustments (consisting of normal recurring
adjustments) which the Company considers necessary for a fair presentation of
its financial position, operating results and cash flows for the periods
presented. The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries since the dates of their respective
acquisitions when accounted for under the purchase method of accounting, and for
all periods presented when accounted for under the pooling-of-interests method
of accounting (See Note 4). All material intercompany transactions and balances
4
<PAGE>
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.
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, 1997,
included in the Company's Annual Report on Form 10-K filed with the Securities
and Exchange Commission on March 23, 1998.
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 are recognized at the time goods are shipped to the
customer, or at the time services are performed, 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 of advance
payments received during the current period until research activities are
performed or development milestones are completed.
2. UNAUDITED PRO FORMA BASIC NET LOSS PER SHARE
The Company has computed net loss per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share", which the
Company adopted in 1997. Also, the Company has adopted the guidance of
Securities and Exchange Commission ("SEC") Staff Accounting Bulletin ("SAB") No.
98 and related interpretations. 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 in July 1997 (the "IPO"), historical basic 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 basic net loss per common share is computed using the weighted
average number of common shares outstanding during the period. Diluted net loss
per common share is not presented as the effect of common equivalent shares from
stock options and warrants is anti-dilutive. The Company has assumed the
conversion of convertible preferred stock issued into common stock for all
periods presented.
Prior to the current period and pursuant to SEC SAB No. 83 rules, common
stock and common stock equivalent shares issued by the Company during the 12
months immediately preceding the filing of the IPO, plus
5
<PAGE>
shares which became issuable during the same period as a result of the granting
of options to purchase common stock ("SAB 83 Shares"), were included in the
calculation of basic weighted average number of shares of common stock as if
they were outstanding for all periods presented (using the treasury stock
method), regardless of whether they were anti-dilutive. In February 1998 the SEC
issued SAB No. 98 which replaced SAB 83 in its entirety. As a result, SAB 83
Shares which were originally included in the previously reported 1997 weighted
average common shares outstanding have now been excluded in the restated 1997
weighted average common shares outstanding. The effect of the adoption of SAB 98
was as follows (per share amounts for 1997 have been restated to include the
effects of the SDI acquisition recorded under the pooling-of-interests
accounting method (see Note 4)):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1997 September 30, 1997
------------------ ------------------
<S> <C> <C>
Pro forma basic net loss per share as reported (restated)....... $(0.45) $(1.87)
Impact of adoption of SAB 98..................................... - (0.10)
------- ------
Unaudited pro forma basic net loss per share (restated).......... $(0.45) $(1.97)
====== ======
</TABLE>
The following table shows the reconciliation of the numerators and
denominators of the basic net loss per share and pro forma basic net loss per
share computations as required under SFAS No. 128 (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
For the Three Months Ended September 30, 1998
---------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
<S> <C> <C> <C>
Weighted average common shares outstanding (actual) ................ N/A 26,023 N/A
------
Basic net loss per share ........................................... $(10,853) 26,023 $(0.42)
========= ====== ======
For the Three Months Ended September 30, 1997
---------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Weighted average common shares outstanding (actual)................. N/A 17,332 N/A
Assumed conversion of preferred stock from original date
of issuance N/A 1,081 N/A
------
Unaudited pro forma basic net loss per share ....................... $ (8,299) 18,413 $(0.45)
========= ====== ======
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1998
-------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------- ------------- ----------
<S> <C> <C> <C>
Weighted average common shares outstanding (actual) ........... N/A 24,077 N/A
------
Basic net loss per share ...................................... $(30,625) 24,077 $(1.27)
========= ====== ======
For the Nine Months Ended September 30, 1997
--------------------------------------------------
(restated)
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------ ------------ ---------
Weighted average common shares outstanding (actual) ........... N/A 7,048 N/A
Assumed conversion of preferred stock from original date
of issuance.................................................. N/A 7,849 N/A
------
Unaudited pro forma basic net loss per share................... $(29,328) 14,897 $(1.97)
========= ====== ======
</TABLE>
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,
1998 1997
------------ ------------
(unaudited) (restated)
<S> <C> <C>
Raw materials....... $ 3,679 $ 2,652
Work in process..... 5,760 3,567
Finished goods...... 4,413 4,343
------- -------
$13,852 $10,562
======= =======
</TABLE>
4. BUSINESS ACQUISITION - EFFECTS OF POOLING-OF-INTERESTS ACCOUNTING
Acquisition of SDI - In March 1998 the Company completed its acquisition of
all of the outstanding shares of SDI, a manufacturer and marketer of medical
sensor products, in a transaction using the pooling-of-interests accounting
method. Accordingly, the consolidated financial statements of the Company have
been restated to include the accounts of SDI for all periods presented. There
were no adjustments required to the net assets or previously reported results of
operations of the Company or SDI as a result of the adoption of the same
accounting practices by the respective entities. The following table shows the
reconciliation of restating the accounts of the Company resulting from the
pooling-of-interests on previously reported financial statements (in thousands):
7
<PAGE>
<TABLE>
<CAPTION>
As Previously Effect of
Reported Pooling-of-Interests Restated
-------- --------------------- --------
<S> <C> <C> <C>
Total assets as of December 31, 1997.................. $ 65,248 $3,772 $ 69,020
Total stockholders' equity as of December 31, 1997..... 43,672 180 43,852
Total revenues:
For the three months ended September 30, 1997..... 4,974 2,256 7,230
For the nine months ended September 30, 1997...... 12,170 6,074 18,244
Loss from operations:
For the three months ended September 30, 1997..... (8,624) 86 (8,538)
For the nine months ended September 30, 1997...... (29,403) (73) (29,476)
Net loss:
For the three months ended September 30, 1997..... (8,353) 54 (8,299)
For the nine months ended September 30, 1997...... (29,112) (216) (29,328)
</TABLE>
5. FOLLOW-ON PUBLIC OFFERING
In March 1998 the Company completed its follow-on public offering of
5,750,000 shares of common stock (including 500,000 shares offered by a
stockholder of the Company and an exercised underwriters' over-allotment option
for 750,000 shares) at a price of $9.875 per share, providing the Company with
net proceeds of approximately $48.6 million, after deducting underwriting
discounts and commissions of approximately $2.8 million and offering costs of
approximately $400,000.
6. MAJOR CUSTOMERS
The Company had sales of greater than 10% of total revenue to only one
customer during the three months and nine months ended September 30, 1998 and
1997. This customer, which represented 16.3% and 16.1% of the Company's total
revenues for the three months ended September 30, 1998 and 1997, respectively,
and 14.6% and 22.5% of total revenues for the nine months ended September 30,
1998 and 1997, respectively, purchases animal vaccines from the Company's
wholly-owned subsidiary, Diamond Animal Health, Inc. ("Diamond").
7. GEOGRAPHIC SEGMENT REPORTING
The Company manufactures and markets its products in two major geographic
areas, North America and Europe. The Company's primary manufacturing facilities
are located in North America.
All revenues from research and development are earned in North America by
Heska or Diamond. There have been no material exports from North America or
Europe.
In the three months and nine months ended September 30, 1998 and 1997, the
Company's European subsidiaries did not purchase significant amounts of products
from North America for sale to European customers; however, Heska sold products
directly to the Company's Italian distributor in each of the first three
quarters of 1998. Transfer prices to foreign subsidiaries are intended to allow
the North American companies to produce profit margins commensurate with their
sales and marketing efforts. Certain information by geographic area is as
follows (in thousands):
8
<PAGE>
<TABLE>
<CAPTION>
For the Three Months Ended September 30,
----------------------------------------------------------------------------------------------
1998 1997
------------------------------------------------ -------------------------------------------
(restated)
North America Europe Consolidated North America Europe Consolidated
------------- -------- ------------ ----------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Product revenues, net......... $ 8,960 $ 863 $ 9,823 $ 6,243 $ 591 $ 6,834
Loss from operations.......... $(10,735) $ (623) $(11,358) $ (8,322) $ (216) $ (8,538)
Identifiable assets........... $104,665 $ 4,437 $109,102 $ 71,357 $4,698 $ 76,055
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
----------------------------------------------------------------------------------------------
1998 1997
----------------------------------------------- --------------------------------------------
(restated)
North America Europe Consolidated North America Europe Consolidated
----------- -------- ------------ ----------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Product revenues, net........ $ 23,793 $ 2,520 $ 26,313 $ 15,880 $1,331 $ 17,211
Loss from operations......... $(29,873) $(1,819) $(31,692) $(29,198) $ (278) $(29,476)
</TABLE>
8. COMPREHENSIVE INCOME
In 1998 the Company adopted SFAS No. 130, "Reporting Comprehensive Income",
which requires companies to report and display comprehensive income and its
components in a financial statement that is displayed with the same prominence
as other financial statements. The components of comprehensive loss are as
follows (in thousands):
<TABLE>
<CAPTION>
For the Three Months Ended September 30,
---------------------------------------
1998 1997
--------------- --------------
(restated)
<S> <C> <C>
Net loss.................................................... $(10,853) $ (8,299)
Unrealized gain on marketable securities.................... $ 523 $ -
Change in foreign currency translation adjustments.......... (5) (6)
-------- --------
Total comprehensive loss.................................... $(10,335) $ (8,305)
======== ========
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
---------------------------------------
1998 1997
--------------- ---------------
(restated)
<S> <C> <C>
Net loss................................................... $(30,625) $(29,328)
Unrealized gain on marketable securities................... $ 523 -
Change in foreign currency translation adjustments......... (25) (3)
-------- --------
Total comprehensive loss................................... $(30,127) $(29,331)
======== ========
</TABLE>
9
<PAGE>
9. RECENT ACCOUNTING PRONOUNCEMENTS
During the second quarter of 1998, the Company adopted the provisions of a
new accounting standard, AICPA Statement of Position 98-5, "Reporting on the
Costs of Start-up Activities", which requires that start-up costs be expensed as
incurred rather than capitalized. The adoption of this Statement has had no
effect on the Company's reported results of operations.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information". The
Statement establishes reporting standards requiring that a public business
enterprise report financial and descriptive information about its reportable
operating segments. The Company will adopt SFAS No. 133 for the fiscal year
ended December 31, 1998.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". The Statement
establishes accounting and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in other
contracts) be recorded in the balance sheet as either an asset or liability
measured at fair value. The Statement requires that changes in the derivative's
fair value be recognized currently in earnings unless specific hedging criteria
are met. The Company will adopt SFAS No. 133 for the fiscal year ended December
31, 1998 and does not expect that the adoption of the Statement will have a
material effect on reported earnings or comprehensive income.
10. UNREGISTERED SALES OF COMMON STOCK
Asset Purchase Agreement - In July 1998 the Company issued 205,619 shares
of common stock to Bayer Corporation ("Bayer") in consideration for the
acquisition by Diamond of certain assets, including land and buildings formerly
leased by Diamond from Bayer, and as repayment in full of certain indebtedness
of Diamond to Bayer, in a transaction valued at approximately $2.3 million.
Private Placement of Common Stock - In July 1998 the Company issued
1,165,592 million shares of common stock to Ralston Purina Company ("Ralston"),
providing the Company with proceeds of $14.75 million. In addition, the Company
issued to Ralston a warrant to purchase an equal number of shares of common
stock for a warrant purchase price of $250,000. The initial exercise price of
the warrant is $12.87 per share increasing over the three year term of the
warrant. In addition, the Company and Ralston entered into a strategic product
research and development collaboration.
10
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Quarterly Report on Form 10-Q, including the Notes to the Condensed
Consolidated Financial Statements and this "Management's Discussion and Analysis
of Financial Condition and Results of Operations," contains express or implied
forward-looking statements. Additional written or oral forward-looking
statements may be made by the Company from time to time in filings with the
Securities and Exchange Commission, in its press releases or other public
statements, or otherwise. The words "believes", "expects", "anticipates",
"intends", "forecasts", "projects", "estimates" and similar expressions identify
forward-looking statements. Such statements reflect the Company's current views
with respect to future events and financial performance or operations and speak
only as of the date the statements are made. Such statements are inherently
subject to risks and uncertainties and future events and actual results could
differ materially from those set forth in, contemplated by, or underlying the
forward-looking statements. Readers are cautioned not to place undue reliance on
these forward-looking statements. Factors that could cause actual results to
differ materially from those expressed or implied in such forward-looking
statements are set below under the caption "Factors that May Affect Results,"
and elsewhere in this Quarterly Report, including in the Notes to Condensed
Consolidated Financial Statements and in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations". Other factors that
could contribute to or cause such differences are described throughout the
Company's other filings with the Securities and Exchange Commission and in its
press releases and other public statements from time to time. The Company
undertakes no obligation to publicly update, review or revise any forward-
looking statements 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 substantial
net losses since inception. As of September 30, 1998, the Company's
accumulated deficit was $103.1 million.
During 1996, Heska evolved from being primarily a research and development
concern to a fully-integrated research, development, manufacturing and marketing
company. The Company also expanded the scope and level of its scientific and
business development activities, increasing the opportunities for new products.
In recent periods, the company has further evolved into a sales and marketing
company.
11
<PAGE>
In 1997, the Company introduced 13 additional companion animal health
products and expanded in the United States through the acquisition of Center
Laboratories, Inc. ("Center"), a Food and Drug Administration ("FDA") and United
States Department of Agriculture ("USDA") licensed manufacturer of allergy
immunotherapy products located in Port Washington, New York, and internationally
through the acquisitions of Bloxham Laboratories Limited ("Bloxham"), a
veterinary diagnostic laboratory in Teignmouth, England, and CMG Centre Medical
des Grand'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 Company's acquisitions prior to 1998
was accounted for 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 July 1997, the Company
established a new subsidiary, Heska AG, located near Basel, Switzerland, for the
purpose of managing its European operations.
In the first quarter of 1998 the Company added patient monitoring equipment
to its product lines through its acquisition of SDI. The acquisition of SDI has
been accounted for as a pooling-of-interests and, accordingly, the consolidated
financial statements of the Company have been restated to include the accounts
of SDI for all periods presented.
The Company anticipates that it will continue to incur substantial
operating losses as it introduces new products, continues its research and
development activities for products under development and integrates acquired
businesses. There can be no assurance that the Company will attain profitability
or, if attained, will remain profitable on a quarterly or annual basis in the
future. See "Factors that May Affect Results" below.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1998 and 1997
Total revenues, which include product and research and development
revenues, increased to $9.9 million in the third quarter of 1998 as compared to
$7.2 million in the third quarter of 1997. Product revenues increased to $9.8
million in the third quarter of 1998 as compared to $6.8 million for the third
quarter of 1997. The growth in revenue during the third quarter of 1998 was
primarily due to increased sales of the Company's products and from
consolidating revenues from acquired businesses. The Company completed its
acquisition of SDI during the first quarter of 1998. The acquisition has been
accounted for using the pooling-of-interests accounting method and, accordingly,
the consolidated financial statements of the Company have been restated to
include the accounts of SDI for all periods presented.
