-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SrCsDEhnIakvAfrLHMWa/L0DGDoSkJNocK653cusTsoxPPfy8YlkG00B/IRMFwgs 3zApVBsBu9BnrIF9SKedfw== /in/edgar/work/20000814/0000950134-00-007031/0000950134-00-007031.txt : 20000921 0000950134-00-007031.hdr.sgml : 20000921 ACCESSION NUMBER: 0000950134-00-007031 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HESKA CORP CENTRAL INDEX KEY: 0001038133 STANDARD INDUSTRIAL CLASSIFICATION: [2836 ] IRS NUMBER: 770192527 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 333-72155 FILM NUMBER: 699312 BUSINESS ADDRESS: STREET 1: 1825 SHARP POINT DR CITY: FORT COLLINS STATE: CO ZIP: 80525 BUSINESS PHONE: 9704937272 MAIL ADDRESS: STREET 1: 1825 SHARP POINT DR CITY: FORT COLLINS STATE: CO ZIP: 80525 10-Q 1 e10-q.txt FORM 10-Q FOR QUARTER ENDED JUNE 30, 2000 1 =============================================================================== =============================================================================== 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 June 30, 2000 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] 1613 PROSPECT PARKWAY 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 August 10, 2000 was 33,859,885 =============================================================================== =============================================================================== 2 HESKA CORPORATION FORM 10-Q QUARTERLY REPORT TABLE OF CONTENTS
PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited): Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999........................................................................ 3 Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2000 and 1999................................ 4 Consolidated Statements of Cash Flows for the six months ended June 30, 2000 and 1999 ................................................................. 5 Notes to Consolidated Financial Statements.................................................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............................................................................... 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................. 23 PART II. OTHER INFORMATION Item 1. Legal Proceedings........................................................................... Not Applicable Item 2. Changes in Securities and Use of Proceeds................................................... 23 Item 3. Defaults Upon Senior Securities............................................................. Not Applicable Item 4. Submission of Matters to a Vote of Security Holders......................................... 24 Item 5. Other Information........................................................................... Not Applicable Item 6. Exhibits and Reports on Form 8-K............................................................ 24 Exhibit Index.......................................................................................... 25 Signatures............................................................................................. 26
2 3 HESKA CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollars in thousands) (unaudited)
JUNE 30, DECEMBER 31, 2000 1999 --------- ----------- ASSETS Current assets: Cash and cash equivalents ........................................................ $ 5,650 $ 1,499 Marketable securities ............................................................ 7,232 22,482 Accounts receivable, net ......................................................... 11,155 9,652 Inventories, net ................................................................. 11,853 13,957 Other current assets ............................................................. 586 1,027 --------- --------- Total current assets ..................................................... 36,476 48,617 Property and equipment, net ................................................................... 14,872 19,574 Intangible assets, net ........................................................................ 1,209 1,629 Restricted marketable securities and other assets ............................................. 1,454 1,348 --------- --------- Total assets ............................................................ $ 54,011 $ 71,168 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable ................................................................. $ 6,276 $ 6,928 Accrued liabilities .............................................................. 4,222 4,369 Current portion of deferred revenue .............................................. 309 930 Line of credit borrowings ........................................................ 1,408 917 Current portion of capital lease obligations ..................................... 515 604 Current portion of long-term debt ................................................ 1,940 6,635 --------- --------- Total current liabilities ............................................... 14,670 20,383 Capital lease obligations, less current portion ............................................... 445 718 Long-term debt, less current portion .......................................................... 3,462 4,428 Deferred revenue and other long-term liabilities .............................................. 915 200 --------- --------- Total liabilities ...................................................... 19,492 25,729 --------- --------- Commitments and contingencies Stockholders' equity: Preferred stock, $.001 par value, 25,000,000 shares authorized; none issued and outstanding .................................................. -- -- Common stock, $.001 par value, 75,000,000 shares authorized; 33,848,100 and 33,435,669 shares issued and outstanding, respectively ....................... 34 33 Additional paid-in capital ....................................................... 199,580 199,156 Deferred compensation ............................................................ (354) (648) Stock subscription receivable from officers ...................................... (38) (124) Accumulated other comprehensive loss ............................................. (469) (376) Accumulated deficit .............................................................. (164,234) (152,602) --------- --------- Total stockholders' equity ............................................. 34,519 45,439 --------- --------- Total liabilities and stockholders' equity ............................. $ 54,011 $ 71,168 ========= =========
See accompanying notes to consolidated financial statements 3 4 HESKA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS (in thousands, except per share amounts) (unaudited)
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, -------------------- -------------------- 2000 1999 2000 1999 -------- -------- -------- -------- Revenues: Products, net ...................................... $ 13,714 $ 12,553 $ 26,137 $ 23,563 Research, development and other .................... 529 325 2,469 366 -------- -------- -------- -------- Total revenues ................................. 14,243 12,878 28,606 23,929 Cost of goods sold .................................... 9,464 8,286 17,886 15,995 -------- -------- -------- -------- 4,779 4,592 10,720 7,934 -------- -------- -------- -------- Operating expenses: Selling and marketing .............................. 3,923 3,402 8,211 6,812 Research and development ........................... 3,798 4,291 7,801 8,535 General and administrative ......................... 2,511 2,713 5,329 5,449 Amortization of intangible assets and deferred compensation ................... 222 827 416 1,684 Restructuring expense .............................. -- -- 435 -- Gain on sale of assets ............................. (151) -- (151) -- -------- -------- -------- -------- Total operating expenses ....................... 10,303 11,233 22,041 22,480 -------- -------- -------- -------- Loss from operations .................................. (5,524) (6,641) (11,321) (14,546) Other income (expense), net ........................... (179) (290) (311) (268) -------- -------- -------- -------- Net loss .............................................. (5,703) (6,931) (11,632) (14,814) -------- -------- -------- -------- Other comprehensive income (loss): Foreign currency translation adjustments ........... (124) (44) (97) (84) Unrealized gain (loss) on marketable securities .... (47) (332) 4 (677) -------- -------- -------- -------- Other comprehensive income (loss) ..................... (171) (376) (93) (761) -------- -------- -------- -------- Comprehensive loss .................................... $ (5,874) $ (7,307) $(11,725) $(15,575) ======== ======== ======== ======== Basic and diluted net loss per share .................. $ (0.17) $ (0.26) $ (0.35) $ (0.56) ======== ======== ======== ======== Shares used to compute basic and diluted net loss per share .......................................... 33,729 26,714 33,665 26,660
