<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 March 31, 1998
OR
[_] TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ____________
Commission file number 000-22427
HESKA CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 77-0192527
[State or other jurisdiction [I.R.S. Employer Identification No.]
of incorporation or organization]
1825 SHARP POINT DRIVE
FORT COLLINS, COLORADO 80525
(Address of principal executive offices)
(970) 493-7272
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [_] No
The number of shares of the Registrant's Common Stock, $.001 par value,
outstanding at May 11, 1998 was 24,891,217
<PAGE>
HESKA CORPORATION
FORM 10-Q
QUARTERLY REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
<S> <C>
Condensed Consolidated Balance Sheets as of March 31, 1998 and December 31, 1997.............. 1
Condensed Consolidated Statements of Operations for the three months ended March 31, 1998
and 1997...................................................................................... 2
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 1998
and 1997...................................................................................... 3
Notes to Condensed Consolidated Financial Statements.......................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ............................................................................ Not Applicable
Item 2. Changes in Securities and Use of Proceeds..................................................... 20
Item 3. Defaults upon Senior Securities .............................................................. Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders .......................................... Not Applicable
Item 5. Other Information ............................................................................ Not Applicable
Item 6. Exhibits and Reports on Form 8-K ............................................................. 20
Exhibit Index............................................................................................. 21
Signatures................................................................................................ 22
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HESKA CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- ------------
<S> <C> <C>
Current assets: (unaudited)
Cash and cash equivalents $ 7,925 $ 10,679
Marketable securities 58,224 18,073
Accounts receivable, net 4,962 5,327
Inventories, net 13,103 10,562
Other current assets 1,885 1,236
----------- ------------
Total current assets 86,099 45,877
Property and equipment, net 16,925 15,979
Intangible assets, net 5,480 6,009
Restricted marketable securities and other assets 838 1,155
----------- ------------
Total assets $ 109,342 $ 69,020
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,373 $ 6,425
Accrued liabilities 2,744 2,968
Deferred revenue 1,326 284
Current portion of capital lease obligations 611 600
Current portion of long-term debt 5,572 4,137
----------- ------------
Total current liabilities 16,626 14,414
Capital lease obligations, less current portion 1,572 1,620
Long-term debt, less current portion 8,095 9,021
Accrued pension liability 113 113
----------- ------------
Total liabilities 26,406 25,168
----------- ------------
Commitments and contingencies
Stockholders' equity:
Common stock, $.001 par value, 40,000,000 shares authorized;
24,827,578 and 19,491,022 shares issued and outstanding,
respectively 25 19
Additional paid-in capital 167,134 118,448
Deferred compensation (1,760) (1,967)
Stock subscription receivable from officers (161) (158)
Cumulative translation adjustment 7 1
Accumulated deficit (82,309) (72,491)
----------- ------------
Total stockholders' equity 82,936 43,852
----------- ------------
Total liabilities and stockholders' equity $ 109,342 $ 69,020
=========== ============
</TABLE>
See accompanying notes to condensed consolidated financial statements
1
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HESKA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Three Months Ended March 31,
----------------------------
1998 1997
-------- --------
Revenues:
Products, net $ 7,390 $ 4,506
Research and development 520 438
-------- --------
7,910 4,944
Costs and operating expenses:
Cost of goods sold 4,811 3,409
Research and development 6,178 4,605
Selling and marketing 3,090 1,937
General and administrative 3,000 2,650
Amortization of intangible assets and
deferred compensation 765 650
-------- --------
17,844 13,251
-------- --------
Loss from operations (9,934) (8,307)
Other income (expense):
Interest income 575 296
Interest expense (470) (216)
Other, net 12 (30)
-------- --------
Net loss $ (9,817) $ (8,257)
======== ========
Basic net loss per share $ (0.46) $ -
======== ========
Unaudited pro forma basic net loss per share $ - $ (0.64)
======== ========
Shares used to compute basic net loss per share
and unaudited pro forma basic net loss per share 21,233 12,814
======== ========
See accompanying notes to condensed consolidated financial statements
2
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HESKA CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Ended March 31,
1998 1997
--------- --------
CASH FLOWS USED IN OPERATING ACTIVITIES:
Net cash used in operating activities $ (10,004) $ (7,488)
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of businesses, net of cash acquired (6) (180)
Cash deposited in restricted cash account related
to Bloxham acquisition - (238)
Additions to intangible assets (13) (14)
Purchase of marketable securities (54,988) -
Proceeds from sale of marketable securities 15,005 6,140
Purchases of property and equipment (1,611) (2,229)
--------- --------
Net cash provided by (used in) investing
activities (41,613) 3,479
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 48,693 609
Proceeds from borrowings 1,657 1,614
Repayment of debt and capital lease obligations (1,510) (365)
--------- --------
Net cash provided by financing activities 48,840 1,858
--------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 23 7
--------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (2,754) (2,144)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 10,679 6,630
--------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,925 $ 4,486
========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 460 $ 192
Non-cash investing and financing activities:
Issuance of debt related to acquisitions - 320
Issuance of common and preferred stock related to
acquisitions, net of cash acquired 6,997 648
Purchase of assets under direct capital lease
financing - 225
See accompanying notes to condensed consolidated financial statements
3
<PAGE>
HESKA CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 (UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
Heska Corporation (the "Company") 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 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 continues to incur substantial net losses due principally to
its research and development and sales and marketing activities. Cumulative net
losses from inception of the Company in 1988 through March 31, 1998 have totaled
$82.3 million.