Revenues from sponsored research and development decreased to $38,000 in
the third quarter of 1998 from $396,000 in the third quarter of 1997.
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. The Company expects that revenues
from sponsored research and development will decline in future periods,
reflecting the expiration of current funding commitments and the Company's
decision to fund its future research activities primarily from internal sources,
although the Company may engage in additional sponsored research if such
projects become available and are consistent with the Company's policies.
Cost of goods sold totaled $8.0 million in the third quarter of 1998 as
compared to $4.9 million in the third quarter of 1997. The resulting gross
margin for the third quarter of 1998 decreased to $1.8 million from $2.0 million
in the third quarter of 1997, due substantially to write-offs of approximately
$400,000 of periodontal
12
<PAGE>
product inventory in anticipation of the expiration of approved sales dates and
approximately $330,000 of vaccine work-in-progress inventory as a result of a
water purity issue. Additional inventory provisions relating to the periodontal
product are likely in the fourth quarter. Additionally, the lower gross margin
percentage is attributable to a higher proportion of revenues resulting from
sales of equipment and contract manufacturing which have lower gross margins
than the Company's proprietary pharmaceutical and diagnostic products. The
Company expects that gross margins will not significantly improve until more of
the Company's proprietary products are approved by the applicable regulatory
bodies and achieve market acceptance.
Research and development expenses increased to $6.3 million in the third
quarter of 1998 from $4.7 million in the third quarter of 1997. The increase in
1998 is due primarily to expenses related to new collaborative agreements and
licenses to support research and development activities for potential products
to be marketed by the Company. The Company currently does not expect that
significant increases above current research and development expenses will be
required to maintain its current research and development activities.
Selling and marketing expenses increased to $3.2 million in the third
quarter of 1998 from $2.5 million in the third quarter of 1997. This increase
reflects the expansion of the Company's sales and marketing organization, its
introduction and marketing of new products and additional field sales force
personnel. Selling and marketing expenses consist primarily of salaries,
commissions and benefits for sales and marketing personnel, commissions paid to
contract sales agents and expenses of product advertising and promotion. The
Company expects selling and marketing expenses to increase as sales volume
increases and new products are introduced to the market.
General and administrative expenses increased to $3.1 million in the third
quarter of 1998 from $3.0 million in the third quarter of 1997. General and
administrative expenses are expected to decrease as a percentage of revenues in
future years.
Amortization of intangible assets and deferred compensation increased to
$650,000 in the third quarter of 1998 from $631,000 in the third quarter of
1997. Amortization of intangible assets resulted primarily from the Company's
1997 and 1996 business acquisitions. Net intangible assets at September 30,
1998 and December 31, 1997 totaled $5.2 million and $6.0 million, respectively.
The amortization of deferred compensation resulted in a non-cash charge to
operations in the third quarter of 1998 of $174,000 as compared to $157,000 in
the third quarter of 1997. In connection with the grant of certain stock options
in the years ended December 31, 1997 and 1996, the Company recorded deferred
compensation representing the difference between the deemed value of the common
stock for accounting purposes and the option exercise price of such options at
the date of grant. In 1998 the Company also granted stock options to non-
employees in exchange for consulting services at an exercise price equal to fair
market value on the date of grant, measuring compensation cost as the fair value
of the options on the date of grant and for which expenses will be recognized
over the service period. The Company will incur a non-cash charge to operations
of approximately $743,000, $652,000, $585,000 and $34,000 per year for 1998,
1999, 2000 and 2001, respectively, for amortization of deferred compensation.
Interest income increased to $879,000 in the third quarter of 1998 from
$621,000 in the third quarter of 1997 due to increased cash available for
investment resulting from the proceeds from the Company's initial public
offering in July 1997, the follow-on offering completed in March 1998 and the
private placement of common stock with Ralston in July 1998. Interest income is
expected to decline in future periods as the Company uses cash to finance
business operations. Interest expense increased to $521,000 in the third
quarter of
13
<PAGE>
1998 from $371,000 in the third quarter of 1997 due to increases in debt
financing for laboratory and manufacturing equipment and debt related to the
Company's 1997 business acquisitions.
The Company reported a net loss in the third quarter of 1998 of $10.9
million as compared to a third quarter 1997 net loss $8.3 million. While
revenues increased quarter to quarter, revenue growth stemmed primarily from
lower gross margin products such as equipment and contract manufacturing. This
lower gross margin sales mix, combined with inventory write-offs as described
above, higher selling and marketing expenses and higher research and development
expenses caused losses to be higher in the third quarter of 1998 as compared to
the third quarter of 1997.
Nine months ended September 30, 1998 and 1997
Total revenues, which include product and research and development
revenues, increased to $27.0 million in the first nine months of 1998 as
compared to $18.2 million in the first nine months of 1997. Product revenues
increased to $26.3 million in the first nine months of 1998 as compared to $17.2
million for the first nine months of 1997. The growth in revenues during the
first half of 1998 was primarily due to increased sales of the Company's
products and from consolidating revenues from acquired businesses.
Revenues from sponsored research and development of $677,000 in the first
nine months of 1998 declined as compared to $1.0 million in the first nine
months of 1997. Fluctuations in revenues from contract research and development
are generally the result of changes in the number of funded projects as well as
timing and performance of contract milestones. The Company expects that
revenues from sponsored research and development will decline in future periods,
reflecting the expiration of current funding commitments and the Company's
decision to fund its future research activities primarily from internal sources,
although the Company may engage in additional sponsored research if such
projects become available and are consistent with the Company's policies.
Cost of goods sold totaled $19.6 million in the first nine months of 1998
as compared to $12.5 million in the first nine months of 1997. The resulting
gross margin for the first nine months of 1998 increased to $6.7 million from
$4.7 million in the first nine months of 1997, due primarily to increased
product sales and manufacturing volumes, partially offset by the write-offs of
inventories described above. The lower gross margin percentage is attributable
to a higher proportion of revenues resulting from sales of equipment and
contract manufacturing which have lower gross margins than the Company's
proprietary pharmaceutical and diagnostic products. The Company expects that
gross margins will not significantly improve until more of the Company's
proprietary products are approved by the applicable regulatory bodies and
achieve market acceptance.
Research and development expenses increased to $19.0 million in the first
nine months of 1998 from $14.9 million in the first nine months of 1997. The
increase in 1998 is due primarily to increases in the level and scope of the
Company's internal research and development activities and expenses related to
new collaborative agreements and licenses to support research and development
efforts for potential products to be marketed by the Company. The Company does
not expect that significant increases above current research and development
expenses will be required to maintain its current research and development
activities.
Selling and marketing expenses increased to $9.1 million in the first nine
months of 1998 from $6.8 million in the first nine months of 1997. This increase
reflects the expansion of the Company's sales and marketing
14
<PAGE>
organization, its introduction and marketing of new products and additional
field sales force personnel. Selling and marketing expenses consist primarily of
salaries, commissions and benefits for sales and marketing personnel,
commissions paid to contract sales agents and expenses of product advertising
and promotion. The Company expects selling and marketing expenses to increase as
sales volume increases and new products are introduced to the market.
General and administrative expenses decreased to $8.9 million in the first
nine months of 1998 from $9.4 million in the first nine months of 1997. The
decrease in the first nine months of 1998 was due primarily to one-time charges
in 1997 relating to a supply agreement termination fee. General and
administrative expenses are expected to decrease as a percentage of revenues in
future years.
Amortization of intangible assets and deferred compensation increased to
$2.1 million in the first nine months of 1998 from $1.7 million in the first
nine months of 1997. Amortization of intangible assets resulted primarily from
the Company's 1997 and 1996 business acquisitions. Net intangible assets at
September 30, 1998 and December 31, 1997 totaled $5.2 million and $6.0 million,
respectively. The amortization of deferred compensation resulted in a non-cash
charge to operations in the first nine months of 1998 of $569,000 as compared to
$435,000 in the first nine months of 1997. In connection with the grant of
certain stock options in the years ended December 31, 1997 and 1996, the Company
recorded deferred compensation representing the difference between the deemed
value of the common stock for accounting purposes and the option exercise price
of such options at the date of grant. In 1998 the Company also granted stock
options to non-employees in exchange for consulting services at an exercise
price equal to fair market value on the date of grant, measuring compensation
cost as the fair value of the options on the date of grant and for which
expenses will be recognized over the service period. The Company will incur a
non-cash charge to operations of approximately $743,000, $652,000, $585,000 and
$34,000 per year for 1998, 1999, 2000 and 2001, respectively, for amortization
of deferred compensation.
Interest income increased to $2.4 million in the first nine months of 1998
from $1.1 million in the first nine months of 1997 due to increased cash
available for investment resulting from the proceeds from the Company's initial
public offering in July 1997, the follow-on offering completed in March 1998 and
the private placement of common stock with Ralston in July 1998. Interest
income is expected to decline in future periods as the Company uses cash to
finance business operations. Interest expense increased to $1.5 million in the
first nine months of 1998 from $821,000 in the first nine months of 1997 due to
increases in debt financing for laboratory and manufacturing equipment and debt
related to the Company's 1997 business acquisitions.
The Company reported a net loss in the first nine months of 1998 of $30.6
million as compared to a net loss of $29.3 million in the first nine months of
1997. While revenues increased period to period, revenue growth stemmed
primarily from lower gross margin products such as equipment and contract
manufacturing. This lower gross margin sales mix, combined with the inventory
write-offs described above, higher selling and marketing expenses and higher
research and development expenses caused losses to be higher in the first nine
months of 1998 than the first nine months of 1997. These factors were partially
offset by one-time charges recorded in the second quarter of 1997 for purchased
research and development and supply contract termination fees.
15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
In July 1997, the Company completed its IPO of 5,637,850 shares of common
stock at a price of $8.50 per share, providing the Company with net proceeds of
approximately $43.9 million. Upon the completion of the IPO, all outstanding
shares of preferred stock were converted into 11,289,388 shares of common stock.
In March 1998 the Company completed a follow-on public offering of
5,750,000 shares of common stock (including 500,000 shares offered by a
stockholder of the Company and an exercised underwriters' over-allotment option
for 750,000 shares) at a price of $9.875 per share, providing the Company with
net proceeds of approximately $48.6 million, after deducting underwriting
discounts and commissions of approximately $2.8 million and offering costs of
approximately $400,000.
As of September 30, 1998, the Company had received aggregate proceeds of
$163.0 million from various equity transactions, including $15 million from the
July 1998 private placement to Ralston, $48.6 million from the March 1998
follow-on public offering, $43.9 million from the July 1997 IPO, and the
remainder from prior private equity placements.
In addition, the Company has received proceeds from equipment financing
totaling $12.0 million through September 30, 1998. The Company also assumed
$4.3 million in short and long-term debt in connection with its 1996
acquisitions and assumed $3.8 million in long-term debt in connection with its
1997 acquisitions. Capital lease obligations and term debt owed by the Company
totaled $17.9 million as of September 30, 1998, with installments payable
through 2006. Expenditures for property and equipment totaled $4.8 million and
$5.8 million for the nine months ended September 30, 1998 and 1997,
respectively. 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 and its subsidiaries have secured
lines of credit and other debt facilities totaling approximately $4.6 million,
against which borrowings of approximately $3.0 million were outstanding at
September 30, 1998. These financing facilities are secured by assets of Heska
and the respective subsidiaries and corporate guarantees of Heska. The Company
expects to seek additional asset-based borrowing facilities.
Net cash used for operating activities was $29.9 million and $23.9 million
for the nine months ended September 30, 1998 and 1997, respectively. Cash was
used primarily to fund research and development activities, sales and marketing
activities, general and administrative expenses and general working capital
requirements.
The Company currently expects to spend approximately $1.0 million during
the remainder of 1998 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 secured
debt facilities, where possible.
The Company's primary short-term needs for capital, which are subject to
change, are for continuing research and development efforts, its sales,
marketing and administrative activities, working capital and capital
expenditures relating to developing and expanding the Company's manufacturing
operations. At September 30, 1998, the Company's principal source of liquidity
was $61.2 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 liquidity and capital funding requirements will
depend on numerous factors, including the extent to which the Company's present
and future products gain market acceptance, the extent to which products
16
<PAGE>
or technologies under research or development are successfully developed, the
timing of regulatory actions regarding the Company's products, the costs and
timing of expansion of sales, marketing and manufacturing activities, the cost,
timing and business management of current and potential acquisitions and
contingent liabilities associated with such 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 at current operating levels
for at least the next 12 months, assuming no significant uses of cash in
acquisition activities. Thereafter, if cash generated from operations is
insufficient to satisfy the Company's working capital requirements, the Company
will need to raise additional capital to continue funding its business
operations. 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 would likely be dilutive to stockholders and debt
financing, if available, may include restrictive covenants which may limit the
Company's currently planned operations and strategies. 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 potentially 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. See "Factors that May Affect Results - Future Capital Requirements;
Uncertainty of Additional Funding".
NET OPERATING LOSS CARRYFORWARDS
As of December 31, 1997, the Company had a net operating loss ("NOL")
carryforward of approximately $59.5 million and approximately $1.1 million 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 2011. The Company's April 1996 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 $4.7 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. In
addition, the Company believes that its follow-on public offering of Common
Stock in March 1998 resulted in a further "change of ownership." The Company
does not believe that either of these limitations will affect the eventual
utilization of its total NOL carryforwards.
YEAR 2000 CONVERSION
The Year 2000 ("Y2K") issue is the result of computer programs being
written using two digits, rather than four, to define the applicable year.
Mistaking "00" for the year 1900, rather than 2000, could result in
miscalculations and errors and cause significant business interruptions for the
Company, as well as the government and most other companies. The Company has
initiated procedures to identify, evaluate and implement any necessary changes
to its computer systems, applications and embedded technologies resulting from
the conversion. The Company is coordinating these activities with suppliers,
distributors, financial institutions and others with whom it does business.
Based on the results of its current evaluation, the Company does not believe
that the Y2K conversion will have a material adverse effect on its business.