See accompanying notes to consolidated financial statements 4 5 HESKA CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)
SIX MONTHS ENDED JUNE 30, ------------------------- 2000 1999 -------- -------- CASH FLOWS USED IN OPERATING ACTIVITIES: Net cash used in operating activities ............. $(11,729) $(16,116) -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of marketable securities .......................... -- (5,000) Proceeds from sale of marketable securities ................ 15,546 26,000 Proceeds from sale of subsidiary ........................... 6,000 -- Proceeds from disposition of property and equipment ........ 179 262 Purchases of property and equipment ........................ (739) (2,683) -------- -------- Net cash provided by investing activities ......... 20,986 18,579 -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock ..................... 397 368 Proceeds from borrowings ................................... 626 1,618 Repayments of debt and capital lease obligations ........... (5,802) (4,311) -------- -------- Net cash used in financing activities ............. (4,779) (2,325) -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH ................................. (327) (262) -------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........................ 4,151 (124) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .......................... 1,499 5,921 -------- -------- CASH AND CASH EQUIVALENTS, END OF PERIOD ................................ $ 5,650 $ 5,797 ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest .................................................. $ 771 $ 1,009 ======== ========
See accompanying notes to consolidated financial statements 5 6 HESKA CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 (UNAUDITED) 1. ORGANIZATION AND BUSINESS Heska Corporation ("Heska" or the "Company") is primarily focused on the discovery, development and marketing of companion animal health products. In addition to manufacturing certain of Heska's companion animal health products, the Company's primary manufacturing subsidiary, Diamond Animal Health, Inc. ("Diamond"), also manufactures bovine and other animal vaccine products and pharmaceutical products that are marketed and distributed by third parties. In addition to manufacturing veterinary allergy products for marketing and sale by the Company, Heska's subsidiary, CMG-Heska Allergy Products S.A. ("CMG"), a Swiss corporation, also manufactures and sells human allergy products. The Company also offers diagnostic services to veterinarians at its Fort Collins, Colorado location and through CMG. 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. During 1996, Heska grew from being primarily a research and development concern to a fully-integrated research, development, manufacturing and marketing company. The Company accomplished this by acquiring Diamond, a licensed pharmaceutical and biological manufacturing facility in Des Moines, Iowa, hiring key employees and support staff, establishing marketing and sales operations to support Heska products introduced in 1996, and designing and implementing more sophisticated operating and information systems. The Company also expanded the scope and level of its scientific and business development activities, increasing the opportunities for new products. In 1997, the Company introduced additional 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 Heska UK Limited ("Heska UK", formerly Bloxham Laboratories Limited), a veterinary diagnostic laboratory in Teignmouth, England and CMG (formerly Centre Medical des Grand'Places S.A.) in Fribourg, Switzerland, which manufactures and markets allergy diagnostic products for use in veterinary and human medicine, primarily in Europe. Each of the Company's acquisitions during this period 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 1997, the Company established a new subsidiary, Heska AG, located near Basel, Switzerland, for the purpose of managing its European operations. In 1999, the Company formed a new subsidiary in Limoges, France, Heska EURL, for the purpose of introducing its products into the French market. During the first quarter of 1998 the Company acquired Heska Waukesha (formerly Sensor Devices, Inc.), a manufacturer and marketer of patient monitoring devices used in both animal health and human applications. The operations of Heska Waukesha were combined with existing operations in Fort Collins, Colorado and Des Moines, Iowa during the fourth quarter of 1999. The Heska Waukesha facility was closed in December 1999. In the fourth quarter of 1999, the Company announced its intent to sell Heska UK. The transaction was completed in March 2000. During the second quarter of 2000, the Company sold its subsidiary, Center Laboratories, Inc. The results of operations for the period include a gain on the sale of approximately $151,000. The Company has incurred net losses since its inception and anticipates that it will continue to incur additional net losses in the near term as it introduces new products, expands its sales and marketing capabilities 6 7 and continues its research and development activities. Cumulative net losses from inception of the Company in 1988 through June 30, 2000 have totaled $164.2 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 manage its expenses. Most of the Company's products are subject to long development and regulatory approval cycles and there can be no guarantee that the Company will successfully develop, manufacture or market these products. There can also be no guarantee that the Company will attain profitability or, if achieved, will remain profitable on a quarterly or annual basis in the future. Until the Company attains positive cash flow, the Company may continue to finance operations with additional equity and debt financing. There can be no guarantee that such financing will be available when required or will be obtained under favorable terms. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The balance sheet as of June 30, 2000, the statements of operations and comprehensive loss for the three and six months ended June 30, 2000 and 1999 and the statements of cash flows for the six months ended June 30, 2000 and 1999 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. All material intercompany transactions and balances have been eliminated in consolidation. Although the Company believes that the disclosures in these financial statements are adequate to make the information presented not misleading, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the U.S. 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, 1999, included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 24, 2000. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Inventories, net 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. 7 8 Inventories, net of provisions, consist of the following (in thousands):