The Company's ability to achieve profitable operations will depend
primarily upon its ability to commercialize products that are currently under
development and to successfully 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. During the period required to develop its
products, 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 March 31, 1998, the statements of
operations for the three months ended March 31, 1998 and 1997 and the statements
of cash flows for the three months ended March 31, 1998 and 1997 are unaudited,
but include all adjustments (consisting of normal recurring adjustments) which
the Company considers necessary for a fair presentation of the financial
position, operating results and cash flows for the periods presented. The
consolidated financial statements include the accounts of the Company and its
wholly-owned subsidiaries since the dates of their respective acquisitions 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. All material intercompany transactions and balances have been
eliminated in consolidation. Although the Company believes that the disclosures
in these financial statements are adequate to make the information presented not
misleading, certain information and
4
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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 form 10-K filed with the Securities and Exchange
Commission.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Revenues from products and services are recognized at the time goods are
shipped to the customer, with an appropriate provision for returns and
allowances.
The Company recognizes revenue from sponsored research and development as
research activities are performed or as development milestones are completed
under the terms of the research and development agreements. Costs incurred in
connection with the performance of sponsored research and development are
expensed as incurred. The Company defers revenue recognition 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 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
5
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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 been excluded in the restated
1997 weighted average common shares outstanding. the effect of the adoption of
SAB 98 was as follows:
<TABLE>
<CAPTION>
For the Three Months Ended
March 31, 1997
--------------
<S> <C>
Pro forma basic net loss per share as previously reported....................... $(0.60)
Impact Of adoption of SAB 98.................................................... (0.04)
------
Unaudited pro forma basic net loss per share.................................... $(0.64)
======
</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 March 31, 1998
------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
<S> <C> <C> <C>
Weighted average common shares outstanding (actual)............ N/A 21,233 N/A
------
Basic net loss per share....................................... $ (9,817) 21,233 $ (0.46)
=========== ====== ========
For the Three Months Ended March 31, 1997
------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- -----------
Weighted average common shares outstanding (actual) .......... N/A 1,631 N/A
Assumed conversion of preferred stock from original date
of issuance.............................................. N/A 11,183 N/A
------
Unaudited pro forma basic net loss per share.................. $ (8,257) 12,814 $ (0.64)
=========== ====== =========
</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>
March 31, December 31,
1998 1997
--------- ------------
<S> <C> <C>
Raw materials........ $ 3,351 $ 2,652
Work in process...... 4,401 3,567
Finished goods....... 5,351 4,343
------- -------
$13,103 $10,562
======= =======
</TABLE>
6
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4. BUSINESS ACQUISITIONS
Acquisition of Sensor Devices, Inc. ("SDI") - In March 1998 the Company
completed its acquisition of all of the outstanding shares of SDI, a
manufacturer of medical sensor products, in a transaction valued at
approximately $8.9 million. The Company issued 639,622 shares of its common
stock and also reserved an additional 147,898 shares of its common stock for
issuance in connection with outstanding SDI options that were assumed by the
Company in the merger. The acquisition 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.