State of Readiness
17
<PAGE>
The Company relies on software in its information systems, and
manufacturing and laboratory equipment. Most of this equipment and software was
installed and written within the past three years. The Company has done an
initial survey of the installed control systems, computers, and applications
software, and it appears that these systems are either Y2K compliant, or the
vendors claim Y2K compliance, or the problems can be corrected by purchasing or
receiving relatively small amounts of hardware, software, or software upgrades.
Costs
The Company has a plan to validate each of these systems by the end of the
second quarter of 1999. This plan (40% of total expected hours were completed as
of September 30, 1998) will be accomplished through a combination of written
vendor confirmations, when available, and specific validation testing. This
validation process is expected to be accomplished primarily with internal
corporate staff. This validation phase is expected to cost approximately
$100,000, including consulting and internal resources.
Based on management's evaluations to date, remediation costs are not
expected to be material due to the fact that the Company's information and
embedded systems are new, generally off-the-shelf, and vendor relationships
still exist for most subject equipment and software. These costs are expected
to consist of replacing relatively low-cost personal computers, and
installations of bug-fixes from major manufacturers of equipment, along with
some custom software fixes. These costs, including hardware replacements
accelerated by the Y2K situation, and other contingency plan activities, are not
expected to exceed approximately $200,000.
Risks
The most likely risks to the Company from Y2K issues are external, due to
the difficulty of validating the readiness of key third parties for Y2K. The
Company will seek confirmation of such compliance and seek relationships which
are compliant. However, the risk that a major supplier or customer will become
unreliable due to Y2K problems will still exist. The Company will develop
contingency plans for key relationships as they arise. Such contingency plans
are currently being developed by the Company.
FACTORS THAT MAY AFFECT RESULTS
The Company's future operating results and financial condition are
dependent on a number of factors. The following potential risks and
uncertainties, as well as others discussed herein and in the Company's filings
with the SEC, which other filings should be read in conjunction herewith, could
affect the Company's future operating results and financial condition.
Dependence on Development; Introduction and Acceptance of New Products
Some of the Company's products have only recently been introduced and many
are still under development. There can be no assurance that current products
will gain market acceptance or that future products will be successfully
developed or commercialized on a timely basis, or at all. Several of the
Company's current products as well as a number of products under development,
are novel. The Company must expend substantial efforts in educating its
customer base in the need for and use of such products. The Company believes
that its revenue growth and profitability, if any, will substantially depend
upon its ability to improve market acceptance of its current products and
achieve market acceptance for its future products and to complete development of
and successfully introduce and commercialize its new products. The development
and regulatory approval activities necessary to bring new products to market are
time-consuming and costly. The Company has experienced delays in receiving
regulatory approvals. There can be no assurance that the Company will not
experience difficulties that could delay
18
<PAGE>
or prevent successfully developing, obtaining regulatory approvals to market or
introducing new products, that regulatory clearance or approval of any new
products will be granted by the USDA, the FDA, the Environmental Protection
Agency ("EPA") or foreign regulatory authorities on a timely basis, or at all.
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 of 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 product candidates. Further, for certain of the Company's proposed
products, the Company is dependent on collaborative partners to successfully and
timely perform research, development and commercialization 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 adversely affect sales of such products or 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; Customer Concentration
Heska has incurred substantial net losses since its inception. At
September 30, 1998, the Company's accumulated deficit was $103.1 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 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 for major companies in the animal
health industry and products for companies in other industries. Revenues from
one Diamond customer comprised approximately 21% of the Company's total revenues
in the year ended December 31, 1997 and 15% of total revenues for the first nine
months of 1998. 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
and other periodic 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's current level of
operating expenses are being incurred in anticipation of higher levels of
revenues and for new product development and marketing, the Company's operating
results will be materially affected if its sales do not correspondingly increase
or if its product development efforts are unsuccessful or experience delays.
19
<PAGE>
Limited Sales and Marketing Experience; Dependence on Others
To be successful, Heska will have to continue to develop and train its
direct sales force or rely on marketing partners or other arrangements with
third parties for the marketing, distribution and sale of its products. The
Company is currently marketing its products to veterinarians through third party
distribution channels and, to a lesser extent, through its direct sales force.
There can be no assurance that the Company will be able to successfully maintain
marketing, distribution or sales capabilities or make arrangements with third
parties to perform those activities on terms satisfactory to the Company. With
respect to the Company's recently introduced and anticipated introduction of new
diagnostic products, the Company may experience increased marketing costs and
limitations resulting from the inability of many of the Company's distributors
to carry these products due to contractual agreements with a competitor of the
Company.
In addition, the Company has granted marketing and commercialization rights
to certain products under development to third parties, including Novartis AG
and its Japanese affiliate ("Novartis"), Bayer AG ("Bayer"), Eisai Co., Ltd.
("Eisai") and Ralston. 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. Novartis wil also distribute certain of the Company's products in
Japan when such products receive required Japanese regulatory approvals. 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.
In addition, the Company recently granted to Ralston the exclusive licensing
rights to develop and commercialize the Company's technologies in certain pet
food products. There can be no assurance that Novartis, Bayer, Eisai or any
other collaborative party will devote sufficient resources to marketing or
commercializing the Company's products. Furthermore, there is nothing to
prevent Novartis, Bayer, Eisai or any other collaborative party from pursuing
alternative technologies or products that may compete with the Company's
products.
20
<PAGE>
Future Capital Requirements; Uncertainty of Additional Funding
The Company has incurred negative cash flow from operations since inception
and does not expect to generate positive cash flow sufficient to fund its
operations for the next several years. The Company believes that its available
cash and cash from operations will be sufficient to satisfy its funding
requirements at current operating levels for at least the next 12 months,
assuming no significant uses of cash in acquisition activities. Thereafter, if
cash generated from operations is insufficient to satisfy the Company's working
capital requirements, the Company will need to raise additional capital to
continue funding its business operations. The Company's future liquidity and
capital funding requirements will depend on numerous factors, including market
acceptance of current and future products; successful development of new
products; timing of regulatory actions regarding the Company's potential
products; 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 or
favorable to the Company or its existing stockholders, if at all. Furthermore,
any additional equity financing would likely be dilutive to stockholders, and
debt financing, if available, may include restrictive covenants which may limit
the Company's currently planned operations and strategies. 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 potentially 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.
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,
Merial Ltd., 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 principally 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
21
<PAGE>
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'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. 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.
22
<PAGE>
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 its 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 manufacturing of many new products and there can be no
assurance that such work can be completed successfully or on a timely basis.
In addition to Diamond, Center and SDI, the Company relies and intends to
continue to rely on contract manufacturers for certain of its products. The
Company currently has supply agreements with Atrix Laboratories, Inc. for its
canine periodontal disease therapeutic and a supply agreement with Quidel
Corporation for certain manufacturing services relating to its point-of-care
canine and feline heartworm diagnostic tests. Patient monitoring equipment and
associated consumable products are also manufactured to the Company's
specifications by third parties. These agreements typically require the
manufacturing partner to supply the Company's requirements within certain
parameters. There can be no assurance that these partners will be able to
manufacture products to regulatory standards and 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 could 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, for regulated products, 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 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 continue to satisfy existing or future 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 operations.
23
<PAGE>
Potential Difficulties in Management of Growth; Identification and Integration
of Acquisitions
The Company anticipates additional growth in its sales and marketing
operations, the scope of its operating and financial systems and the geographic
area of its operations as the Company seeks to increase its sales and marketing
activities, as distribution strategies evolve, and as new products are developed
and commercialized. This growth will result in an increase in responsibilities
for both existing and new management and other 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 current employees and hire new employees. There
can be no assurance that the Company will be able to manage its expansion
effectively, 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 of assets
relating to its canine allergy business. The Company's more recent acquisitions
include: the February 1997 purchase of Bloxham; the July 1997 purchase of the
allergy immunotherapy products business of Center, an FDA and USDA licensed
manufacturer of allergy immunotherapy products; the September 1997 purchase of
CMG, a Swiss corporation which manufactures and markets allergy diagnostic
products for use in veterinary and human medicine, primarily in Europe and
Japan; and the March 1998 purchase of SDI, a manufacturer and marketer of
patient monitoring and other medical equipment. The Company also anticipates
issuing additional shares of common stock to effect future acquisitions. Such
issuances may be dilutive. Identifying and pursuing acquisition opportunities,
integrating the acquired businesses and managing growth requires a significant
amount of management time and skill. There can be no assurance that the Company
will be effective in identifying and effecting attractive acquisitions, avoiding
unforeseen contingent liabilities, 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.
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 and strategies or result in a change
of current business strategies. 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 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
24
<PAGE>
coverage under the terms of the policy. There can be no assurance that the
Company will be able to continue to obtain adequate insurance at a reasonable
cost, 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.
Year 2000 Compliance and Risks
The Y2K issue is the result of computer programs being written using two
digits, rather than four, to define the applicable year. Mistaking "00" for the
year 1900, rather than 2000, could result in miscalculations and errors and
cause significant business interruptions for the Company, as well as the
government and most other companies. The Company has initiated procedures to
identify, evaluate and implement any necessary changes to its computer systems,
applications and embedded technologies resulting from the Y2K conversion. The
Company is coordinating these activities with suppliers, distributors, financial
institutions and others with whom its does business. There can be no assurance
that full compliance will be achieved in a timely manner or at all. Based on
the results of its current evaluation, the Company does not believe that the Y2K
conversion will have a material adverse effect on its business, however, there
can be no assurance in this regard.
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.
25
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) In July 1998, the Company issued 205,619 shares of common stock to
Bayer Corporation ("Bayer") in consideration for the acquisition
by Diamond of certain assets, including land and buildings
formerly leased by Diamond from Bayer, and as repayment in full of
certain indebtedness of Diamond to Bayer. The Registrant relied
upon the exemption provided by Section 4(2) of the Securities Act
of 1933, as amended (the "Act") because (a) the transaction did
not involve a public offering and (b) the purchaser represented
that it was an "accredited investor" as such term is defined in
rules of the SEC promulgated under the Act.
(c) In July 1998, the Company issued 1,165,592 million shares of
common stock to Ralston for an aggregate purchase price of $14.75
million. In addition, the Company issued to Ralston a warrant to
purchase an equal number of shares of common stock for a warrant
purchase price of $250,000. The initial exercise price of the
warrant is $12.87 per share increasing over the three year term of
the warrant. The Registrant relied upon the exemption provided by
Section 4(2) of the Act because (a) the transaction did not
involve a public offering and (b) the purchaser represented that
it was an "accredited investor" as such term is defined in rules
of the SEC promulgated under the Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit Index on Page 27
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended September 30, 1998.
26
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Document
------ -----------------------
4.2 (a) Waiver and Amendment to First Amended Investors' Rights Agreement
among the Company and certain other parties.
4.2 (b) Second Waiver and Amendment to First Amended Investors' Rights
Agreement among the Company and certain other parties.
4.2 (c) Third Waiver and Amendment to First Amended Investors' Rights
Agreement among the Company and certain other parties.
4.5 Common Stock Warrant Purchase Agreement dated as of July 29, 1998
between the Company and Ralston Purina Company
27 Financial Data Schedule
- ----------
27
<PAGE>
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 16, 1998 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)
28
<PAGE>
EXHIBIT 4.2(A)
WAIVER AND AMENDMENT
---------------------
TO FIRST AMENDED INVESTORS' RIGHTS AGREEMENT
--------------------------------------------
THIS WAIVER AND AMENDMENT TO THE FIRST AMENDED INVESTORS' RIGHTS AGREEMENT
(the "Agreement") is made as of the 22nd day of January, 1998, by and among
Heska Corporation, a Delaware corporation (the "Company"), and Novartis Produkte
AG, Charter Ventures, Charter Ventures II, L.P. and Volendam Investeringen N.V.
(the "Holders"):
W I T N E S S E T H:
WHEREAS, the Company and the Holders are parties to that certain First
Amended Investors' Rights Agreement, dated as of April 12, 1996 (the "Investors'
Rights Agreement");
WHEREAS, the Company proposes to file a registration statement with the
Securities and Exchange Commission in order to register its securities in
connection with a firm commitment underwritten public offering of the Company's
Common Stock to be co-managed by Merrill Lynch & Co., Credit Suisse First Boston
Corporation and Hambrecht & Quist LLC (the "Offering"); and
WHEREAS, the Company proposes to enter into that certain Agreement and Plan
of Merger (the "Merger Agreement") by and among the Company, SDI Acquisition
Subsidiary, Inc., a Wisconsin corporation, and Sensor Devices, Inc., a Wisconsin
corporation, pursuant to which the New Investors (as defined in Section 2 below)
will receive shares of Common Stock of the Company;
WHEREAS, the Holders desire that the transactions contemplated by the Merger
Agreement be consummated, and, as a condition thereof and to induce such action,
the Holders are willing to enter into this Agreement to permit the New Investors
to become parties to the Investors' Rights Agreement, as set forth in Section 2
below.
In consideration of the foregoing and the promises and covenants contained
herein and other good and valuable consideration, the receipt of which is hereby
acknowledged, the parties hereto agree as follows:
1. Waiver of Registration and Written Notice Rights. Pursuant to Section
------------------------------------------------
6.1 of the Investors' Rights Agreement, the Holders hereby consent, on behalf of
themselves and all other stockholders having rights under the Investors' Rights
Agreement, to waive the observance of, and their rights under, Section 2 of the
Investors' Rights Agreement, including, but not limited to the Holders' rights
to participate in up to 15% of the shares offered by the Company and rights to
receive written notice from the Company, with respect to the Offering for a
period commencing on the date hereof and continuing to a date 90 days after the
effective date of the Registration Statement filed with the Securities and
Exchange Commission with respect to the Common Stock to be sold in the Offering
(the "Effective Date"); provided, however, that the foregoing waiver shall
terminate if the Effective Date has not occurred on or before June 1, 1998.
<PAGE>
2. Additional Parties to the Agreement. Schedule B to the Investors'
-----------------------------------
Rights Agreement is hereby amended to include the beneficial owners of SDI
Common Stock (as defined in the Merger Agreement) as set forth on Schedule
2.1(d) to the Merger Agreement (but not including any beneficial owner who does
not receive any of the Merger Consideration (as defined in the Merger Agreement)
because of such owner's assertion of his or her dissenters' rights or
otherwise); provided, however, that such parties shall be added as parties to
the Investors' Rights Agreement only with respect to Section 2.3 and related
sections of the Investors' Rights Agreement and only with respect to fifty
percent (50%) of the Common Stock of the Company received by each such party as
a result of the Merger (as defined in the Merger Agreement) (the "New Investors'
Shares").
3. Amendments to Agreement. The New Investors are collectively referred to
-----------------------
as "Holders" and the New Investors' Shares are collectively referred to as
"Registrable Securities" for purposes of the Investors' Rights Agreement.