JUNE 30, DECEMBER 31, 2000 1999 -------- ------------ Raw materials......................................................... $ 2,566 $ 3,436 Work in process....................................................... 5,652 6,445 Finished goods........................................................ 3,635 4,076 -------- -------- $ 11,853 $ 13,957 ======== ========
Revenue Recognition Product revenues 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. License revenues received under arrangements to license patent rights or technology rights are deferred and amortized over the life of the related arrangement. The Company deferred $700,000 of such revenues in the three months ended June 30, 2000. No royalty revenue has been recognized to date. Royalties will be recognized as products are sold to customers. 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 until research activities are performed or development milestones are completed. In addition to its direct sales force and a contract sales force specializing in equine products, the Company utilizes both distributors and sales agency organizations to sell its products. Distributors purchase goods from the Company, take title to those goods and resell them to their customers in the distributors' territory. Sales agents maintain inventories of goods on consignment from the Company and sell these goods on behalf of the Company to customers in the sales agents' territory. The Company recognizes revenue at the time goods are sold to the customers by the sales agents. Sales agents are paid a fee for their services, which include maintaining product inventories, sales activities, billing and collections. Fees earned by sales agents are netted against revenues generated by these entities. In December 1999, the Securities and Exchange Commission ("SEC") staff released Staff Accounting Bulletin No. 101, Revenue Recognition ("SAB 101"). SAB 101 provides interpretive guidance on the recognition, presentation and disclosure of revenue in financial statements. The accounting impact of SAB 101 is continuing to be reviewed by industry and the accounting profession. Currently, the accounting impact of SAB 101 is required to be determined no later than the Company's fourth fiscal quarter of 2000. If the Company determines that its revenue recognition policies must change to be in compliance with SAB 101 or any revisions made to it, the implementation of SAB 101 is expected to be reflected as a cumulative effect of change in accounting principle as if SAB 101 had been implemented on January 1, 2000. The Company continues to review SAB 101 and all additional interpretive guidance to determine what impact, if any, SAB 101 will have on its financial position and results of operations. Basic and Diluted Net Loss Per Share The Company presents basic and diluted net loss per share in accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings per Share, which establishes standards for computing and presenting basic and diluted earnings per share. Also, the Company has adopted the guidance of SEC Staff Accounting Bulletin No. 98 and related interpretations. Basic net loss per common share is computed using the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed using the sum of the weighted average number of shares of common stock outstanding and, if not anti-dilutive, the effect of outstanding stock options and warrants determined using the treasury stock method. 8 9 Foreign Currency Translation The functional currencies of the Company's international subsidiaries are the French Franc and the Swiss Franc. Assets and liabilities of the Company's international subsidiaries are translated using the exchange rate in effect at the balance sheet date. Revenue and expense accounts are translated using an average of exchange rates in effect during the period. Cumulative translation gains and losses, if material, are shown in the consolidated balance sheets as a separate component of stockholders' equity. Exchange gains and losses arising from transactions denominated in foreign currencies (i.e., transaction gains and losses) are recognized in current operations. To date, the Company has not entered into any forward contracts or hedging transactions. 3. RESTRUCTURING EXPENSES During the first quarter of fiscal 2000, the Company initiated a cost reduction and restructuring plan at its Diamond subsidiary. The restructuring resulted from the rationalization of Diamond's business including a reduction in the size of its workforce and the Company's decision to vacate a leased warehouse and distribution facility no longer needed after the Company's decision to discontinue contract manufacturing of certain low margin human healthcare products. The charge to operations of approximately $435,000 related primarily to personnel severance costs for 12 individuals and the costs associated with closing the leased facility, terminating the lease and abandoning certain leasehold improvements. The facility was closed in April 2000. In August 1999, the Company announced plans to consolidate its Heska Waukesha operations with existing operations in Fort Collins, Colorado and Des Moines, Iowa. This consolidation was based on the Company's determination that significant operating efficiencies could be achieved through the combined operations. The Company recognized a charge to operations of approximately $1.2 million for this consolidation. These expenses related primarily to personnel severance costs for 40 individuals and the costs associated with facilities being closed and excess equipment, primarily at the Company's Waukesha, Wisconsin location. This facility was closed in December 1999. Shown below is a reconciliation of restructuring costs for the six months ended June 30, 2000 (in thousands):
Payments/Charges Balance at Additions for the Six For the Six Balance at December 31, Months Ended Months Ended June 30, 1999 June 30, 2000 June 30, 2000 2000 ------------ --------------------- ---------------- ---------- Severance pay, benefits and relocation expenses..... $ 429 $ 121 $ (550) $ -- Noncancellable leased facility closure costs........ 694 314 (715) 293 ------- --------- -------------- ----- Total.......................................... $ 1,123 $ 435 $ (1,265) $ 293 ======= ========= ============== =====
The balances of $293,000 and $1.1 million are included in accrued liabilities in the accompanying consolidated balance sheets as of June 30, 2000 and December 31, 1999, respectively. 9 10 4. MAJOR CUSTOMERS The Company had sales of greater than 10% of total revenue to two customers during the three months and two customers during the six months ended June 30, 2000. These customers, which represented 24% of the Company's total revenue for the three months ended June 30, 2000 and 23% of total revenue for the six months ended June 30, 2000, purchased animal vaccines from Diamond. No customer accounted for more than 10% of total revenue during the three and six months ended June 30, 1999. 5. SEGMENT REPORTING The Company divides its operations into two reportable segments, Animal Health, which includes the operations of Heska Fort Collins, Diamond, Heska Waukesha, Heska UK and Heska AG, and Allergy Diagnostics and Treatment, which includes the operations of Center and CMG. The operations of Heska Waukesha were consolidated into the existing operations at Heska Fort Collins and Diamond as of December 31, 1999. Heska UK was sold in March 2000 and Center was sold in June 2000. Summarized financial information concerning the Company's reportable segments is shown in the following table (in thousands). The "Other" column includes the elimination of intercompany transactions.