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
No customer accounted for more than 10% of total revenue during the three
months ended March 31, 1998. The Company had sales of greater than 10% of total
revenue to only one customer during the three months ended March 31, 1997. This
customer, which represented 25% of total revenues, 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 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 significant exports from North America or
Europe.
In the three months ended March 31, 1998 and 1997 European subsidiaries did
not purchase any products from North America for sale to European customers;
however, Heska Corporation sold products directly to the Company's Italian
distributor in the first quarter 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):
7
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<TABLE>
<CAPTION>
For the Three Months Ended March 31, 1998
-------------------------------------------------
North America Europe Consolidated
------------- ------ ------------
<S> <C> <C> <C>
Product revenues, net...... $ 6,574 $ 816 $ 7,390
Loss from operations....... $ (9,337) $ (597) $ (9,934)
Identifiable assets........ $ 104,869 $ 4,473 $ 109,342
For the Three Months Ended March 31, 1997
-------------------------------------------------
North America Europe Consolidated
------------- ------ ------------
Product revenues, net..... $ 4,318 $ 188 $ 4,506
Loss from operations...... $ (8,282) $ (25) $ (8,307)
</TABLE>
8. COMPREHENSIVE INCOME
In the first quarter of 1998 the Company adopted Statement of Financial
Accounting Standards 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 income (loss) are as
follows (in thousands):
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
------------------------------------
1998 1997
----------- ------------
<S> <C> <C>
Net loss............................................... $ (9,817) $ (8,257)
Change in foreign currency translation adjustments..... 6 1
---------- -----------
Total comprehensive income (loss)...................... $ (9,811) $ (8,256)
========== ===========
</TABLE>
8
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PART I. FINANCIAL INFORMATION
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
When used in this Management's Discussion and Analysis of Financial
Condition and Results of Operations, the word "expects", "anticipates",
"estimates" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to risks and uncertainties, including
those set forth below under "Factors that May Affect Results" and throughout the
Company's filings with the Securities and Exchange Commission, that could cause
actual results to differ materially from those projected. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date of this Form 10-Q. The Company expressly disclaims any
obligation or undertaking to release publicly any updates or revisions to any
forward-looking statements contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any such statement is based.
OVERVIEW
Heska discovers, develops, manufactures and markets companion animal health
products, primarily for dogs, cats and horses. From the Company's inception in
1988 until early 1996, the Company's operating activities related primarily to
research and development activities, entering into collaborative agreements,
raising capital and recruiting personnel. Prior to 1996, the Company had not
received any revenues from the sale of products, and it has incurred net losses
since inception. As of March 31, 1998, the Company's accumulated deficit was
$82.3 million.
During 1996, Heska grew from being primarily a research and development
concern to a fully-integrated research, development, manufacturing and marketing
company. The Company also expanded the scope and level of its scientific and
business development activities, increasing the opportunities for new products.
In 1997, the Company introduced 13 additional companion animal health
products and expanded in the United States through the acquisition of Center
Laboratories ("Center"), a Food and Drug Administration ("FDA") and United
States Department of Agriculture ("USDA") licensed manufacturer of allergy
immunotherapy products located in Port Washington, NY, and internationally
through the acquisitions of Bloxham Laboratories Limited ("Bloxham"), a
veterinary diagnostic laboratory in Teignmouth, England and CMG Centre Medical
des 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.
9
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In the first quarter of 1998 the Company added patient monitoring equipment
to its product lines through its acquisition of Sensor Devices, Inc. ("SDI").
The acquisition of SDI qualified, and 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 additional operating
losses as it introduces new products, continues its research and development
activities for products under development and integrates newly acquired
businesses. There can be no assurance that the Company will attain
profitability or, if achieved, will remain profitable on a quarterly or annual
basis in the future. See "Factors that May Affect Results" below.
RESULTS OF OPERATIONS
Three months ended March 31, 1998 and 1997
Total revenues, which include product and research and development
revenues, increased to $7.9 million in the first quarter of 1998 as compared to
$4.9 million in the first quarter of 1997. Product revenues increased to $7.4
million in the first quarter of 1998 as compared to $4.5 million for the first
quarter of 1997. The growth in revenue during the first 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 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.
Revenues from sponsored research and development increased to $520,000 in
the first quarter of 1998 from $438,000 in the first 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.