4. Effectiveness. The waiver and amendment set forth in this Agreement
-------------
shall be effective as of the date first above written, and, except as expressly
modified by this Agreement, the Investors' Rights Agreement, as originally
written and as subsequently amended, shall remain in full force and effect.
5. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. This Agreement will be
binding upon the Company and the Holders and their respective successors,
assigns, heirs and personal representatives.
6. Severability. If one or more provisions of this Agreement are held to
------------
be unenforceable under applicable law, such provision shall be excluded from
this Agreement and the balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
7. Entire Agreement. This Agreement, together with the Investors' Rights
----------------
Agreement, constitutes the full and entire understanding and agreement between
the parties with regard to the subjects hereof and thereof.
-2-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
HESKA CORPORATION
By: /s/ Fred M. Schwarzer
-------------------------------------------
Name: Fred M. Schwarzer
-----------------------------------------
Title President
----------------------------------------
Address: 1825 Sharp Point Way
Fort Collins, Colorado 80525
HOLDERS:
-------
NOVARTIS PRODUKTE AG
By: /s/ H.B. Gurtler /s/ R. Muttenzer
-------------------------------------------
Name__________________________________________
Title_________________________________________
Address: P.O. Box
------------------------------------
CH-4002 Basel
------------------------------------
Switzerland
CHARTER VENTURES
By: /s/ A. Barr Dolan
-------------------------------------------
Name: A. Barr Dolan
-----------------------------------------
Title General Partner
----------------------------------------
Address: 525 University Avenue
------------------------------------
Palo Alto, CA 94301
------------------------------------
-3-
<PAGE>
CHARTER VENTURES II, L.P.
By: /s/ A. Barr Dolan
---------------------------------------------
Name A. Barr Dolan
--------------------------------------------
Title General Partner
------------------------------------------
Address: 525 University Avenue
---------------------------------------
Palo Alto, CA 94301
---------------------------------------
VOLENDAM INVESTERINGEN N.V.
By: MeesPierson Trust (Curacao) N.V.
----------------------------------------------
Name: /s/ Anneke Soedhoe /s/Andries Kroon
---------------------------------------------
Title Managing Director
-------------------------------------------
Address: 14 J.B. Gorsiraweg
----------------------------------------
Curacao, Netherlands Antilles
----------------------------------------
-4-
<PAGE>
COUNTERPART SIGNATURE PAGE TO
FIRST AMENDED INVESTORS' RIGHTS AGREEMENT
WHEREAS, Heska Corporation ("Heska") and the present Holders under the
First Amended Investors' Rights Agreements dated April 12, 1996, as amended, by
and among the Heska and the Holders, as defined therein (the "Investors' Rights
Agreement"), have agreed to the addition of certain former shareholders of
Sensor Devices, Inc. ("SDI") identified on Exhibit A hereto (the "SDI
Shareholders") as parties to the Investors' Rights Agreement, to the extent and
on the terms set forth below:
NOW, THEREFORE, each SDI Shareholder indicated on Exhibit A hereto shall be
deemed a party to the Investors' Rights Agreement; provided, however, that such
SDI Shareholder shall be deemed a party only with respect to Section 2.3 and
related sections of the Investors' Rights Agreement and only with respect to the
number of shares of Common Stock of Heska listed on Exhibit A hereto (the "New
Investor Shares"). Accordingly, each SDI Shareholder shall be deemed a
"Holder," and the New Investor Shares shall be deemed "Registrable Securities,"
for purposes of such Sections 2.3 and related sections of the Investors' Rights
Agreement.
IN WITNESS WHEREOF, the undersigned Shareholder Agent, designated as such
under that certain Agreement and Plan of Merger dated as of February 3, 1998 by
and among Heska, Red River Merger Subsidiary, Inc. and SDI, have executed this
Agreement on behalf of and for the benefit of the SDI Shareholders effective as
of March __, 1998.
SDI SHAREHOLDER AGENTS
/s/ Richard D. Pauls
----------------------------------------
Richard D. Pauls
/s/ Steven D. Wiederholt
----------------------------------------
Steven D. Wiederholt
HESKA CORPORATION
By /s/Fred M. Schwarzer
--------------------------------------
Title: President
----------------------------------
-5-
<PAGE>
EXHIBIT 4.2 (B)
SECOND WAIVER AND AMENDMENT
---------------------------
TO FIRST AMENDED INVESTORS' RIGHTS AGREEMENT
--------------------------------------------
THIS SECOND WAIVER AND AMENDMENT TO THE FIRST AMENDED INVESTORS' RIGHTS
AGREEMENT (the "Agreement") is made as of the 14th day of July, 1998, among
Heska Corporation, a Delaware corporation (the "Company"), Novartis Produkte AG
(formerly Ciba-Geigy Limited), Charter Ventures, Charter Ventures II, L.P. and
Volendam Investeringen N.V. (the "Holders"):
W I T N E S S E T H:
WHEREAS, the Company and the Holders are parties to that certain First
Amended Investors' Rights Agreement, dated as of April 12, 1996, as amended by
that certain Waiver and Amendment to First Amended Investor's Rights Agreement
dated as of January 22, 1998 (collectively, the "Investors' Rights Agreement");
WHEREAS, the Company proposes to enter into that certain Asset Purchase
Agreement (the "Purchase Agreement") by and among the Company, Diamond Animal
Health, Inc., an Iowa corporation and wholly owned subsidiary of the Company,
and Bayer Corporation, an Indiana corporation ("Bayer"), pursuant to which Bayer
will sell and assign certain real property to Diamond and in consideration for
such sale, Bayer or its affiliates (the New Investor, as defined in Section 2
below) will receive shares of Common Stock of the Company, the exact number of
which will be determined at the closing of the transactions contemplated by the
Purchase Agreement (the "Bayer Shares"); and
WHEREAS, the Holders desire that the transactions contemplated by the
Purchase Agreement be consummated, and, as a condition thereof and to induce
such action, the Holders are willing to enter into this Agreement to permit the
New Investor to become a party to the Investors' Rights Agreement with respect
to the Bayer Shares, as set forth in Section 2 below.
In consideration of the foregoing and the promises and covenants herein and
other good and valuable consideration, the receipt of which is hereby
acknowledged, the parties hereby agree as follows:
1. Consent and Waiver Agreement Pursuant to Section 6.1 of the Investor's
----------------------------
Rights Agreement, the Holders hereby consent, on behalf of themselves and all
other stockholders of the Company having rights under the Investors' Rights
Agreement, to the amendments to the Investors' Rights Agreement set forth in
this Agreement, and hereby waive the provisions of Section 2.11 of the
Investors' Rights Agreement with respect to the registration rights granted to
the New Investors pursuant to Section 2 of this Agreement.
2. Additional Parties to the Agreement. Schedule B to the Investors'
-----------------------------------
Rights Agreement is hereby amended to include Bayer, or any other affiliate or
affiliates of Bayer designated by it to receive the Bayer Shares pursuant to the
Purchase Agreement (collectively, the "New Investor") as a party; provided,
however, that such New Investor shall be added as a party or as parties to the
Investors' Rights Agreement only with respect to Section 2.3 thereof and related
sections of the Investors' Rights Agreement; and provided further, that the
"piggyback" registration rights granted to the New Investor pursuant to this
Section 2 and Section 2.3 of the
<PAGE>
Investors' Rights Agreement shall be granted and remain exercisable only for a
period of one (1) 2.abyear after the date of consummation of the transactions
contemplated by the Purchase Agreement.
3. Amendments to Agreement. Subject to the limitations set forth in
-----------------------
Section 2 above, the New Investor is referred to (individually or collectively)
as "Holder" and the Bayer Shares are collectively referred to as "Registrable
Securities" for purposes of the Investors' Rights Agreement.
4. Effectiveness. The waiver and amendment set forth in this Agreement
-------------
shall be effective as of the date first above written, and, except as expressly
modified by this Agreement, the Investors' Rights Agreement, as originally
written and as subsequently amended, shall remain in full force and effect.
5. Counterparts. This Agreement may be executed by facsimile and in two
------------
or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same original instrument. This
Agreement will be binding upon the Company and the Holders (including the New
Investor) and their respective successors, assigns, heirs and personal
representatives.
6. Severability. If one or more provisions of this Agreement are held to
------------
be unenforceable under applicable law, such provision shall be excluded from
this Agreement and the balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
7. Entire Agreement. This Agreement, together with the Investors' Rights
----------------
Agreement, constitutes the full and entire understanding and agreement between
the parties with regard to the subjects hereof and thereof.
2
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
HESKA CORPORATION
By: /s/ Deborah E. Robbins
----------------------------------------------
Name Deborah E. Robbins
--------------------------------------------
Title Vice President and General Counsel
-------------------------------------------
Address 1825 Sharp Point Drive
Fort Collins, Colorado 80525
HOLDERS:
-------
NOVARTIS PRODUKTE AG
(now: Novartis Animal Health, Inc.)
By: /s/ P. Kornicker /s/ Jeff Johnson
----------------------------------------------
Name P. Kornicker Jeff Johnson
---------------------------------------------
Title Legal Counsel Bus. Development
--------------------------------------------
Mgr Address P.O. Box
------------------------------------
CH-4002 Basel (Switzerland)
------------------------------------
3
<PAGE>
CHARTER VENTURES
By: /s/ A. Barr Dolan
----------------------------------------------
Name____________________________________________
Title___________________________________________
Address ____________________________________
____________________________________
CHARTER VENTURES II, L.P.
By: /s/A. Barr Dolan
---------------------------------------------
Name____________________________________________
Title___________________________________________
Address_________________________________________
VOLENDAM INVESTERINGEN N.V.
By: /s/ Anneke Soedhoe /s/Andries Kroon
----------------------------------------------
Name MeesPierson Trust (Curacao) N.V.
--------------------------------------------
Title Managing Director
-------------------------------------------
Address John B. Gorsirqweg 14
-----------------------------------------
Curacao, Netherlands Antilles
-----------------------------------------
4
<PAGE>
EXHIBIT 4.2(C)
THIRD WAIVER AND AMENDMENT
--------------------------
TO FIRST AMENDED INVESTORS' RIGHTS AGREEMENT
--------------------------------------------
THIS THIRD WAIVER AND AMENDMENT TO THE FIRST AMENDED INVESTORS' RIGHTS
AGREEMENT (the "Agreement") is made as of the 12 th day of August, 1998, among
--------- ----
Heska Corporation, a Delaware corporation (the "Company"), Novartis Animal
-------
Health, Inc., (formerly Ciba-Geigy Limited), Charter Ventures, Charter Ventures
II, L.P. and Volendam Investeringen N.V. (the "Holders"):
-------
W I T N E S S E T H:
WHEREAS, the Company and the Holders are parties to that certain First
Amended Investors' Rights Agreement, dated as of April 12, 1996, as amended by
that certain Waiver and Amendment to First Amended Investors' Rights Agreement
dated as of January 22, 1998, as further amended by that certain Second Waiver
and Amendment to First Amended Investors' Rights Agreement dated as of July 14,
1998 (collectively, the "Investors' Rights Agreement");
---------------------------
WHEREAS, the Company proposes to enter into that certain Collaboration and
License Agreement (the "Collaboration Agreement") by and among the Company and
-----------------------
Ralston Purina Company, a Missouri corporation ("Ralston");
-------
WHEREAS, in addition to the Collaboration Agreement, the Company and
Ralston propose to enter into (i) that certain Common Stock Purchase Agreement
(the "Purchase Agreement"), pursuant to which the Company will issue certain
------------------
shares of its common stock, par value $.001 per share (the "Common Stock"), to
------------
Ralston (the "Purchased Shares"), and (ii) that certain Common Stock Warrant
----------------
Purchase Agreement (the "Warrant Agreement"), pursuant to which the Company will
-----------------
issue to Ralston warrants (the "Warrants") to purchase certain shares of Common
--------
Stock (the "Warrant Shares" and, together with the Purchased Shares, the
------- ------
"Ralston Shares"), the exact number of which Ralston Shares will be determined
- ---------------
at the closing of the transactions contemplated by the Purchase Agreement and
the Warrant Agreement; and
WHEREAS, the Holders desire that the transactions contemplated by the
Collaboration Agreement, Purchase Agreement and the Warrant Agreement be
consummated, and, as a condition thereof and to induce such action, the Holders
are willing to enter into this Agreement to permit Ralston to become a party to
the Investors' Rights Agreement with respect to the Ralston Shares, as set
forth in Section 2 below.
NOW, THEREFORE, in consideration of the foregoing and the promises and
covenants herein and other good and valuable consideration, the receipt of which
is hereby acknowledged, the parties hereby agree as follows:
1. Consent and Waiver Agreement Pursuant to Section 6.1 of the Investor's
----------------------------
Rights Agreement, the Holders hereby consent, on behalf of themselves and all
other stockholders of the Company having rights under the Investors' Rights
Agreement, to the amendments to the Investors' Rights Agreement set forth in
this Agreement, and hereby waive the provisions of Section 2.11 of the
Investors' Rights Agreement with respect to the registration rights granted to
Ralston pursuant to Section 2 of this Agreement.
<PAGE>
2. Additional Parties to the Agreement. Schedule A to the Investors'
-----------------------------------
Rights Agreement is hereby amended to include Ralston as a party and the Warrant
Shares, upon exercise of the Warrant to purchase such shares, thereto. Schedule
B to the Investors' Rights Agreement is hereby amended to include Ralston as a
party and the Purchased Shares thereto; provided, however, that Ralston shall be
added as a party to the Investors' Rights Agreement only with respect to Section
2.3 thereof and related sections of the Investors' Rights Agreement that are
applicable to holders of "piggyback" registration rights granted under Section
2.3; and provided further, that the "piggyback" registration rights granted to
Ralston pursuant to this Section 2 and Section 2.3 of the Investors' Rights
Agreement shall be granted and remain exercisable only for the period of time in
which (and with respect to the Ralston Shares as to which) Ralston is unable to
sell such Ralston Shares without volume or manner of sale limitation under Rule
144 promulgated under the Securities Act of 1933, as amended (or similar
successor rule).
3. Amendments to Agreement. Subject to the limitations set forth in
-----------------------
Section 2 above and in the Investors' Rights Agreement, (i) Ralston is referred
to as a "Holder" and (ii) the Purchased Shares and the Warrant Shares (upon
issuance thereof after due and proper exercise of the Warrant) are collectively
referred to as "Registrable Securities" for purposes of the Investors' Rights
Agreement.