ALLERGY ANIMAL DIAGNOSTICS HEALTH AND TREATMENT OTHER TOTAL --------- ------------- --------- --------- THREE MONTHS ENDED JUNE 30, 2000: Revenues ....................... $ 13,246 $ 1,784 $ (787) $ 14,243 Operating loss ................. (5,552) 28 -- (5,524) Total assets ................... 84,395 765 (31,149) 54,011 THREE MONTHS ENDED JUNE 30, 1999: Revenues ....................... $ 12,038 $ 1,891 $ (1,051) $ 12,878 Operating loss ................. (5,611) 21 (1,051) (6,641) Total assets ................... 114,179 8,080 (40,040) 82,219
ALLERGY ANIMAL DIAGNOSTICS HEALTH AND TREATMENT OTHER TOTAL -------- ------------- -------- -------- SIX MONTHS ENDED JUNE 30, 2000: Revenues ....................... $ 26,606 $ 3,474 $ (1,474) $ 28,606 Operating loss ................. (10,876) (10) (435)(a) (11,321) SIX MONTHS ENDED JUNE 30, 1999: Revenues ....................... $ 22,069 $ 3,664 $ (1,804) $ 23,929 Operating loss ................. (12,689) (52) (1,805) (14,546)
- ---------- (a) Includes restructuring expenses of $435,000 (See Note 3). 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. Revenues earned in North America are attributable to Heska Fort Collins, Diamond, and Center. Revenues earned in Europe are primarily attributable to CMG and Heska AG. There have been no significant exports from North America or Europe. In the six months ended June 30, 2000 and 1999, European subsidiaries purchased products from North America for sale to European customers. Transfer prices to international subsidiaries are intended to allow 10 11 the North American companies and international subsidiaries to earn reasonable profit margins. Certain information by geographic area is shown in the following table (in thousands). The "Other" column includes the elimination of intercompany transactions.
NORTH AMERICA EUROPE OTHER TOTAL --------- --------- --------- --------- THREE MONTHS ENDED JUNE 30, 2000: Revenues ......................................................... $ 14,383 $ 646 $ (786) $ 14,243 Operating loss ................................................... (5,364) (160) -- (5,524) Total assets ..................................................... 82,139 3,021 (31,149) 54,011 THREE MONTHS ENDED JUNE 30, 1999: Revenues ......................................................... $ 12,882 $ 1,047 $ (1,051) $ 12,878 Operating loss ................................................... (6,112) (529) -- (6,641) Total assets ..................................................... 117,890 4,369 (40,040) 82,219 NORTH AMERICA EUROPE OTHER TOTAL --------- --------- --------- --------- SIX MONTHS ENDED JUNE 30, 2000: Revenues ......................................................... $ 28,592 $ 1,488 $ (1,474) $ 28,606 Operating loss ................................................... (10,447) (439) (435)(a) (11,321) SIX MONTHS ENDED JUNE 30, 1999: Revenues ......................................................... $ 23,680 $ 2,053 $ (1,804) $ 23,929 Operating loss ................................................... (13,568) (978) -- (14,546)
- ---------- (a) Includes restructuring expenses of $435,000 (See Note 3). 6. NEW CREDIT FACILITY In June 2000, the Company entered into a two-year expanded $13.1 million credit facility with Wells Fargo Business Credit, Inc., an affiliate of Wells Fargo Bank. The credit facility includes a $10.0 million asset based revolving line of credit. Under the agreement, the Company is required to comply with certain financial and non-financial covenants. Among the financial covenants are requirements for monthly minimum book net worth, quarterly minimum net income and minimum cash balances or liquidity levels. 7. RECENT ACCOUNTING PRONOUNCEMENTS In July 2000, the Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board ("FASB") reached final consensus on two issues which are required to be applied no later than the fourth quarter of our fiscal year 2000. EITF No. 00-10, "Accounting for Shipping and Handling Fees and Costs," states that all amounts billed to customers for shipping and handling in a sales transaction must be included as revenue. The EITF did not reach a final conclusion on the classification of costs incurred by the seller for shipping and handling. EITF No. 00-14, "Accounting for Certain Sales Incentives," requires that all costs for rebates and other sales discounts be accounted for as a reduction in revenue in the income statement of the seller. Also, the EITF stated that free goods or services given as a sales incentive should be classified as operating expenses in the seller's income statement. Upon application of these pronouncements, comparative financial statements for prior periods will be reclassified to comply with the new classification guidelines. The Company does not expect these EITF pronouncements to have a material impact on its financial position or results of operations. In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation" ("FIN No. 44"). FIN No. 44 clarifies the application of APB No. 25 for certain issues related to equity based instruments issued to employees. FIN No. 44 is effective on July 1, 2000, except for certain transactions, and will be applied on a prospective basis. The Company believes that FIN No. 44 will not have a significant impact on its financial position or results of operations. 11 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This discussion contains, in addition to historical information, forward-looking statements that involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from the results discussed in the forward-looking statements. When used in this discussion the words "expects," "anticipates," "estimates" and similar expressions are intended to identify forward-looking statements. Such statements, which include statements concerning future revenue sources and concentration, gross margins, research and development expenses, selling and marketing expenses, general and administrative expenses, capital resources, additional financings or borrowings and additional losses, are subject to risks and uncertainties, including those set forth below under "Factors that May Affect Results" that could cause actual results to differ materially from those projected. These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions, or circumstances on which any such statement is based. OVERVIEW We are primarily focused on the discovery, development and marketing of companion animal health products. In addition to manufacturing certain of our companion animal products, our primary manufacturing subsidiary, Diamond, also manufactures bovine vaccine products and pharmaceutical products that are marketed and distributed by third parties. In addition to manufacturing veterinary allergy products for marketing and sale in Europe, our subsidiary, CMG, also manufactures and sells human allergy products. We also offer diagnostic services to veterinarians at our Fort Collins, Colorado location and through CMG. From our inception in 1988 until early 1996, our operating activities related primarily to research and development activities, entering into collaborative agreements, raising capital and recruiting personnel. Prior to 1996, we had not received any revenues from the sale of products. During 1996, we grew from being primarily a research and development concern to a fully-integrated research, development, manufacturing and marketing company. We accomplished this by acquiring Diamond, a licensed pharmaceutical and biological manufacturing facility in Des Moines, Iowa, hiring key employees and support staff, establishing marketing and sales operations to support our products introduced in 1996, and designing and implementing more sophisticated operating and information systems. We also expanded the scope and level of our scientific and business development activities, increasing the opportunities for new products. In 1997, we introduced additional products and expanded in the United States through the acquisition of Center, an FDA and USDA licensed manufacturer of allergy immunotherapy products located in New York, and internationally through the acquisitions of Heska UK, a veterinary diagnostic laboratory in England and CMG in Switzerland, which manufactures and markets allergy diagnostic products for use in veterinary and human medicine, primarily in Europe. Each of our acquisitions during this period was accounted for under the purchase method of accounting and accordingly, our financial statements reflect the operations of these businesses only for the periods subsequent to the acquisitions. In 1997, we established a new subsidiary, Heska AG, located near Basel, Switzerland, for the purpose of managing our European operations. In 1999, we formed a new subsidiary in Limoges, France, Heska EURL, for the purpose of introducing our products into the French market. During the first quarter of 1998, we acquired a manufacturer and marketer of patient monitoring devices. The financial results of this entity have been consolidated with ours under the pooling-of-interests accounting method for all periods presented. These operations were consolidated with our existing operations in Fort Collins, Colorado and Des Moines, Iowa as of December 31, 1999, and our facility in Waukesha, Wisconsin was closed. In December 1999, we announced our intent to sell our subsidiary in the United Kingdom, Heska UK. The sale was completed in March 2000. 