Cost of goods sold totaled $4.8 million in the first quarter of 1998 as
compared to $3.4 million in the first quarter of 1997. The resulting gross
margin for the first quarter of 1998 increased to $2.6 million from $1.1 million
in the first quarter of 1997, due primarily to increased product sales and
manufacturing volumes.
Research and development expenses increased to $6.2 million in the first
quarter of 1998 from $4.6 million in the first quarter of 1997. The increase in
1998 is due primarily to increases in the level and scope of research and
development activities for potential products to be marketed by the Company. The
Company does not expect that significant increases in research and development
expenses will be required to maintain its current research and development
activities.
Selling and marketing expenses increased to $3.1 million in the first
quarter of 1998 from $1.9 million in the first quarter of 1997. This increase
reflects the expansion of the Company's sales and marketing organization as
Heska introduced new products and added 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 marketplace.
10
<PAGE>
General and administrative expenses increased to $3.0 million in the first
quarter of 1998 from $2.6 million in the first quarter of 1997. The increase in
the first quarter of 1998 resulted from the growth of accounting and finance,
human resources, legal, administrative, information systems and facilities
operations to support the Company's increased business, financing and financial
reporting requirements. 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
$765,000 in the first quarter of 1998 from $650,000 in the first quarter of
1997. Amortization of intangible assets resulted primarily from the Company's
1997 and 1996 business acquisitions. Net intangible assets at March 31, 1998
and December 31, 1997 totaled $5.5 million and $6.0 million, respectively. The
amortization of deferred compensation resulted in a non-cash charge to
operations in the first quarter of 1998 of $206,000 as compared to $243,000 in
the first 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. The Company will incur a non-cash charge to operations of
approximately $730,000, $629,000, $574,000 and $34,000 per year for 1998, 1999,
2000 and 2001, respectively, for amortization of deferred compensation.
Interest income increased to $575,000 in the first quarter of 1998 from
$296,000 in the first quarter of 1997 due to increased cash available for
investment resulting from the proceeds from the Company's initial public
offering in July 1997 and the follow-on offering completed in March 1998.
Interest expense increased to $470,000 in the first quarter of 1998 from
$216,000 in the first quarter of 1997 due to an increase 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 quarter of 1998 of $9.8
million as compared to a first quarter 1997 net loss of $8.3 million. The
increase in losses between the periods is primarily due to increases in research
and development expenses, selling and marketing expenses and general and
administrative expenses as the Company continued to build a management and
systems infrastructure to support growing business operations in 1998 and
beyond.
LIQUIDITY AND CAPITAL RESOURCES
In July 1997, the Company completed its initial public offering ("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 March 31, 1998, the Company had received aggregate net proceeds of
$148.1 million from various equity transactions, including $48.6 million from
the March 1998 follow-on offering, $43.9 million from the July 1997 IPO, $36.0
million from the April 1996 private equity placement to Novartis, $10.0 million
from the 1995
11
<PAGE>
private equity placement to Volendam Investeringen N.V. and $9.5 million from
private equity placements to Charter Ventures from 1989 through 1995.
In addition, the Company has received proceeds from equipment financing
totaling $8.9 million through March 31, 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 $15.9
million as of March 31, 1998, with installments payable through 2006.
Expenditures for property and equipment totaled $1.6 million and $2.2 million
for the quarters ended March 31, 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 has secured lines of credit for its subsidiaries
totaling approximately $3.6 million, against which borrowings of approximately
$2.5 million were outstanding at March 31, 1998. These financing facilities are
secured by assets of the respective subsidiaries and corporate guarantees by
Heska Corporation. The Company expects to seek additional asset-based borrowing
facilities.
Net cash used for operating activities was $10.0 million and $7.4 million
for the quarters ended March 31, 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 $5.0 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.
Prior to the IPO, the Company financed its acquisition activities through
the issuance of Preferred Stock. In 1997 and 1996, the Company issued Preferred
Stock valued at $1.2 million and $7.1 million, respectively, in connection with
its acquisitions. In addition, in 1997, the Company issued Common Stock valued
at $1.9 million in connection with an acquisition prior to the IPO. Subsequent
to the IPO, in 1997 and 1998, the Company has financed its acquisitions through
the issuance of Common Stock valued at approximately $7.8 million, the
assumption of approximately $3.8 million in debt and the use of cash totaling
$3.0 million.