4. Effectiveness. The waiver and amendment set forth in this Agreement
-------------
shall be effective as of the date first above written, and, except as expressly
modified by this Agreement, the Investors' Rights Agreement, as originally
written and as subsequently amended, shall remain in full force and effect.
5. Counterparts. This Agreement may be executed by facsimile and in two or
------------
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same original instrument. This Agreement
will be binding upon the Company and the Holders (including Ralston) and their
respective successors, assigns, heirs and personal representatives.
6. Severability. If one or more provisions of this Agreement are held to
------------
be unenforceable under applicable law, such provision shall be excluded from
this Agreement and the balance of the Agreement shall be interpreted as if such
provision were so excluded and shall be enforceable in accordance with its
terms.
7. Entire Agreement. This Agreement, together with the Investors' Rights
----------------
Agreement, constitutes the full and entire understanding and agreement between
the parties with regard to the subjects hereof and thereof.
2
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
HESKA CORPORATION
By /s/ Fred M. Schwarzer
-----------------------------------------
Name Fred M. Schwarzer
---------------------------------------
Title President and Chief Executive Officer
--------------------------------------
Address 1825 Sharp Point Drive
Fort Collins, Colorado 80525
HOLDERS:
-------
NOVARTIS ANIMAL HEALTH INC.
By /s /R. Steiger /s/ R. Muttenzer
--------------------------------------------
Name R. Steiger R. Muttenzer
-----------------------------------------
Title Sr. Research Coord. General Counsel
----------------------------------------
Address Schwaszwaldaller 215
--------------------
4058 Basel
----------
3
<PAGE>
CHARTER VENTURES
By /s/ A. Barr Dolan
------------------------------------------
Name A. Barr Dolan
-------------------------------------
Title General Partner
-------------------------------------
Address
-------------------------------------
-------------------------------------
CHARTER VENTURES II, L.P.
By /s/A. Barr Dolan
------------------------------------------
Name A. Barr Dolan
--------------------------------------
Title General Partner
-------------------------------------
Address
-------------------------------------
-------------------------------------
VOLENDAM INVESTERINGEN N.V.
By /s/Anneke Soedhoe /s/Andries Kroon
------------------------------------------
Name MeesPierson Trust (Curacao) N.V.
--------------------------------------
Title Managing Director
-----------------------------------
Address 14 J.B. Gorsiraweg
-----------------------------------
Curacao, Netherlands Antilles
-----------------------------------
4
<PAGE>
RALSTON PURINA COMPANY
By /s/ James R. Elsesser
--------------------
Name James R. Elsesser
---------------------------------------------
Title President and Chief Financial Officer
----------------------------------------
Address Checkerboard Square
----------------------------------------
St. Louis, MO 63164
----------------------------------------
5
<PAGE>
EXHIBIT 4.5
COMMON STOCK WARRANT PURCHASE AGREEMENT
This COMMON STOCK WARRANT PURCHASE AGREEMENT (the "Agreement") is made
---------
and entered into as of this 29th day of July, 1998 by and between HESKA
CORPORATION, a Delaware corporation ("Company"), and RALSTON PURINA COMPANY, a
-------
Missouri corporation ("Purchaser").
---------
RECITALS
WHEREAS, Company and Purchaser have entered into a Collaboration and
License Agreement of even date herewith (the "Collaboration Agreement");
-----------------------
WHEREAS, in addition to the Collaboration Agreement, Purchaser desires to
acquire from Company, and Company has agreed to issue to Purchaser, warrants to
purchase shares of Company's common stock, par value $.001 per share, on the
terms and subject to the conditions set forth herein; and
WHEREAS, in addition to the transactions contemplated hereby, Purchaser and
Company are entering into a Common Stock Purchase Agreement (the "Stock Purchase
--------------
Agreement") of even date, pursuant to which Purchaser will acquire from Company,
- ---------
and Company will issue and sell to Purchaser, shares of Company Common Stock
(the "Purchased Shares"), on the terms and subject to the conditions set forth
----------------
in the Stock Purchase Agreement;
1. DEFINITIONS. Unless the context otherwise requires, the following
terms shall have the meanings specified for all purposes of this Agreement:
"Agreement" shall mean this Agreement.
---------
"Amendment" shall have the meaning ascribed to it in section 3.2
---------
hereof.
"Applicable Law" shall mean all applicable provisions of all (i)
--------------
constitutions, treaties, statutes, laws (including the common law), rules,
regulations, ordinances, codes or orders of any Governmental Authority, (ii)
Governmental Approvals, (iii) orders, decisions, injunctions, judgments, awards
and decrees of or agreements with any Governmental Authority and (iv) the rules
and regulations of any stock exchange or self regulatory organization governing
the market or markets where Company's or Purchaser's securities are actively
traded.
"Business Day" shall mean a day other than a Saturday, Sunday or
------------
other day on which commercial banks in the State of New York are authorized or
required to close.
<PAGE>
"Certificate of Incorporation" shall mean Company's restated certificate of
----------------------------
incorporation, as filed with the Secretary of State of the State of Delaware, in
effect on the date of this Agreement and as the same may be amended from time to
time after the date hereof.
"Closing" shall have the meaning assigned to it in Section 4.
-------
"Closing Date" shall have the meaning assigned to it in Section 4.
------------
"Company" shall have the meaning ascribed to it in the preamble of this
-------
Agreement.
"Company Common Stock" shall mean the common stock of Company, $.001 par
--------------------
value per share, as described in the Certificate of Incorporation.
"Collaboration Agreement" shall have the meaning ascribed to it in the
-----------------------
recitals to this Agreement.
"Commission" shall mean the Securities and Exchange Commission.
----------
"Consent" shall mean any consent, approval, authorization, waiver, permit,
-------
grant, franchise, concession, agreement, license, exemption or order of,
registration, certificate, declaration or filing with, or report or notice to,
any Person, including but not limited to any Governmental Authority.
"Effective Date" with respect to the Collaboration Agreement, shall have
--------------
the meaning ascribed to such term in the Collaboration Agreement.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended,
------------
and the rules and regulations of the Commission promulgated thereunder as in
effect from time to time.
"Governmental Approval" shall mean any Consent of, with or from any
---------------------
Governmental Authority.
"Governmental Authority" shall mean any nation or government, any state or
----------------------
other political subdivision thereof, any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government, including without limitation any government authority, agency,
department, board, commission or instrumentality of the United States, any State
of the United States or any political subdivision thereof, and any tribunal or
arbitrator(s) of competent jurisdiction.
"HSR Act" shall mean the Hart-Scott-Rodino Antitrust Improvements Act of
-------
1976, as amended, and all rules and regulations promulgated thereunder.
2
<PAGE>
"Holder" of any security shall mean the permitted record or beneficial
------
owner of such security.
"Investors' Rights Agreement" shall have the meaning ascribed to it in
---------------------------
section 3.2 hereof.
"Material Adverse Effect" shall mean, with regard to any party, any event,
-----------------------
occurrence, fact, condition, change or effect that individually or in the
aggregate with similar events, occurrences, facts, conditions, changes or
effects will or can reasonably be expected to have a material adverse effect on
the business, assets, liabilities, operations or financial or other condition of
such party and its subsidiaries, if any, taken as a whole, or cause a material
limitation on the ability of such party to perform its obligations under this
Agreement.
"Person" shall mean any natural person, firm, partnership, association,
------
corporation, company, limited liability company, limited partnership, trust,
business trust, Governmental Authority, unincorporated entity or other entity.
"Purchaser" shall have the meaning ascribed to it in the preamble of
---------
this Agreement.
"SEC Documents" shall have the meaning ascribed in Section 7.6.
-------------
"Securities Act" shall mean the Securities Act of 1933, as amended, and the
--------------
rules and regulations of the Commission promulgated thereunder as in effect from
time to time.
"Warrant" shall have the meaning assigned to it in Section 2.
-------
"Warrant Purchase Price" shall mean: (i) for the period of time commencing
----------------------
on the Date of Issuance of the Warrant, as defined therein, and ending on and
including the last day of the first anniversary of such date (the "Initial
-------
Exercise Period"), an amount equal to $12.87 per Warrant Share; (ii) for the
- ---------------
period of time commencing on the first day following the expiration of the
Initial Exercise Period and ending on and including the last day of the second
anniversary of the Date of Issuance of the Warrant (the "Second Exercise
---------------
Period"), an amount equal to $14.16 per Warrant Share; and (iii) for the period
of time commencing on the first day following the expiration of the Second
Exercise Period and ending on and including the last day of the Exercise Period
(as defined in the Warrant), an amount equal to $15.57 per Warrant Share;
subject in each case to adjustment as provided in the Warrant.
"Warrant Shares" shall mean the shares of Company Common Stock into which
--------------
the Warrant is at any time exercisable, as set forth in Section 2 hereof.
2. AUTHORIZATION OF WARRANT AND WARRANT SHARES. Company has authorized
the issuance of (i) a stock purchase warrant in the form of Annex A hereto (the
-------
"Warrant"), entitling the holder of the Warrant to purchase up to One Million
-------
One Hundred Sixty Five Thousand Five
3
<PAGE>
Hundred Ninety Two (1,165,592) shares of Company Common Stock at the Warrant
Purchase Price and on the terms and conditions set forth in the Warrant (the
"Warrant Shares") and (ii) the Warrant Shares, upon exercise of the Warrant.
--------------
3. SALE AND PURCHASE OF WARRANT; REGISTRATION OF WARRANT SHARES.
3.1 SALE AND PURCHASE OF WARRANT. Upon the terms and subject to the
conditions herein contained, at the Closing on the Closing Date, (i) Company
agrees to issue to Purchaser the Warrant and (ii) Purchaser agrees to pay
Company, as the purchase price for the Warrant, the aggregate sum of Two Hundred
and Fifty Thousand Dollars ($250,000), payable by wire transfer to the account
of Company designated by Company.
3.2 "PIGGYBACK" REGISTRATION OF WARRANT SHARES. Within thirty (30)
days after the Closing, Company will use its best efforts to cause its existing
First Amended Investors' Rights Agreement, as amended (the "Investors' Rights
-----------------
Agreement") (a true and correct copy of which has been provided to Purchaser),
- ---------
to be further amended to provide "piggyback" registration rights to Purchaser
with respect to the Warrant Shares, substantially in accordance with the terms
of that certain Third Waiver and Amendment To First Amended Investors' Rights
Agreement, a copy of which is annexed hereto as Annex B (the "Amendment"). In
-------- ---------
the event Company is unable to obtain the requisite signatures of the existing
parties to the Investors' Rights Agreement to approve the Amendment within such
thirty (30) day period, Company and Purchaser shall enter into a mutually
acceptable registration rights agreement providing for "piggyback" registration
rights on terms consistent with the rights that would have been provided for
under the currently operative provisions of the Investors' Rights Agreement, as
amended by the Amendment, subject to the limitations, including without
limitation the limitations on future registration rights, set forth in the
Investors' Rights Agreement.
4. CLOSING. Subject to the satisfaction of the conditions specified in
Section 5 hereof, the closing of the issuance to and acquisition by Purchaser of
the Warrant (the "Closing") shall occur upon execution and delivery of this
-------
Agreement, or at such later time as Company and Purchaser mutually agree upon,
but in no event sooner than the Effective Date of the Collaboration Agreement
and the closing of the transactions contemplated by the Stock Purchase Agreement
(the "Closing Date"). At the Closing, Company shall deliver to Purchaser the
------- ----
duly executed Warrant in the form of Annex A, which Warrant shall be registered
-------
in Purchaser's name as stated on Purchaser's signature page hereto, against
delivery to Company of the purchase price therefor in accordance with Section 3
above.
5. CONDITIONS TO CLOSING.
5. CONDITIONS TO PURCHASER'S OBLIGATIONS AT CLOSING. The obligation
of Purchaser to purchase the Warrant on the Closing Date is subject to the
fulfillment prior to or on the Closing Date of the following conditions, any of
which conditions may be waived by Purchaser:
4
<PAGE>
(A) REPRESENTATIONS AND WARRANTIES; COVENANTS. The
representations and warranties of Company contained in this Agreement (i) shall
be true and correct at and as of the date hereof and (ii) shall be repeated and
shall be true and correct on and as of the Closing Date (if later than the date
hereof) with the same effect as though made on and as of the Closing Date.
Company shall have duly performed and complied with all covenants and agreements
and conditions required by this Agreement to be performed or complied with by
Company prior to or on the Closing Date. Company shall have delivered to
Purchaser a duly authorized, properly executed certificate or certificates of
its President or other appropriate executive level officer, dated the Closing
Date to the foregoing effect.
(B) BOARD APPROVAL. Resolutions of the board of directors of
Company, certified by the Secretary or Assistant Secretary of Company, as of
the Closing Date, shall have been duly adopted and in full force and effect on
such date authorizing the consummation of the transactions contemplated by this
Agreement, and such certificate shall have been delivered to Purchaser.
(C) INCUMBENCY. Certificates of the Secretary or an Assistant
Secretary of Company, dated the Closing Date, as to the incumbency and
signatures of the officers of Company executing this Agreement and other
certificates or documents to be delivered pursuant hereto, together with
evidence of the incumbency of such Secretary or Assistant Secretary, shall have
been delivered to Purchaser.
(D) OTHER CLOSING CONDITIONS. Company shall have duly executed
and delivered to Purchaser the Collaboration Agreement and the Stock Purchase
Agreement and all conditions to Purchaser's obligation to consummate the
transactions contemplated by the Collaboration Agreement and the Stock Purchase
Agreement shall have been satisfied or waived.
(E) PROCEEDINGS AND DOCUMENTS. All other corporate and other
proceedings and actions taken in connection with the transactions contemplated
hereby and all certificates, agreements, instruments and documents mentioned
herein or incident to any such transactions, shall be reasonably satisfactory in
form and substance to Purchaser and its counsel.
5.2. CONDITIONS TO COMPANY'S OBLIGATIONS AT CLOSING. The obligation of
Company to issue the Warrant on the Closing Date is subject to the fulfillment
prior to or on the Closing Date of the following conditions, any of which
conditions may be waived by Company:
(A) REPRESENTATIONS AND WARRANTIES; COVENANTS. The
representations and warranties of Purchaser contained in this Agreement (i)
shall be true and correct at and as of the date hereof and (ii) shall be
repeated and shall be true and correct on and as of the Closing Date (if later
than the date hereof) with the same effect as though made on and as of the
Closing Date. Purchaser shall have duly performed and complied with all
covenants and agreements and conditions required by this Agreement to be
performed or complied with by Purchaser prior to or on the Closing Date.