12 13 We announced the completion of the sale of Center in late June 2000. The second quarter 2000 statement of operations reflects a gain on the sale of approximately $151,000. We have incurred net losses since our inception and anticipate that we will continue to incur additional net losses in the near term as we introduce new products, expand our sales and marketing capabilities and continue our research and development activities. Cumulative net losses from our inception in 1988 through June 30, 2000 have totaled $164.2 million. Our ability to achieve profitable operations will depend primarily upon our ability to successfully market and sell our products, the product mix and gross margins associated with those products, our ability to commercialize products that are currently under development and to develop new products. Most of our products are subject to long development and regulatory approval cycles and there can be no assurance that we will successfully develop, manufacture or market these products. There can also be no assurance that we will attain profitability or, if achieved, will remain profitable on a quarterly or annual basis in the future. Until we attain positive cash flow, we may continue to finance operations with additional equity and debt financing, either of which may be dilutive to existing stockholders. There can be no assurance that financing will be available under our existing credit facility or that additional equity or debt financing will be available when required or can be obtained under favorable terms. See the discussion later in this section titled "Factors That May Affect Results" for a more in-depth explanation of risks faced by us. RESULTS OF OPERATIONS Three Months Ended June 30, 2000 and 1999 Total revenues, which include product and sponsored research and development revenues, increased more than 10% to $14.2 million in the second quarter of 2000 compared to $12.9 million for the second quarter of 1999. Product revenues increased 9% to $13.7 million in the second quarter of 2000 compared to $12.6 million for the second quarter of 1999. The growth in revenues during 2000 was primarily due to improved sales of veterinary medical instrumentation and vaccines, plus the sales of new products introduced by the Company during 2000. Revenues from research, development and other increased to $529,000 in the second quarter of 2000 compared to $325,000 in the second quarter of 1999. Fluctuations in revenues from sponsored research and development are generally the result of changes in the number of funded research projects as well as the timing and performance of contract milestones. Cost of goods sold totaled $9.5 million in the second quarter of 2000 compared to $8.3 million in the second quarter of 1999. The increase in cost of goods sold was attributable to increased product sales. The gross profit margin on product sales in the second quarter of 2000 was 31%, down from approximately 34% in the second quarter of 1999. The decline in gross profit margin was primarily attributable to the product sales mix in the current quarter, as revenue growth occurred primarily in vaccine products from Diamond and veterinary medical instrumentation, each of which have lower gross profit margins than our proprietary companion animal products. Center, which was sold June 23, 2000, also had a substantially lower gross profit margin during the second quarter of 2000 compared to the second quarter of 1999. Selling and marketing expenses increased to $3.9 million in the second quarter of 2000 from $3.4 million in the second quarter of 1999. This increase reflects primarily the expansion of the Company's sales and marketing organization and costs associated with the introduction and marketing of new products. 13 14 Research and development expenses decreased to $3.8 million in the second quarter of 2000 from $4.3 million in the second quarter of 1999. Fluctuations in research and development expenses are generally the result of the number of research projects in progress. General and administrative expenses decreased to $2.5 million in the second quarter of 2000 from $2.7 million in the second quarter of 1999. Amortization of intangible assets and deferred compensation decreased to $222,000 in the second quarter of 2000 from $827,000 in the second quarter of 1999. The decrease in amortization expense in 2000 is due primarily to the completed amortization of certain intangible assets and the write-off of intangible assets related to the sale of Heska UK and certain other intangible assets in 1999. Intangible assets resulted primarily from the Company's 1997 and 1998 business acquisitions and are being amortized over lives of 6 to 10 years. The amortization of deferred compensation resulted in a non-cash charge to operations in the second quarter of 2000 of $140,000 compared to $161,000 in the second quarter of 1999. In connection with the grant of certain stock options in 1997 and 1996, the Company recorded deferred compensation representing the difference between the deemed value of the common stock for accounting purposes and the exercise price of such options at the date of grant. In 1998 the Company also granted stock options to non-employees in exchange for consulting services. Compensation costs, equal to the fair value of the options on the date of grant, are being recognized over the service period. Six Months Ended June 30, 2000 and 1999 Total revenues, which include product, research, development and other revenues, increased more than 19% to $28.6 million in the first half of 2000 compared to $23.9 million for the first half of 1999. Product revenues increased 11% to $26.1 million in the first half of 2000 compared to $23.6 million for the first half of 1999. The growth in revenues during 2000 was primarily due to improved sales of veterinary medical instrumentation and vaccines, plus the sales of new products introduced by the Company during 2000. Revenues from research, development and other increased to $2.5 million in the first half of 2000 from $366,000 in the first half of 1999. Included in other are revenues attributable to the sale of the PERIOceutic(TM) Gel product. Fluctuations in revenues from sponsored research and development are generally the result of changes in the number of funded research projects as well as the timing and performance of contract milestones. Cost of goods sold totaled $17.9 million in the first half of 2000 compared to $16.0 million in the first half of 1999. The increase in cost of goods sold was attributable to increased product sales. Gross profit margins on products sold during the six month period ended June 30, 2000 decreased slightly to 31.6% from 32.1% in the same period of 1999. Selling and marketing expenses increased to $8.2 million in the first half of 2000 from $6.8 million in the first half of 1999. This increase reflects primarily the expansion of the Company's sales and marketing organization and costs associated with the introduction and marketing of new products. Research and development expenses decreased to $7.8 million in the first half of 2000 from $8.5 million in the first half of 1999. Fluctuations in research and development expenses are generally the result of the number of research projects in progress. General and