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 March 31, 1998 the Company's principal source of liquidity was
$66.1 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 products under development
are successfully developed and gain market acceptance, the timing of regulatory
actions regarding the Company's potential products, the costs and the timing of
expansion of sales, marketing and manufacturing activities, the cost, timing and
business management of current and potential acquisitions, the procurement and
enforcement of patents important to the Company's business, the results of
product trials and competition.
The Company believes that its available cash and cash from operations will
be sufficient to satisfy its funding requirements for current operations for the
next 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 may need to raise additional
capital to continue funding its research
12
<PAGE>
and development activities, scaling up its manufacturing activities and
expanding its sales and marketing force. There can be no assurance that such
additional capital will be available on terms acceptable to the Company, if at
all. Furthermore, any additional equity financing may be dilutive to
stockholders and debt financing, if available, may include restrictive
covenants. If adequate funds are not available, the Company may be required to
curtail its operations significantly or to obtain funds through entering into
collaborative agreements or other arrangements on 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 Company does not believe that the year 2000 conversion will have a
material adverse effect on its business. However, the Company has established
procedures to identify, evaluate and implement any necessary changes to computer
systems and applications. The Company is coordinating these activities with
suppliers, distributors, financial institutions and others with whom it does
business.
FACTORS THAT MAY AFFECT RESULTS
This report includes certain forward-looking statements about the Company's
business and results of operations which are subject to risks and uncertainties
that could cause the Company's actual results to vary materially from those
indicated by such forward-looking statements. Factors that could cause such
differences include those discussed below, as well as those discussed elsewhere
herein and in the Company's Form 10-K as filed with the Securities and Exchange
Commission. The factors discussed below should be read in conjunction with the
risk factors discussed in the Company's Form 10-K and other SEC filings, which
are incorporated by reference.
Dependence on Development and Introduction of New Products
Many of the Company's products are still under development and there can be
no assurance such products will be successfully developed or commercialized on a
timely basis, or at all. The Company believes that its revenue growth and
profitability, if any, will substantially depend upon its ability to complete
development of and
13
<PAGE>
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. There can be no assurance that the Company will not
experience difficulties that could delay or prevent successfully developing,
obtaining regulatory approvals to market or introducing these new products, that
regulatory clearance or approval of any new products will be granted by the
USDA, the FDA, the Environmental Protection Agency ("EPA") or foreign regulatory
authorities on a timely basis, or at all, or that the new products will be
successfully commercialized. The Company's strategy is to develop a broad range
of products addressing different disease indications. The Company has limited
resources to devote to the development of all 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 and development activities on behalf
of the Company. In order to successfully commercialize any new products, the
Company will be required to establish and maintain a reliable, cost-efficient
source of manufacturing for such products. If the Company is unable, for
technological or other reasons, to complete the development, introduction or
scale up of manufacturing of any new product or if any new product is not
approved for marketing or does not achieve a significant level of market
acceptance, the Company could be materially and adversely affected. Following
the introduction of a product, adverse side effects may be discovered that make
the product no longer commercially viable. Publicity regarding such adverse
effects could affect sales of the Company's other products for an indeterminate
time period. The Company is dependent on the acceptance of its products by both
veterinarians and pet owners. The failure of the Company to engender confidence
in its products and services could affect the Company's ability to attain
sustained market acceptance of its products.
Loss History and Accumulated Deficit; Uncertainty of Future Profitability;
Quarterly Fluctuations and Customer Concentration
Heska has incurred net losses since its inception. At March 31, 1998, the
Company's accumulated deficit was $82.3 million. The Company anticipates that
it will continue to incur additional operating losses for the next several
years. Such losses have resulted principally from expenses incurred in the
Company's research and development programs and, to a lesser extent, from
general and administrative and sales and marketing expenses. Currently, a
substantial portion of the Company's revenues are from Diamond, which
manufactures veterinary biologicals and pharmaceuticals for major companies in
the animal health industry. Revenues from one Diamond customer comprised
approximately 21% of total revenues in the year ended December 31, 1997. If
this customer does not continue to purchase from Diamond and if the lost
revenues are not replaced by other customers or products, the Company's
financial condition and results of operations could be adversely affected.
There can be no assurance that the Company will attain profitability or, if
achieved, will remain profitable on a quarterly or annual basis in the future.