Purchaser shall have delivered to Company a duly authorized, properly executed
certificate
5
<PAGE>
or certificates of an appropriate executive level officer of Purchaser, dated
the Closing Date, to the foregoing effect.
(B) BOARD APPROVAL. To the extent required under Purchaser's
articles of incorporation, bylaws, charters or resolutions of its board of
directors or committees thereof, contractual commitments or otherwise,
resolutions of the board of directors of Purchaser, certified by the Secretary
or Assistant Secretary of Purchaser, as of the Closing Date, shall have been
duly adopted and in full force and effect on such date authorizing the
consummation of the transactions contemplated by this Agreement, and such
certificate shall have been delivered to Company.
(C) INCUMBENCY. Certificates of the Secretary or an Assistant
Secretary of Purchaser, dated the Closing Date, as to the incumbency and
signatures of the officers of Purchaser executing this Agreement and other
certificates or documents to be delivered pursuant hereto, together with
evidence of the incumbency of such Secretary or Assistant Secretary, shall have
been delivered to Company.
(D) OTHER CLOSING CONDITIONS. Purchaser shall have duly
executed and delivered to Company the Collaboration Agreement and the Stock
Purchase Agreement and all conditions to Company's obligation to consummate the
transactions contemplated by the Collaboration Agreement and the Stock Purchase
Agreement shall have been satisfied or waived.
(E) PROCEEDINGS AND DOCUMENTS. All other corporate and other
proceedings and actions taken in connection with the transactions contemplated
hereby and all certificates, agreements, instruments and documents mentioned
herein or incident to any such transactions, shall be reasonably satisfactory in
form and substance to Company and its counsel.
5.3 CONDITIONS TO OBLIGATIONS OF EACH PARTY. The obligations of the
parties to consummate the transactions contemplated hereby shall be subject to
the fulfillment on or prior to the Closing Date of the following conditions:
(A) HSR ACT NOTIFICATION. In respect of any necessary
notifications of Purchaser and Company pursuant to the HSR Act, if applicable,
the applicable waiting period and any extensions thereof shall have expired or
been terminated.
(B) NO INJUNCTION, ETC. Consummation of the transactions
contemplated hereby or by the Collaboration Agreement shall not have been
restrained, enjoined or otherwise prohibited by any Applicable Law, including
without limitation any order, injunction, decree, or judgment of any court or
other Governmental Authority. No court or other Governmental Authority shall
have determined any Applicable Law to make illegal the consummation of the
transactions contemplated hereby, and no proceeding with respect to the
application of any such Applicable Law to such effect shall be pending.
6
<PAGE>
(C) QUALIFICATION UNDER SECURITIES LAWS. All registrations,
qualifications, permits and approvals, if any, required under the Securities
Act and applicable state and foreign securities laws to be obtained prior to
execution, delivery and performance of this Agreement, including the offer and
sale of the Warrant, shall have been obtained.
6. REPRESENTATIONS AND WARRANTIES BY COMPANY. Company represents
and warrants to Purchaser as of the date hereof and as of the Closing Date that,
except as set forth on a Schedule of Exceptions attached hereto:
6.1 CORPORATE STATUS; AUTHORIZATION, ETC. Company is a
corporation duly organized, validly existing, and in good standing under the
laws of the State of Delaware with full corporate power and authority to execute
and deliver this Agreement, to perform its obligations hereunder and to
consummate the transactions contemplated hereby. The execution and delivery by
Company of this Agreement and the consummation of the transactions contemplated
hereby have been duly authorized by all requisite corporate action of Company.
Company has duly executed and delivered this Agreement. This Agreement is the
valid and legally binding obligation of Company enforceable against Company in
accordance with its terms, subject to bankruptcy, insolvency, reorganization,
receivership, moratorium, and similar laws affecting creditors' rights
generally, and to the availability of equitable remedies (whether asserted at
law or in equity).
6.2 NO CONFLICTS, ETC. The execution, delivery, and performance
by Company of this Agreement and the consummation of the transactions
contemplated hereby do not and will not conflict with or result in a violation
of or under (i) the certificate of incorporation or bylaws of Company or (ii)
any Applicable Law applicable to Company or any of its properties or assets
except, in the case of clause (ii), for violations and defaults that,
individually and in the aggregate, have not and will not have a Material Adverse
Effect on Company.
6.3 LITIGATION. There is no action, claim, suit, or proceeding
pending, or to the best knowledge of Company, threatened, by or against or
affecting Company in connection with or relating to the transactions
contemplated by this Agreement or of any action taken or to be taken in
connection herewith or the consummation of the transactions contemplated hereby.
6.4 BROKERS, FINDERS, ETC. All negotiations relating to this
Agreement and the transactions contemplated hereby have been carried on without
the participation of any Person acting on behalf of Company in such manner as to
give rise to any valid claim against Purchaser for any brokerage or finder's
commission, fee or similar compensation.
6.5 CAPITAL STRUCTURE OF COMPANY. As of the date of this
Agreement, the authorized capital stock of Company consists of 40,000,000 shares
of Company Common Stock, par value $.001 per share, and 25,000,000 shares of
preferred stock, par value $.001 per share. At the close of business on June
30, 1998, 24,999,979 shares of Company Common Stock were issued and outstanding,
no shares of Company's preferred stock were issued and outstanding and 4,112,820
shares of Company's Common Stock were reserved for issuance under Company's
7
<PAGE>
stock plans. The Warrant Shares are duly authorized and have been reserved for
issuance upon exercise of the Warrant. All of the outstanding shares of Company
Common Stock are, and the Warrant Shares, when issued against payment therefor
and otherwise in accordance with this Agreement and the Warrant, will be, duly
authorized, validly issued, fully paid and nonassessable. The Warrant, when
issued pursuant to the terms of this Agreement, and the Warrant Shares, when
issued against payment therefor and otherwise in accordance with this Agreement
and the Warrant, will be free of any liens or encumbrances created by or as a
result of action or inaction by Company, other than restrictions on transfer
under federal and state securities laws as set forth herein, and as may be
required by future changes in such laws. None of the Warrant Shares, when issued
against payment therefor in accordance with this Agreement and the Warrant, will
be subject to preemptive rights created by statute, Company's certificate of
incorporation or bylaws or any agreement to which Company is a party or bound.
There are no bonds, debentures, notes or other indebtedness of Company having
general voting rights (or convertible into securities having such general voting
rights( ("Voting Debt") issued and outstanding. Except as set forth above, in
-----------
the SEC Documents, or in Schedule 3.5 to the Stock Purchase Agreement, which
------------
schedule is incorporated herein by this reference as if fully set forth herein,
as of the date hereof, and except for shares of Company Common Stock issued or
issuable in an aggregate amount not to exceed 250,000 shares, (i), there are no
shares of capital stock or other voting securities of Company authorized, issued
or outstanding, (ii) there are no existing options, warrants, calls, preemptive
rights, subscriptions, or other rights, agreements, arrangements, or commitments
of any character, (A) relating to the issued or unissued capital stock of
Company, (B) obligating Company to issue, transfer or sell, or cause to be
issued, transferred or sold, any shares of capital stock or Voting Debt of, or
other equity securities in, or securities convertible into or exchangeable for
such shares or equity securities, in Company, or (C) obligating Company to
grant, extend, or enter into any such option, option, warrant, call,
subscription or other right, agreement, arrangement or commitment.
6.6 SEC DOCUMENTS. Since July 1, 1997, Company has timely made all
filings with the Commission it has been required to make under the Securities
Act and under the Exchange Act (such filings being collectively referred to
herein as, the "SEC Documents"). Each of the SEC Documents filed with the
-------------
Commission complied with the applicable disclosure requirements of the
Securities Act and Exchange Act in all material respects on the date of filing.
None of the SEC Documents, as of their respective dates, contained any untrue
statement of a material fact or omitted to state a material fact necessary in
order to make the statements made therein, in light of the circumstances in
which they were made, not misleading. For purposes of this Agreement, the term
"SEC Documents" shall also mean and include all exhibits to such SEC Documents
filed by Company with the Commission (and those exhibits filed previously with
the Commission by Company and referenced or incorporated by reference in such
SEC Documents), and all financial statements (including the notes thereto) of
Company included in such SEC Documents or otherwise previously filed with the
Commission by Company.
8
<PAGE>
6.7 NO UNTRUE STATEMENTS OR OMISSIONS. No representation or
warranty contained in this Agreement or in any schedule hereto contains, to the
knowledge of Company, any untrue statement of a material fact or omits a
material fact necessary to make the statements contained herein or therein, in
light of the circumstances under which they are made, not misleading.
7. REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser represents and
warrants to Company as of the date hereof and as of the Closing Date, and hereby
covenants, that:
7.1 REPRESENTATIONS AND WARRANTIES AS TO INVESTMENT. With respect to
its purchase of the Warrants and, upon exercise of the Warrant, the Warrant
Shares, hereunder, Purchaser represents and warrants to Company that:
(a) Purchaser understands that the neither the Warrant nor the
Warrant Shares have been registered under the Securities Act or applicable state
or federal securities laws on the grounds that such shares are being issued in a
transaction exempt from the registration requirements of the Securities Act and
such state or federal securities laws.
(b) Purchaser is acquiring its interest in the Warrant and the
Warrant Shares solely for its own account and not with a view to or for resale
in connection with any distribution thereof within the meaning of the Securities
Act or any applicable state or foreign securities laws.
(c) By reason of its knowledge, sophistication and experience in
business and financial matters and its financial condition, Purchaser is capable
of evaluating the merits and risks of an investment in the Warrant and the
Warrant Shares pursuant to the terms of this Agreement and the Warrant, is able
to protect its own interest in connection with the transactions contemplated
hereunder and is able to bear the economic risk of such investment and is able
to afford a complete loss of such investment.
(d) Purchaser is an "accredited investor" as that term is
defined in Rule 501 of Regulation D under the Securities Act.
(e) Purchaser has had an opportunity to review all documents and
other materials filed by Company with the Commission, including the SEC
Documents, and has been given an opportunity to ask such questions of Company's
officers concerning the terms and conditions of its acquisition of the Warrant
and the Warrant Shares and Company's business, operations, financial condition,
assets, liabilities and other relevant matters as it may have deemed necessary
or desirable, in order to evaluate the merits and risks of the investment
contemplated herein.
7.2 CORPORATE STATUS; AUTHORIZATION, ETC. Purchaser is a
corporation duly organized, validly existing, and in good standing under the
laws of the State of Missouri with full
9
<PAGE>
corporate power and authority to execute and deliver this Agreement, to perform
its obligations hereunder and to consummate the transactions contemplated
hereby. The execution and delivery by Purchaser of this Agreement and the
consummation of the transactions contemplated hereby have been duly authorized
by all requisite corporate action of Purchaser. Purchaser has duly executed and
delivered this Agreement. This Agreement is the valid and legally binding
obligation of Purchaser enforceable against Purchaser in accordance with its
terms, subject to bankruptcy, insolvency, reorganization, receivership,
moratorium and similar laws affecting creditors' rights generally, and to the
availability of equitable remedies (whether asserted at law or in equity).
7.3 NO CONFLICTS, ETC. The execution, delivery and performance by
Purchaser of this Agreement and the consummation of the transactions
contemplated hereby do not and will not conflict with or result in a violation
of or under (i) the articles of incorporation or bylaws of Purchaser or (ii) any
Applicable Law applicable to Purchaser or any of its properties or assets
except, in the case of clause (ii), for violations and defaults that,
individually and in the aggregate, have not and will not have a Material Adverse
Effect on Purchaser.
7.4 LITIGATION. There is no action, claim, suit, or proceeding
pending, or to the best knowledge of Purchaser, threatened, by or against or
affecting Purchaser in connection with or relating to the transactions
contemplated by this Agreement or of any action taken or to be taken in
connection herewith or the consummation of the transactions contemplated hereby.
7.5 BROKERS, FINDERS, ETC. All negotiations relating to this
Agreement and the transactions contemplated hereby have been carried on without
the participation of any Person, entity or association acting on behalf of
Purchaser in such manner as to give rise to any valid claim against Company for
any brokerage or finder's commission, fee or similar compensation.
8. COVENANTS.
8.1 COVENANTS OF COMPANY. Company covenants and agrees that from
the date hereof until the Closing Date (and thereafter with respect to any
covenant or agreement extending beyond the Closing Date), except as otherwise
expressly permitted or required by this Agreement or the Collaboration Agreement
or except as otherwise consented to by Purchaser in its writing:
(a) Company will use all reasonable good faith efforts to take
all actions and to do all things necessary, proper or advisable to consummate
the transactions contemplated hereby by the Closing Date.
(b) As promptly as practicable, Company will file or supply, or
cause to be filed or supplied, all applications, notifications and information
required to be filed or supplied by it pursuant to Applicable Law in connection
with this Agreement and the consummation of the other transactions contemplated
hereby or the Collaboration Agreement, including without limitation all filings
required under the HSR Act.
10
<PAGE>
(c) As promptly as practicable, Company will use all reasonable
efforts to obtain, or cause to be obtained, all Consents (including, without
limitation, all Governmental Approvals) necessary to be obtained by it in order
to consummate the transactions contemplated hereby.
(d) Company will coordinate and cooperate with Purchaser in
exchanging such information and supplying such assistance as may be reasonably
requested by Purchaser in connection with the filings and other actions
contemplated by Section 8.2.
(e) At all times prior to the Closing Date, Company will
promptly notify Purchaser in writing of any fact, condition, event or occurrence
known to Company in the exercise of reasonable business prudence that will or
may result in the failure of any of the conditions contained in Sections 5.1 and
5.3 to be satisfied, promptly upon becoming aware of the same.
(f) Except as otherwise required by Applicable Law , Company
shall not issue any news release or other public announcement, written or oral,
whether in the public press or stockholders' reports (if applicable), or
otherwise, relating to the existence of or the performance under this Agreement,
without the prior written approval of Purchaser not to be unreasonably withheld
or delayed more than ten (10) Business Days.
(g) Upon receipt of evidence reasonably satisfactory to Company
of the loss, theft, destruction or mutilation of any Warrant or any Warrant
Shares and, in the case of any such loss, theft or destruction, upon receipt of
indemnity reasonably satisfactory to Company, or in the case of any such
mutilation, upon surrender and cancellation of any certificate therefor, Company
will make and deliver, in lieu of such lost, stolen, destroyed or mutilated
security, a new certificate of like nature and number.