administrative expenses decreased to $5.3 million in the first half of 2000 from $5.4 million in the first half of 1999. Amortization of intangible assets and deferred compensation decreased to $416,000 in the first half of 2000 from $1.7 million in the first half of 1999. The decrease in amortization expense in 2000 is due primarily to the completed amortization of certain intangible assets and the write-off of intangible assets related to the sale of Heska UK and certain other intangible assets in 1999. Intangible assets resulted primarily from the Company's 1997 and 14 15 1998 business acquisitions and are being amortized over lives of 6 to 10 years. The amortization of deferred compensation resulted in a non-cash charge to operations in the first half of 2000 of $294,000 compared to $328,000 in the first half of 1999. LIQUIDITY AND CAPITAL RESOURCES Our primary sources of liquidity at June 30, 2000 are our $12.9 million in cash, cash equivalents and marketable securities and our expanded $10.0 million asset based revolving line of credit. In June 2000, we entered into the two-year credit facility with Wells Fargo Business Credit, an affiliate of Wells Fargo Bank. This credit facility requires us to maintain certain minimum financial covenants including book net worth, net income and cash balances or liquidity levels. Cash used in operating activities was $11.7 million in the first half of 2000, compared to $16.1 million in the first half of 1999. The decrease in cash used for operating activities for the first half of 2000 compared to the same period in 1999 was primarily due to a decrease of approximately $3.2 million in the net loss for the period and lower inventory increases in the first half of 2000 versus the same period in 1999. Our investing activities provided $21.0 million in the first half of 2000, compared to $18.6 million during the first half of 1999. Net cash provided by investing activities was primarily related to the net sale of marketable securities to fund our business operations. During the second quarter of 2000, we sold Center for $6.0 million. Expenditures for property and equipment totaled $739,000 for the first half of 2000 compared to $2.7 million in the first half of 1999. The Company currently expects to spend approximately $2.0 million in 2000 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. Our financing activities used $4.8 million in the first half of 2000 compared to $2.3 million in the first half of 1999. Repayments of debt and capital lease obligations totaled $5.8 million in the first half of 2000 compared to $4.3 million in the first half of 1999. We received $626,000 in proceeds from borrowings during the first half of 2000 compared to $1.6 million in the comparable period in 1999. Our primary short-term needs for capital, which are subject to change, are for our continuing research and development efforts, our sales, marketing and administrative activities, working capital associated with increased product sales and capital expenditures relating to developing and expanding our manufacturing operations. Our future liquidity and capital requirements will depend on numerous factors, including the extent to which our present and future products gain market acceptance, the extent to which products or technologies under research or development are successfully developed, the timing of regulatory actions regarding our 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 our business and the results of competition. We believe that our available cash, cash equivalents and marketable securities, together with cash from operations, available borrowings and borrowings we expect to be available under our revolving line of credit facility will be sufficient to satisfy our projected cash requirements through the end of 2000 and into 2001, assuming no significant uses of cash in acquisition activities. Thereafter, if cash resources are insufficient to satisfy our cash requirements, we will need to raise additional capital to continue our business operations. There can be no assurance that such additional capital will be available on terms acceptable to us, 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 our operations and strategies. 15 16 NET OPERATING LOSS CARRYFORWARDS As of December 31, 1999, we had a net operating loss carryforward of approximately $127.5 million and approximately $2.7 million of research and development 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 2019. Our 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, we will be limited in the amount of NOL's incurred prior to the merger that we 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. We believe that this limitation may affect the eventual utilization of our total NOL carryforwards. RECENT ACCOUNTING PRONOUNCEMENTS In December 1999, the Securities and Exchange Commission ("SEC") staff released Staff Accounting Bulletin No. 101, Revenue Recognition ("SAB 101"). SAB 101 provides interpretive guidance on the recognition, presentation and disclosure of revenue in financial statements. The accounting impact of SAB 101 is continuing to be reviewed by industry and the accounting profession. Currently, the accounting impact of SAB 101 is required to be determined no later than the Company's fourth fiscal quarter of 2000. If the Company determines that its revenue recognition policies must change to be in compliance with SAB 101 or any revisions made to it, the implementation of SAB 101 is expected to be reflected as a cumulative effect of change in accounting principle as if SAB 101 had been implemented on January 1, 2000. The Company continues to review SAB 101 and all additional interpretive guidance to determine what impact, if any, SAB 101 will have on its financial position and results of operations. In July 2000, the Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board ("FASB") reached final consensus on two issues which are required to be applied no later than the fourth quarter of our fiscal year 2000. EITF No. 00-10, "Accounting for Shipping and Handling Fees and Costs," states that all amounts billed to customers for shipping and handling in a sales transaction must be included as revenue. The EITF did not reach a final conclusion on the classification of costs incurred by the seller for shipping and handling. EITF No. 00-14, "Accounting for Certain Sales Incentives," requires that all costs for rebates and other sales discounts be accounted for as a reduction in revenue in the income statement of the seller. Also, the EITF stated that free goods or services given as a sales incentive should be classified as operating expenses in the seller's income statement. Upon application of these pronouncements, comparative financial statements for prior periods will be reclassified to comply with the new classification guidelines. We do not expect these EITF pronouncements to have a material impact on our financial position or results of operations. In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation" ("FIN No. 44"). FIN No. 44 clarifies the application of APB No. 25 for certain issues related to equity based instruments issued to employees. FIN No. 44 is effective on July 1, 2000, except for certain transactions, and will be applied on a prospective basis. We believe that FIN No. 44 will not have a significant impact on our financial position or results of operations. 