The Company believes that future operating results will be subject to quarterly
fluctuations due to a variety of factors, including whether and when new
products are successfully developed and introduced by the Company or its
competitors, market acceptance of current or new products, regulatory delays,
product recalls, competition and pricing pressures from competitive products,
manufacturing delays, shipment problems, product seasonality and changes in the
mix of products sold. Because the Company is continuing to increase its
operating expenses for personnel, new product development and marketing, the
14
<PAGE>
Company's operating results will be adversely affected if its sales do not
correspondingly increase or if its product development efforts are unsuccessful
or subject to delays.
Limited Sales and Marketing Experience; Dependence on Others
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 a direct
sales force and certain third parties. 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.
In addition, the Company has granted marketing rights to certain products
under development to third parties, including Novartis AG ("Novartis"), Bayer AG
("Bayer") and Eisai Co., Ltd. ("Eisai"). Novartis has the right to manufacture
and market throughout the world (except in countries where Eisai has such
rights) under Novartis trade names any flea control vaccine or feline heartworm
vaccine developed by the Company on or before December 31, 2005. The Company
retained the right to co-exclusively manufacture and market these products
throughout the world under its own trade names. Accordingly, if both elect to
market these products, the Company and Novartis will be direct competitors, with
each party sharing revenues on the other's sales. Heska also granted Novartis a
right of first refusal pursuant to which, prior to granting rights to any third
party for any products or technology developed or acquired by the Company for
either companion animal or food animal applications, Heska must first offer
Novartis such rights. Bayer has exclusive marketing rights to the Company's
canine heartworm vaccine and its feline toxoplasmosis vaccine (except in
countries where Eisai has such rights). Eisai has exclusive rights in Japan and
most countries in East Asia to market the Company's feline and canine heartworm
vaccines, feline and canine flea control vaccines and feline toxoplasmosis
vaccine. The Company's agreements with its marketing partners contain no
minimum purchase requirements in order for such parties to maintain their
exclusive or co-exclusive marketing rights. There can be no assurance that
Novartis, Bayer or Eisai or any other collaborative party will devote sufficient
resources to marketing the Company's products. Furthermore, there is nothing to
prevent Novartis, Bayer or Eisai or any other collaborative party from pursuing
alternative technologies or products that may compete with the Company's
products.
Highly Competitive Industry
The market in which the Company competes is intensely competitive. Heska's
competitors include companion animal health companies and major pharmaceutical
companies that have animal health divisions. Companies with a significant
presence in the animal health market, such as American Home Products, Bayer,
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 only through
15
<PAGE>
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 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
16
<PAGE>
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.
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, SDI manufactures some of its own products for medical sensors and also
relies on contract manufacturers.
In addition to Diamond, Center and SDI, the Company intends to rely on
contract manufacturers for certain of its products. The Company currently has
supply agreements with Atrix for its canine periodontal disease therapeutic and
a supply agreement with Quidel for certain manufacturing services relating to
its point-of-care canine and feline heartworm diagnostic tests. These
agreements all require the manufacturing partner to supply the Company's
requirements within certain parameters. 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 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.
17
<PAGE>
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 such regulatory requirements, and any
failure to do so would have a material adverse effect on the Company's business,
financial condition or results of operations.
There can be no assurance that the Company will not incur significant costs
to comply with laws and regulations in the future or that laws and regulations
will not have a material adverse effect upon the Company's business, financial
condition or results of operations.
Future Capital Requirements; Uncertainty of Additional Funding
While the Company believes that its available cash will be sufficient to
satisfy its funding needs for current operations for the next 12 months,
assuming no significant uses of cash in acquisition activities, 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. Thus, the Company may need to raise additional capital to fund
its research and development, manufacturing and sales and marketing activities.
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 to the Company, if at all. Furthermore, any
additional equity financing may be dilutive to stockholders, and debt financing,
if available, may include restrictive covenants. If adequate funds are not
available, the Company may be required to curtail its operations significantly
or to obtain funds through entering into collaborative agreements or other
arrangements on unfavorable terms. The failure by the Company to raise capital
on acceptable terms when needed would have a material adverse effect on the
Company's business, financial condition or results of operations.
Potential Difficulties in Management of Growth; Identification and Integration
of Acquisitions
The Company anticipates additional growth in the number of its employees,
the scope of its operating and financial systems and the geographic area of its
operations as new products are developed and commercialized. This growth will
result in an increase in responsibilities for both existing and new management
personnel. The Company's ability to manage growth effectively will require it
to continue to implement and improve its operational, financial and management
information systems and to train, motivate and manage its 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 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
18
<PAGE>
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 of medical sensor products. 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, 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. 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 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.