(h) Company will use its best efforts to cause the Warrant
Shares to be listed or quoted, when issued and subject to official notice of
issuance, on all automated quotation systems on which the Company Common Stock
is quoted or listed as of the date hereof, or, for so long as Purchaser or any
Registered Holder (as defined in the Warrant) holds any Warrant Shares, on any
other national securities exchange on which the Company Common Stock may in the
future be listed, including without limitation filing all necessary additional
shares notification forms and, with respect to any future listing of the
Purchased Shares on any national securities exchange, entering into customary
listing applications and agreements with such exchange.
(i) For so long as Purchaser or any Registered Holder (as
defined in the Warrant) holds any Warrant Shares, Company will use its best
efforts to maintain the current listing or quotation of the Company Common Stock
on the Nasdaq Stock Market-National Market or, if such securities are in the
future listed on any national securities exchange, on such exchange.
(j) For so long as Purchaser or any Registered Holder (as
defined in the Warrant) holds any Warrant Shares, Company will use its best
efforts to file any periodic or current
11
<PAGE>
reports required to be filed by it under the Exchange Act, and will take such
further actions within its control as may be reasonably requested by Purchaser
and which are required to enable Purchaser to sell the Warrant Shares without
registration thereof in accordance with Rule 144 or Rule 144A promulgated under
the Securities Act, as amended from time to time (or any similar rules adopted
by the Commission after the date hereof); provided, however, that nothing herein
-------- -------
shall require Company to qualify as a foreign corporation or consent to general
service of process in any jurisdiction in which it is not otherwise so qualified
or required to be qualified or in which it has not already consented to such
general service of process.
8.2 COVENANTS OF Purchaser. Purchaser covenants and agrees that
from the date hereof until the Closing Date (and thereafter with respect to any
covenant or agreement extending beyond the Closing Date), except as otherwise
expressly permitted or required by this Agreement or the Collaboration Agreement
or except as otherwise consented to by Purchaser in its writing:
(a) Purchaser will use all reasonable good faith efforts to take all
actions and to do all things necessary, proper or advisable to consummate the
transactions contemplated hereby by the Closing Date.
(b) As promptly as practicable, Purchaser will file or supply, or
cause to be filed or supplied, all applications, notifications, and information
required to be filed or supplied by Purchaser pursuant to Applicable Law in
connection with this Agreement and the consummation of the transactions
contemplated hereby , including, without limitation, all filings required under
the HSR Act.
(c) As promptly as practicable, Purchaser will use all reasonable
efforts to obtain, or cause to be obtained, all Consents (including without
limitation all Governmental Approvals) that are necessary to be obtained by it
in order to consummate the transactions contemplated hereby.
(d) Purchaser will coordinate and cooperate with Company in
exchanging such information and supplying such reasonable assistance as may be
reasonably requested by Company in connection with the filings and other actions
contemplated by Section 8.1.
(e) At all times prior to the Closing Date, Purchaser will promptly
notify Company in writing of any fact, condition, event or occurrence that will
or may result in the failure of any of the conditions contained in Sections 5.2
and 5.3 to be satisfied, promptly upon becoming aware of the same.
(f) Except as otherwise required by Applicable Law, Purchaser shall
not issue any news release or other public announcement, written or oral,
whether in the public press or stockholders' reports (if applicable), or
otherwise, relating to the existence of or the performance under this Agreement,
without the prior written approval of Company not to be unreasonably withheld or
delayed more than ten (10) Business Days.
12
<PAGE>
(g) Purchaser agrees with Company that the certificates evidencing
the Warrant, the Warrant Shares, and each certificate issued in transfer or
exchange of any of the forgoing, will bear substantially the following legend:
"The securities evidenced by this certificate have not been registered
under the Securities Act of 1933 or the securities or blue sky laws of any
state, and may not be sold or transferred unless there is an effective
registration statement under such Act and any applicable state securities
laws covering such securities or such sale or transfer is exempt from the
registration and prospectus delivery requirements of such Act and
applicable state securities laws. The securities are subject to and
entitled to the benefits of a Common Stock Warrant Purchase Agreement and
may not be transferred, sold or otherwise disposed of, except as therein
provided."
(h) Purchaser covenants that in no event will it, directly or
indirectly, offer, transfer, sell, assign, pledge, hypothecate or otherwise
dispose of any the Warrant or any of the Warrant Shares or any interest therein
(or solicit any offers to buy, purchase, or otherwise transfer, acquire or
dispose of the Warrant or any of the Warrant Shares or any interest therein) in
violation of the Securities Act, the Exchange Act or applicable state or foreign
laws and regulations related to the issuance of securities. Furthermore,
Purchaser acknowledges that the Company will place a stop transfer or similar
notation in its records that the Warrant and the Warrant Shares cannot be
transferred absent compliance with the restrictions on transfer described in
this Agreement.
9. MISCELLANEOUS.
9.1 WAIVERS AND AMENDMENTS. With the written consent Company and
Purchaser, if it is then the Holder of one or more Warrants representing the
right to acquire at least fifty percent (50%) of the shares of Company Common
Stock represented by the Warrant on the date hereof, subject to adjustment as
set forth in the Warrant, or, if not, the Holder or Holders of the Warrant or
Warrant Shares thereby adversely affected, the obligations of Company and the
rights of the Holders of the Warrant and Warrant Shares under this Agreement may
be waived (either generally or in a particular instance, either retroactively or
prospectively and either for a specified period of time or indefinitely), and
(b) Company may enter into a supplementary agreement for the purpose of adding
any provisions to or changing in any manner or eliminating any of the provisions
of this Agreement or of any supplemental agreement or modifying in any manner
the rights and obligations hereunder of the Holders of the Warrant and Warrant
Shares and Company. Each Holder of Warrant Shares shall have the absolute right
to exercise or refrain from exercising any right or rights which such Holder may
have by reason of this Agreement or its status as a Holder of the Warrant,
including, without limitation, the right to consent to the waiver of any
obligation of Company under this Agreement and to enter into an agreement with
Company for the purpose of modifying this Agreement or any agreement effecting
any such modification, and such Holder shall not incur any liability to any
other Holder or Holders of Warrant Shares with respect to exercising or
refraining from exercising any such right or rights.
13
<PAGE>
9.2 NOTICES. All notices and other communications required or
permitted hereunder shall be in writing and shall be personally delivered
(professional courier such as Federal Express acceptable) to, or mailed by first
class air mail, postage prepaid, addressed to:
(a) If to any Holder of any of the Warrant or any Warrant
Shares other than Purchaser, addressed to such Holder at such address as such
Holder may specify by written notice to Company, or
(b) If to Company, to Heska Corporation, 1825 Sharp Point
Drive, Fort Collins, Colorado 80525, Attention: President, with a copy to the
General Counsel of Company at the address of Company, or at such other address
as Company may specify by written notice to Purchaser, or
(c) if to Purchaser, to Ralston Purina Company, Checkerboard
Square, St. Louis, Missouri 63164, Attention: James Neville, Esq.,General
Counsel, or such other address as the Purchaser shall have furnished to the
Company pursuant hereto, with a copy to Stanley Rea, Esq., Pet Products Division
Counsel.
9.3 SURVIVAL OF REPRESENTATIONS AND WARRANTIES, ETC. All
representations and warranties made in, pursuant to or in connection with this
Agreement shall survive the execution and delivery of this Agreement and the
closing of the transactions contemplated hereby for a period of three (3) years
following the Closing, except that the representations and warranties of Company
set forth in Sections 6.6 and 6.7 hereof shall survive the Closing of the
transactions contemplated hereby for a period of one (1) year.
9.4 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto, including any permitted Holder of the Warrant.
9.5 GOVERNING LAW. This Agreement and the Warrant shall be governed
by and construed under the laws of the State of Delaware, without regard to the
provisions thereof concerning the application of the laws of other
jurisdictions.
9.6 ENTIRE AGREEMENT. This Agreement and the Warrant shall constitute
the full and entire understanding and agreement between the parties with regard
to the subject hereof and shall supersede any prior agreements or
representations, whether written or oral, with respect to the subject matter
hereof.
9.7 EXPENSES. Company and Purchaser shall each bear their own
expenses, fees and costs (including attorneys', auditors' and financing
commitment fees and any filing fees payable under the HSR Act) in connection
with the transactions contemplated hereby, including the
14
<PAGE>
preparation, execution, and delivery of this Agreement, the issuance of the
Warrant and compliance herewith, whether or not the transactions contemplated
hereby shall be consummated. in connection with the consummation of this
transaction.
9.8 TITLES AND SUBTITLES. The titles of the sections and subsections
of this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
9.9 COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by facsimile, each of which shall be deemed an original, but
all of which together shall constitute one instrument.
IN WITNESS WHEREOF, the undersigned have caused this Common Stock
Warrant Purchase Agreement to be duly executed and delivered by their respective
duly authorized officers on the day and year first above written,
RALSTON PURINA COMPANY, a Missouri corporation.
By /s/ W. Patrick McGinnis
------------------------------------------
Its: Co-Chief Executive Officer
HESKA CORPORATION:
By /s/ Fred M. Schwarzer
------------------------------------------
Its: President and CEO
15
<PAGE>
ANNEX A
-------
THE WARRANT REPRESENTED BY THIS CERTIFICATE WAS ORIGINALLY ISSUED ON JULY
30, 1998, AND HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. THE TRANSFER OF THE WARRANT REPRESENTED BY THIS CERTIFICATE IS
SUBJECT TO THE CONDITIONS SPECIFIED IN A COMMON STOCK WARRANT PURCHASE
AGREEMENT DATED JULY 29, 1998. THE COMPANY RESERVES THE RIGHT TO REFUSE THE
TRANSFER OF SUCH WARRANT UNTIL SUCH CONDITIONS HAVE BEEN FULFILLED WITH
RESPECT TO SUCH TRANSFER. A COPY OF SUCH AGREEMENT SHALL BE FURNISHED BY
THE COMPANY TO THE REGISTERED HOLDER HEREOF UPON WRITTEN REQUEST AND
WITHOUT CHARGE.
HESKA CORPORATION
WARRANT FOR THE PURCHASE OF SHARES OF COMMON STOCK
--------------------------------------------------
Date of Issuance: July 30, 1998 Certificate No. W-RP-1
For value received, Heska Corporation, a Delaware corporation (the
"Company"), hereby grants to Ralston Purina Company, a Missouri corporation
("Purchaser"), or its registered assigns (together with the Purchaser, the
"Registered Holder"), the right to purchase from the Company One Million One
Hundred Sixty Five Thousand Five Hundred Ninety Two (1,165,592) shares of
Common Stock at the Warrant Purchase Price (as adjusted from time to time
hereunder, the "Exercise Price"). This Warrant is issued pursuant to the terms
of the Common Stock Warrant Purchase Agreement of even date (the "Agreement"),
among the Company and the Purchaser. Certain capitalized terms used herein are
defined in Section 4 hereof. Capitalized terms used but not otherwise defined
herein shall have the meanings set forth for such terms in the Agreement.
This Warrant is subject to the following provisions:
Section 1. Exercise of Warrant.
-------------------
1A. Exercise Period. The Registered Holder may exercise, in whole or
---------------
in part , the purchase rights represented by this Warrant at any time and from
time to time (i) beginning after the Date of Issuance, (ii) up to and including
the third anniversary of such date (the "Exercise Period").
16
<PAGE>
1B. Exercise Procedure.
------------------
(i) This Warrant shall be deemed to have been exercised when the
Company has received all of the following items (the "Exercise Time"):
(a) a completed Exercise Agreement, as described in Section
1C below, executed by the Registered Holder exercising all or part of the
purchase rights represented by this Warrant;
(b) this Warrant;
(c) if this Warrant is not registered in the name of the
Registered Holder, an Assignment or Assignments in the form set forth in
Exhibit II hereto evidencing the assignment of this Warrant to the
----------
Registered Holder in which case the Registered Holder shall have complied
with the provisions set forth in Section 6 hereof; and
(d) a certified check payable to the Company in an amount
equal to the product of the Exercise Price multiplied by the number of
Warrant Shares being purchased upon such exercise (the "Aggregate Exercise
Price").
(ii) Certificates for Warrant Shares purchased upon exercise of
this Warrant shall be delivered by the Company or the transfer agent and
registrar of the Company Common Stock to the Registered Holder within ten (10)
Business Days after the date of the Exercise Time. Unless this Warrant has
expired or all of the purchase rights represented hereby have been exercised,
the Company shall prepare a new Warrant, substantially identical hereto,
representing the rights formerly represented by this Warrant which have not
expired or been exercised and shall, within such ten-day period, deliver such
new Warrant to the Registered Holder designated for delivery in the Exercise
Agreement. The Company shall not issue any fractional share of Common Stock upon
exercise of this Warrant. Instead, the Company shall deliver its check for the
current market value of the fractional share. The current market value of a
fraction of a share is determined by multiplying the Current Market Price (as
defined in Section 4 below) of one full share of Common Stock on the last
trading date prior to the Exercise Time by the fraction of a share and rounding
the result to the nearest cent.
(iii) The Warrant Shares issuable upon the exercise of this Warrant
shall be deemed to have been issued to the Registered Holder at the Exercise
Time, and the Registered Holder shall be deemed for all purposes to have become
the record holder of such Warrant Shares at the Exercise Time.
(iv) In case the Exercise Agreement specifying the name or names in
which the Registered Holder wishes the certificate or certificates for
Warrants or Warrant Shares to be issued shall specify a name or names other
than that of such Registered Holder, or in case any
17
<PAGE>
Registered Holder otherwise wishes to assign all or any part of this Warrant,
such Exercise Agreement or Assignment shall be accompanied by the payment of all
transfer, issuance, documentary stamp or other taxes and duties payable upon
issuance and delivery of the Warrant Shares or upon such assignment in such name
or names.
(v) The Company shall not close its books against the transfer
of this Warrant or any Warrant Shares issued or issuable upon the exercise of
this Warrant in any manner which interferes with the timely exercise of this
Warrant. The Company shall from time to time take all such action as may be
necessary to assure that the par value per share of the unissued Warrant Shares
acquirable upon exercise of this Warrant is at all times equal to or less than
the Exercise Price then in effect.
(vi) The Company shall reasonably assist and cooperate with any
Registered Holder required to make any governmental filings or obtain any
governmental approvals prior to or in connection with any exercise of this
Warrant (including, without limitation, making any filings required to be made
by the Company).