16 17 FACTORS THAT MAY AFFECT RESULTS We have a history of losses and may never achieve profitability. We have incurred net losses since our inception. At June 30, 2000, our accumulated deficit was $164.2 million. We anticipate that we will continue to incur additional operating losses in the near term. These losses have resulted principally from expenses incurred in our research and development programs and from sales and marketing and general and administrative expenses. We cannot assure you that we will attain profitability or, if we do, that we will remain profitable on a quarterly or annual basis in the future. We may need to seek additional financing in the future in order to continue our operations. We have incurred negative cash flow from operations since inception. We may not generate positive cash flow sufficient to fund our operations in the near term. We believe that our available cash, cash equivalents and marketable securities, together with cash from operations, available borrowings and borrowings we expect to be available under our revolving line of credit facility will be sufficient to satisfy our projected cash requirements through the end of 2000 and into 2001, assuming no significant uses of cash in acquisition activities. Thus, we may need to raise additional capital to fund our research and development, manufacturing, sales and marketing activities. Our future liquidity and capital requirements will depend on numerous factors, including: o the extent to which our present and future products gain market acceptance; o the extent to which we successfully develop products from technologies under research or development; o the timing of regulatory actions concerning our products; o the costs of our sales, marketing and manufacturing activities; o the cost, timing and business management of recent and potential acquisitions and contingent liabilities associated with acquisitions; o the procurement and enforcement of important patents, and o the results of competition. We cannot assure you that additional capital will be available on acceptable terms, if at all. Furthermore, any additional equity financing would likely be dilutive to stockholders, and additional debt financing, if available, may include restrictive covenants which may limit our currently planned operations and strategies. If adequate funds are not available, we may be required to curtail our operations significantly or to obtain funds by entering into collaborative agreements or other arrangements on unfavorable terms. If we fail to raise capital on acceptable terms when we need to, our business could be substantially harmed. We have limited resources to devote to product development and commercialization. Our strategy is to develop a broad range of products addressing companion animal healthcare. We believe that our revenue growth and profitability, if any, will substantially depend upon our ability to: o improve market acceptance of our current products; o complete development of new products; and o successfully introduce and commercialize new products. We have introduced some of our products only recently and many of our products are still under development. Because we have limited resources to devote to product development and commercialization, any delay in the development of one product or reallocation of resources to product development efforts that prove unsuccessful may delay or jeopardize the development of our other product candidates. If we fail to develop new products and bring them to market, our business could be substantially harmed. 17 18 We may experience difficulty in commercializing our products. Because several of our current products, as well as a number of products under development, are novel, we may need to expend substantial efforts in order to educate our customers about the uses of our products and to convince them of the need for our products. We cannot assure you that any of our products will achieve satisfactory market acceptance or that we will successfully commercialize them on a timely basis, or at all. If any of our products do not achieve a significant level of market acceptance, our business could be substantially harmed. We must obtain costly regulatory approvals in order to bring our products to market. Many of the products we develop and market are subject to regulation by one or more of the USDA, FDA, EPA and foreign regulatory authorities. The development and regulatory approval activities necessary to bring new products to market are time-consuming and costly. We have experienced in the past, and may experience in the future, difficulties that could delay or prevent us from obtaining the regulatory approvals necessary to introduce new products or to market them. We cannot assure you that the USDA, FDA, EPA or foreign regulatory authorities will issue regulatory clearance or new product approvals on a timely basis, or at all. Any acquisitions of new products and technologies may subject us to additional government regulation. If we do not secure the necessary regulatory approvals for our products, our business could be substantially harmed. Factors beyond our control may cause our operating results to fluctuate and many of our expenses are fixed. We believe that our future operating results will fluctuate on a quarterly basis due to a variety of factors, including: o the introduction of new products by us or by our competitors; o market acceptance of our current or new products; o regulatory and other delays in product development; o product recalls; o competition and pricing pressures from competitive products; o manufacturing delays; o shipment problems; o product seasonality; and o changes in the mix of products sold. We have high operating expenses for personnel, new product development and marketing. Many of these expenses are fixed in the short term. If any of the factors listed above cause our revenues to decline, our operating results could be substantially harmed. We must maintain certain financial and other covenants under our revolving line of credit agreement. Under our revolving line of credit agreement with Wells Fargo Business Credit, Inc., we are required to comply with certain financial and non-financial covenants and we have made various representations and warranties. Among the financial covenants are requirements for monthly minimum book net worth, minimum quarterly net income and minimum cash balances or liquidity levels. Failure to comply with any of the covenants, representations or warranties would negatively impact our ability to borrow under the agreement. Our inability to borrow to fund our operations could materially harm our business. A small number of large customers account for a large percentage of our revenues. We currently derive a substantial portion of our revenues from Diamond, which manufactures certain of our products and products for other companies in the animal health industry. Revenues from two Diamond 18 19 customers comprised approximately 23% of total revenues in the first six months of 2000. No customer accounted for more than 10% of total revenue during the six months ended June 30, 1999. We have limited experience in marketing our products. The market for companion animal healthcare products is highly fragmented, with discount stores and specialty pet stores accounting for a substantial percentage of sales. Because we sell our companion animal health products only to veterinarians, we may fail to reach a substantial segment of the potential market, and we may not be able to offer our products at prices which are competitive with those of companies that distribute their products through retail channels. We currently market our products to veterinarians through a direct sales force and through third parties. To be successful, we will have to continue to develop and train our direct sales force or rely on marketing partnerships or other arrangements with third parties to market, distribute and sell our products. We cannot assure you that we will successfully develop and maintain marketing, distribution or sales capabilities, or that we will be able to make arrangements with third parties to perform these activities on satisfactory terms. If we fail to develop a successful marketing strategy, our business could be substantially harmed. We operate in a highly competitive industry. The market in which we operate is intensely competitive. Our competitors include independent 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., Schering Plough Corporation, Pharmacia & Upjohn, Inc. and IDEXX Laboratories, Inc., have developed or are developing products that compete with our products or would compete with them if developed. These competitors may have substantially greater financial, technical, research and other resources and larger, better-established marketing, sales, distribution and service organizations than us. Our competitors offer broader product lines and have greater name recognition than we do. We cannot assure you that our competitors will not develop or market technologies or products that are more effective or commercially attractive than our current or future products, or that would render our technologies and products obsolete. Moreover, we cannot assure you that we will have the financial resources, technical