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.
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<PAGE>
PART II. OTHER INFORMATION
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) In March 1998, the Registrant issued an aggregate of 639,622 shares
of its Common Stock in connection with its acquisition of Sensor
Devices, Inc. ("SDI"). The shares were issued to persons and
entities who were, immediately prior to such acquisition,
shareholders of SDI. The Registrant relied upon the exemption
provided by Section 4(2) of the Act and Rule 506 of Regulation D
promulgated thereunder. The Registrant believes that such exemptions
are available because (a) the transaction did not involve a public
offering, (b) no more than 35 of the former SDI shareholders were
not "accredited investors", as such term is defined in Regulation D,
and (c) the Registrant otherwise complied with the requirements of
Rule 506.
(d) The Company sold 5,637,850 shares of its Common Stock, par value
$.001, pursuant to a Registration Statement on Form S-1 (File No.
333-25767), declared effective on June 23, 1997 (as amended by a
post-effective amendment dated June 27, 1997). The managing
underwriters of the offering were Credit Suisse First Boston and
Merrill Lynch & Co. and the offering commenced on June 30, 1997. The
aggregate gross proceeds of the offering were approximately $47.9
million. The Company's net proceeds from the offering were
approximately $43.9 million, after giving effect to underwriting
discounts and commissions of approximately $3.1 million and offering
expenses of approximately $1.0 million. As of March 31, 1998, the
Company had used approximately $13.1 million for research and
development efforts, $8.2 million for its sales and marketing
efforts, $2.5 million for business acquisitions, $12.2 million for
working capital and other general corporate purposes and $7.9
million for temporary investments in U.S. government obligations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
See Exhibit Index on Page 21
(b) Reports on Form 8-K
None
20
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Document
- ------- -----------------------
10.9a(+) Second Amendment to Manufacturing and Supply agreement between
Diamond Animal Health, Inc. and Bayer Corporation dated February 26,
1998.
27 Financial Data Schedule
- -------
(+) Confidential treatment has been requested for certain portions of this
agreement.
<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: May 15, 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)
<PAGE>
[CONFIDENTIAL TREATMENT REQUESTED. CONFIDENTIAL PORTIONS OF THIS DOCUMENT HAVE
BEEN REDACTED AND HAVE BEEN SEPARATELY FILED WITH THE COMMISSION]
EXHIBIT 10.9(a)
SECOND AMENDMENT TO
MANUFACTURING AND SUPPLY AGREEMENT
This Second Amendment to Manufacturing and Supply Agreement (the "Amendment") is
made and entered into as of February 26, 1998, by and among DIAMOND ANIMAL
HEALTH, INC. ("Diamond"), an Iowa corporation and BAYER CORPORATION ("Bayer")
(formerly known as Miles, Inc.), an Indiana corporation.
WITNESSETH
----------
WHEREAS, Diamond, Agrion Corporation ("Agrion"), Diamond Scientific Co.
("Diamond Scientific"), and Bayer (then known as Miles Inc.) entered into a
Manufacturing and Supply Agreement, as amended (the "Agreement") dated as of
December 31, 1993 in connection with a certain Stock Purchase Agreement dated as
of December 31, 1993 by and between Bayer and Diamond, whereby Bayer sold to
Diamond one hundred percent (100%) of the issued and outstanding stock of
Agrion; and
WHEREAS, Agrion and Diamond Scientific were merged into and with Diamond which
is the surviving corporation; and
WHEREAS, by that certain Manufacturing and Supply Agreement Amendment and
Extension dated as of September 1, 1995, the parties agreed to extend the term
of the Agreement to June 30, 1999 and to amend the Agreement on the terms and
conditions stated therein, and
WHEREAS, in connection with the execution of the Agreement, Bayer and Diamond
entered into that certain Non-Bovine Technology Agreement dated as of December
31, 1993, as subsequently amended (the "Non-Bovine Technology Agreement") and
WHEREAS, by the terms of the Non-Bovine Technology Agreement, Diamond agreed to
manufacture certain products for Bayer, including a [ ] Vaccine,
Modified Live Virus ([ ])(the "[ ] Vaccine,
Modified Live Virus"); and
<PAGE>
WHEREAS, Bayer has or intends to enter into a Supply Agreement with [
] the "[ ] Supply Agreement") whereby (i) Bayer will sell
to [ ] the [ ] Vaccine, Modified Live Virus
for use by [ ] as a monovalent vaccine or in combination with its
[ ] Vaccine, [ ] (the "[ ] Component")
to manufacture a combination vaccine comprised the [ ]
Vaccine, Modified Live Virus and the [ ] Component (the "Vaccine") and
(ii) [ ] will sell the [ ] Component to Bayer for use by
Bayer to manufacture the Vaccine; and
WHEREAS, Bayer and Diamond have agreed to extend the term of the Agreement and
to amend the Agreement on the terms and conditions of this Second Amendment.