(vii) The Company shall at all times reserve and keep available
out of its authorized but unissued shares of Common Stock, solely for the
purpose of issuance upon the exercise of the Warrant, such number of shares of
Common Stock or other shares of capital stock of the Company as from time to
time may be issuable upon the full exercise of this Warrant. All Warrant Shares
or other securities which are so issuable shall, when issued, be duly and
validly issued, fully paid and nonassessable and free from all liens and
encumbrances, other than those imposed by the Agreement, those incurred or
suffered by Purchaser or a Registered Holder, and restrictions imposed under
applicable federal and state securities laws. The Company shall take all
reasonable actions as may be necessary to assure that all such Warrant Shares
may be so issued without violation of any applicable federal securities law or
any requirements of any domestic securities exchange upon which the Warrant
Shares may be listed (except for official notice of issuance which shall be
delivered by the Company upon each such issuance).
1C. Exercise Agreement. Upon any exercise of this Warrant, the
------------------
Exercise Agreement in the form set forth in Exhibit I hereto shall be completed,
---------
executed and delivered to Company, except that if the Warrant Shares are not to
be issued in the name of the Registered Holder in whose name this Warrant is
registered, the Exercise Agreement shall also state the name of the Registered
Holder or other permitted Person to whom the certificates for the Warrant
Shares are to be issued, and if the number of Warrant Shares to be issued does
not include all the Warrant Shares purchasable hereunder, it shall also state
the name of the Person to whom a new Warrant certificate for the unexercised
portion of the rights hereunder is to be delivered. Such Exercise Agreement
shall be dated the actual date of execution thereof.
18
<PAGE>
Section 2. Certain Adjustments. The number of Warrant Shares obtainable
-------------------
upon exercise of this Warrant, and the Exercise Price, shall be subject to
adjustment from time to time as provided in this Section 2.
2A. Adjustment of Exercise Price for Changes in Capital Stock. If at
---------------------------------------------------------
any time after the Date of Issue and during the Exercise Period the Company:
(i) subdivides its outstanding shares of Common Stock into a greater number of
shares; (ii) combines its outstanding shares of Common Stock into a smaller
number of shares; (iii) pays a dividend or makes a distribution on its Common
Stock in shares of its Common Stock or in other shares of its capital stock or
in evidences of indebtedness of Company or other property of Company (other than
cash); or (iv) issues by reclassification of its Common Stock any shares of its
capital stock, then, in each such case, the Exercise Price in effect immediately
prior to such action shall be adjusted so that the Registered Holder may receive
upon exercise of this Warrant and payment of the same aggregate consideration
the number of shares of Common Stock of the Company which the Registered Holder
would have owned immediately following such action if such Registered Holder had
exercised this Warrant immediately prior to such action.
The adjustment shall become effective immediately after the record
date in the case of a dividend or distribution, immediately after the effective
date in the case of a subdivision, combination or reclassification, and
immediately after the effective date with respect to all other events resulting
in an adjustment hereunder.
2B. Adjustment for Reorganization, Consolidation, Merger or Sale. If
------------------------------------------------------------
at any time after the Date of Issue and prior to the expiration of the Exercise
Period, the Company consummates any capital reorganization or other change of
outstanding shares of Common Stock of the Company (other than a subdivision or
combination of the outstanding Common Stock and other than a change in the par
value of the Common Stock or reclassification set forth in paragraph 2A above)
or in the event of any consolidation or merger of the Company with or into
another unaffiliated corporation (other than a merger in which the Company is
the continuing corporation and does not result in any reclassification, capital
reorganization or other change of outstanding shares of Common Stock of the
class issuable upon exercise of this Warrant ) or in the event of any sale,
lease, transfer or conveyance to another unaffiliated corporation of the
property or assets of the company as an entirety or substantially as an entirety
(each such event being referred to herein as an "Organic Change"), then prior to
the consummation of such Organic Change, the Company will utilize its
commercially reasonable best efforts to make appropriate provision to be made so
that the Registered Holders of the Warrant who has not elected to exercise such
Warrant shall thereafter have the right, by exercising the Warrant, to acquire
and receive in lieu of or in addition to (as the case may be) the Warrant Shares
immediately theretofore acquirable and receivable upon the exercise of such
Registered Holder's Warrant, such shares of stock, securities, properties or
assets as may be issued or payable with respect to or in exchange for the number
of Warrant Shares immediately theretofore acquirable and receivable upon
exercise of such Registered Holder's Warrant had such capital reorganization or
Organic Change not taken place, and, if such provision is not agreed to by the
acquiring Person or if it is a condition to such transaction that it be
accounted for as a "pooling
19
<PAGE>
of interests" or as a tax free reorganization and such provision would cause, in
the opinion of Company's or the acquiring Person's accountants or tax counsel,
the failure of such condition, then Company shall in lieu of such provision
provide notice to such Registered Holder of such Organic Change so that the
Registered Holders will have opportunity to exercise the Warrant prior to
consummation of such Organic Change.
2C. Deferral of Issuance or Payment. In any case in which an event
-------------------------------
covered by Section 2A shall require that an adjustment in the Exercise Price be
made effective as of a record date or an effective date, the Company may elect
to defer until consummation of such event (i) issuing to the Registered Holder,
if this Warrant is exercisable after such record or effective date, the shares
of Common Stock of the Company, if any, issuable upon such exercise over and
above the shares of Common Stock of the Company, if any, issuable upon such
exercise on the basis of the Exercise Price in effect prior to such adjustment,
and (ii) paying to the Registered Holder by check any amount in lieu of the
issuance of fractional shares pursuant to Section 1B(ii) hereof.
2D. When No Adjustment Required. No adjustment need be made pursuant
---------------------------
to this Section 2 or otherwise for (i) a change in the par value of the Common
Stock (ii) in connection with the issuance of Warrant Shares upon exercise of
the Warrant.
Section 3. Certificates, Notices and Consents.
----------------------------------
3A. Certificates. Upon the occurrence of any event requiring
------------
adjustments of the Exercise Price or number or kind of shares subject to this
Warrant pursuant to Section 2, the Company shall mail to the Registered Holders
a certificate signed by the President or a Vice President and by the Treasurer
or an Assistant Treasurer of the Company, setting forth in reasonable detail the
events requiring the adjustment and the method by which such proposed adjustment
was calculated, specifying the adjusted Exercise Price or number or kind of
shares subject to this Warrant after giving effect to the proposed adjustments.
3B. Failure and Defects. Failure to file any certificate or to mail
-------------------
any notice, or any defect in any certificate or notice, pursuant to Section 3A,
shall not affect the legality or validity of the adjustment of the Exercise
Price or number or kind of Warrant Shares subject to this Warrant pursuant to
Section 2, or otherwise affect the legality or validity of any action required
to be set forth in such certificate or notice.
Section 4. Definitions. The following terms have meanings set forth
-----------
below:
"Common Stock" shall mean the Company's currently authorized shares of
------------
common stock, par value $.001 per share, together with any equity securities of
any class of the Company hereinafter authorized which shall not be limited to a
fixed sum or percentage in respect of the rights of the holders thereof to
participate in dividends or distributions of assets upon the voluntary or
involuntary dissolution or winding up of the Company. However, subject to the
provisions of Section 2A hereof, shares issuable upon exercise hereof shall
include only shares of the class
20
<PAGE>
designated as Common Stock of the Company as of the date hereof or shares of any
class or classes resulting from any reclassification thereof.
"Current Market Price" shall mean, with respect to a specific date,
--------------------
the last reported sales price of the Common Stock in the over-the-counter
market, as reported by NASDAQ or, if listed on a national securities exchange on
the date of determination, the last reported sales price of the Common Stock on
such exchange, or if there are no transactions in the Common Stock on such day
then the Current Market Price shall be the last sales price on the over-the-
counter market or on such exchange, as the case may be, on the last preceding
day on which there was a transaction in the Common Stock. In the event the
Common Stock is not so listed or traded on a date such Current Market Price is
to be determined, the Current Market Price shall be determined by the Company
and the Registered Holders of Warrants to purchase not less than fifty percent
(50%) of the Warrant Shares subject to issuance at such time, or if the parties
cannot so agree, then such Current Market Price shall be determined on the basis
of the an average of the fair market values as of such date as determined by two
or more independent and well-qualified experts in the appraisal of stock values
reasonably acceptable to Purchaser and Company.
"Date of Issuance" shall mean the date of initial issuance of the
----------------
Warrant shown on the first page of this Warrant, regardless of the number of
times new certificates representing the unexpired and unexercised rights
formerly represented by this Warrant shall be issued.
"Registered Holder" with respect to the Warrant means the Person who
-----------------
is reflected as the holder thereof on the register maintained by the Company or
the transfer agent and registrar of the Common Stock for such purpose and
"Registered Holders" at any time means all Registered Holders of Warrants.
"Warrant Purchase Price" shall have the meaning assigned to it in the
----------------------
Agreement.
"Warrant Shares" means the Common Stock of the Company issuable upon
--------------
exercise of the Warrant; provided that if there is a change in the class of
securities so issuable, then the term "Warrant Shares" shall mean shares of the
security issuable upon exercise of the Warrant as provided in Section 2 herein
if such security is issuable in shares, or shall mean the units in which such
security is issuable if such security is not issuable in shares.
All other terms defined elsewhere in this Warrant shall have the
meanings defined herein. All capitalized terms not defined herein and defined in
the Agreement shall have the meanings ascribed to such terms in the Agreement.
Section 5. Rights of the Registered Holders. No Registered Holder
--------------------------------
(including without limitation Purchaser) shall by virtue of hereof, and nothing
in this Warrant or the interest represented hereby or the Warrant Shares
issuable purchasable hereunder, or the Agreement, shall entitle the Registered
Holder or other holder hereof to, exercise any rights as a stockholder of
Company, either at law or equity, until, and only to the extent that, this
Warrant shall have been
21
<PAGE>
exercised in accordance with its terms. The rights of the Registered Holders
shall be limited to those set forth in this Warrant and the Agreement. Without
limiting the generality of the foregoing, no Registered Holder or other holder
of this Warrant shall or shall be entitled to exercise any rights to vote or
consent or receive notice as a stockholder of the Company on any matters or with
respect to any rights whatsoever as a stockholder of the Company. No dividends
or interest shall be payable or accrued in respect of this Warrant or the
Warrant Shares.
Section 6. Warrant Transferable. Subject to the transfer conditions
--------------------
referred to in the legend endorsed hereon and subject to the terms and
conditions of the Agreement, this Warrant and all rights hereunder are
transferable, in whole or in part, upon surrender of this Warrant with a
properly executed Assignment (in the form of Exhibit II hereto) at the principal
----------
office of the Company and compliance with the terms of the Agreement.
Section 7. Warrant Exchangeable for Different Denominations. This
------------------------------------------------
Warrant is exchangeable, upon the surrender hereof by the Registered Holder at
the principal office of the Company, for new Warrants of like tenor representing
in the aggregate the purchase rights hereunder, and each of such new Warrants
shall represent such portion of such rights as is designated by the Registered
Holder at the time of such surrender. All Warrants representing portions of the
rights hereunder are referred to herein as the "Warrant."
Section 8. Replacement. Upon receipt of an affidavit reasonably
-----------
satisfactory to the Company of the loss, theft, destruction or mutilation of any
certificate evidencing this Warrant, and in the case of any such loss, theft or
destruction, upon receipt of an indemnity reasonably satisfactory to the
Company, or in the case of any such mutilation, upon surrender and cancellation
of such certificate, the Company shall, at the expense of the Registered Holder,
execute and deliver in lieu of such certificate a new certificate of like tenor
and dated the date of such lost, stolen, destroyed or mutilated certificate.
Section 9. Notices. Except as otherwise expressly provided herein,
-------
all notices referred to in this Warrant shall be in writing and shall be
delivered as set forth in the Agreement.
Section 10. Amendment and Waiver. Except as otherwise expressly
--------------------
provided herein, the provisions of this Warrant may be amended and the Company
may take any action herein prohibited, or omit to perform any act herein
required to be performed by it, in accordance with the provisions of Section 9.1
of the Agreement.
Section 11. Descriptive Headings; Governing Law. The descriptive
-----------------------------------
headings of the several Sections of this Warrant are inserted for convenience
only and do not constitute a part of this Warrant. All issues concerning the
relative rights of the Company and its stockholders and other internal corporate
affairs of the Company and all other questions concerning the construction,
validity, and interpretation of this Warrant shall be governed by and construed
and enforced in accordance with the laws of the State of Delaware, without
giving effect to any choice of law or
22
<PAGE>
conflict provision or rule (whether of the State of Delaware or any other
jurisdiction) that would cause the application of the internal laws of any
jurisdiction other than as set forth herein..
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed
and attested by its duly authorized officers and to be dated the date first set
forth above.
HESKA CORPORATION, a Delaware corporation
By:______________________________________
Its: President
23
<PAGE>
EXHIBIT I
---------
EXERCISE AGREEMENT
------------------
To: Dated:
The undersigned, pursuant to the provisions set forth in the attached
Warrant (Certificate No. W-RP-1, hereby agrees to subscribe for the purchase of
_____________ Warrant Shares covered by such Warrant and makes payment herewith
in full at the price per share provided by such Warrant.
Signature__________________________________
Name (Printed)_____________________________
Address _____________________________
_____________________________
<PAGE>
EXHIBIT II
----------
ASSIGNMENT
----------
FOR VALUE RECEIVED, _______________________________________
hereby sells, assigns and transfers all of the rights of the undersigned under
the attached Warrant (Certificate No. W-RP-1) with respect to the number of
Warrant Shares covered thereby set forth below, unto:
Name of Assignee Address No. of Warrant Shares
- ---------------- ------- ---------------------
Dated: Signature______________________________________
Name (Printed)______________________________
Address ______________________________
_____________________________________
_____________________________________
<TABLE> <S> <C>
<PAGE>
<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, 1998 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, 1998.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 6,574
<SECURITIES> 54,595
<RECEIVABLES> 6,197
<ALLOWANCES> (198)
<INVENTORY> 13,852
<CURRENT-ASSETS> 82,613
<PP&E> 26,938
<DEPRECIATION> (6,381)
<TOTAL-ASSETS> 109,102
<CURRENT-LIABILITIES> 16,035
<BONDS> 0
0
0
<COMMON> 185,327
<OTHER-SE> (104,180)
<TOTAL-LIABILITY-AND-EQUITY> 109,102
<SALES> 26,313
<TOTAL-REVENUES> 26,990
<CGS> 19,596
<TOTAL-COSTS> 19,596
<OTHER-EXPENSES> 39,086
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,459
<INCOME-PRETAX> (30,625)
<INCOME-TAX> 0
<INCOME-CONTINUING> (30,625)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (30,625)
<EPS-PRIMARY> (1.27)
<EPS-DILUTED> (1.27)
</TABLE>