NOW, THERFORE, in consideration of the premises and covenants contained herein,
the parties agree to amend the Agreement as follows:
1. ANNUAL PURCHASE COMMITMENT.
--------------------------
Diamond agrees that all purchases of the [ ] Vaccine, Modified Live Virus
by Bayer, whether for Bayer's own use or for sale to [ ] pursuant to the
[ ] Supply Agreement, will be applied toward Bayer's minimum annual
aggregate purchase commitment set forth in the Agreement.
2. TERM AND TERMINATION.
--------------------
Section 7.1 of the Agreement is amended by adding the following at the end
thereof:
If (i) the term of the Agreement is not renewed and will expire by its
terms on June 30, 1999, or at any time thereafter through and including
June 30, 2001 and (ii) the [ ] Supply Agreement
2
<PAGE>
is then still in force and effect, Diamond and Bayer agree that the term
of the agreement shall nevertheless automatically renew solely with
respect to the manufacture and sale by Diamond of the [ ]
Vaccine, Modified Live Virus and the Vaccine to Bayer, whether for
purposes of this Agreement or the [ ] Supply Agreement, through
December 31, 2001, and shall automatically renew thereafter with
respect to the [ ] Vaccine, Modified Live Virus and the
Vaccine on an annual basis unless either Bayer or Diamond gives the
other six (6) months prior written notice that it does not wish to
renew this agreement.
3. NEW PRODUCT.
-----------
Diamond and Bayer agree that the Vaccine shall be deemed a "New Product"
under the terms of the Agreement and Diamond shall manufacture the Vaccine
for Bayer pursuant to the terms of the Agreement.
4. REGULATORY MATTERS.
------------------
Section 9.4 of the Agreement is amended by adding a ";" at the end of
subsection "(i)" and by adding the following at the end of Section 9.4:
(j) Diamond shall provide all reasonable assistance to Bayer and also to
[ ] upon Bayer's request, to obtain any non-USA
registrations, marketing authorizations or import permits for the
[ ] Vaccine, Modified Live Virus or the Vaccine as may be
requested by Bayer, all at Bayer's expense.
3
<PAGE>
5. DEFINED TERMS.
-------------
All capitalized terms not otherwise defined in this Amendment shall have
the same meaning given to them in the Agreement.
6. BINDING EFFECT.
--------------
This Amendment shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and (in case of Diamond
permitted) assigns.
7. CONFLICT OF TERMS.
-----------------
Except as specifically set forth herein, the terms of the Agreement are
unchanged and in full force and effect. In the event of any conflict
between terms of this Amendment and the terms of the Agreement (as
previously amended), the letter agreement dated August 18, 1995 between the
parties or the letter agreement dated August 18, 1995 between the parties
or the letter agreement dated September 7, 1995 between the parties, the
terms of this Amendment shall govern.
IN WITNESS WHEREOF, the parties have caused this Amendment to be entered into by
their duly authorized representatives, to be effective as of the date first
above written.
BAYER CORPORATION DIAMOND ANIMAL HEALTH, INC.
AGRICULTURE DIVISION
BY: /s/ Gary R. Zimmerman BY: /s/ Louis VanDaele
--------------------------- ------------------------
NAME: Gary R. Zimmerman NAME: Louis VanDaele
------------------------- ----------------------
TITLE: V.P. New Business Dev. TITLE: President
------------------------ ---------------------
9-26-98 3-4-98
4
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<PAGE>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE REGISTRANT'S
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) AS OF AND FOR THE
QUARTER ENDED MARCH 31, 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 MARCH 31, 1998.
</LEGEND>
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0
0
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