expertise or marketing, distribution or support capabilities to compete successfully. If we fail to compete successfully, our business could be substantially harmed. We have granted third parties substantial marketing rights to our products under development. We have granted marketing rights to certain products under development to third parties, including Novartis, Bayer, Eisai and Ralston Purina. Novartis has the right to manufacture and market throughout the world (except in countries where Eisai has such rights) under the Novartis trade name any flea control vaccine or feline heartworm vaccine we develop on or before December 31, 2005. We have retained the right to co-exclusively manufacture and market these products throughout the world under our own trade names. Accordingly, Novartis and we may become direct competitors, with each party sharing revenues on the other's sales. We have also granted Novartis a right of first refusal pursuant to which, prior to granting rights to any third party for any products or technology we develop or acquire for either companion animal or food animal applications, we must first offer Novartis such rights. In Japan, Novartis also has the exclusive right, upon regulatory approval, to distribute our (a) heartworm diagnostics, (b) trivalent and bivalent feline vaccines and (c) certain other Heska products. Bayer has exclusive marketing rights to our canine heartworm vaccine, except in countries where Eisai has such rights. Eisai has exclusive rights in Japan and most countries in East Asia to market our feline and canine heartworm vaccines, our feline and canine flea control vaccine and our feline toxoplasmosis vaccine. In addition, we granted Ralston Purina the exclusive rights to develop and commercialize our discoveries, know-how and technologies in various pet food products. Our agreements with our corporate marketing partners generally contain no minimum purchase requirements in order for them to maintain their exclusive or co-exclusive marketing rights. We cannot assure 19 20 you that Novartis, Bayer, Eisai or Ralston Purina or any other collaborative party will devote sufficient resources to marketing our products. Furthermore, there is nothing to prevent Novartis, Bayer, Eisai or Ralston Purina or any other collaborative party from pursuing alternative technologies or products that may compete with our products. If we fail to develop and maintain our own marketing capabilities, we may find it necessary to continue to rely on potential or actual competitors for third-party marketing assistance. Third party marketing assistance may not be available in the future on reasonable terms, if at all. We may face costly intellectual property disputes. Our ability to compete effectively will depend in part on our ability to develop and maintain proprietary aspects of our technology and either to operate without infringing the proprietary rights of others or to obtain rights to technology owned by third parties. We have United States and foreign-issued patents and are currently prosecuting patent applications in the United States and with various foreign patent offices. We cannot assure you that any of our pending patent applications will result in the issuance of any patents or that any issued patents will offer protection against competitors with similar technology. We cannot assure you that any patents we receive will not be challenged, invalidated or circumvented in the future or that the rights created by those patents will provide a competitive advantage. We also rely on trade secrets, technical know-how and continuing invention to develop and maintain our competitive position. We cannot assure you that others will not independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets. The biotechnology and pharmaceutical industries have been characterized by extensive litigation relating to patents and other intellectual property rights. In 1998, Synbiotics Corporation filed a lawsuit against us alleging infringement of a Synbiotics patent relating to heartworm diagnostic technology and this litigation remains ongoing. We cannot assure you that we will not become subject to additional patent infringement claims and litigation in the United States or other countries or interference proceedings conducted in the United States Patent and Trademark Office to determine the priority of inventions. The defense and prosecution of intellectual property suits, USPTO interference proceedings, and related legal and administrative proceedings are costly, time-consuming and distracting. We may also need to pursue litigation to enforce any patents issued to us or our collaborative partners, to protect trade secrets or know-how owned by us or our collaborative partners, or to determine the enforceability, scope and validity of the proprietary rights of others. Any litigation or interference proceeding will result in substantial expense to us and significant diversion of the efforts of our technical and management personnel. Any adverse determination in litigation or interference proceedings could subject us to significant liabilities to third parties. Further, as a result of litigation or other proceedings, we may be required to seek licenses from third parties which may not be available on commercially reasonable terms, if at all. We license technology from a number of third parties. The majority of these license agreements impose due diligence or milestone obligations on us, and in some cases impose minimum royalty and/or sales obligations on us, in order for us to maintain our rights under these agreements. Our products may incorporate technologies that are the subject of patents issued to, and patent applications filed by, others. As is typical in our industry, from time to time we and our collaborators have received, and may in the future receive, notices from third parties claiming infringement and invitations to take licenses under third-party patents. It is our policy that when we receive such notices, we conduct investigations of the claims they assert. With respect to the notices we have received to date, we believe, after due investigation, that we have meritorious defenses to the infringement claims asserted. Any legal action against us or our collaborators may require us or our collaborators to obtain one or more licenses in order to market or manufacture affected products or services. However, we cannot assure you that we or our collaborators will be able to obtain licenses for technology patented by others on commercially reasonable terms, that we 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 our businesses. Failure to obtain necessary licenses or to identify and implement alternative approaches could prevent us and our collaborators from commercializing certain of our products under development and could substantially harm our business. 20 21 We have limited manufacturing experience and capacity and rely substantially on third-party manufacturers. To be successful, we must manufacture, or contract for the manufacture of, our 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 increase our manufacturing capacity, we acquired Diamond in April 1996 and certain assets of Center in July 1997. Center was sold in June 2000. We must complete significant improvements in our manufacturing infrastructure in order to scale up for the manufacturing of our new products. We cannot assure you that we can complete such work successfully or on a timely basis. We currently rely on third parties to manufacture those products we do not manufacture at our Diamond facility. We currently have a supply agreement with Quidel Corporation for certain manufacturing services relating to our point-of-care diagnostic tests. Third parties also manufacture our patient monitoring instruments and associated consumable products. We cannot assure you that these partners will manufacture products to regulatory standards and our specifications in a cost-effective and timely manner. If one or more of our suppliers experiences delays in scaling up commercial manufacturing, fails to produce a sufficient quantity of products to meet market demand, or requests renegotiation of contract prices, our business could be substantially harmed. While we typically retain the right to manufacture products ourselves or contract with an alternative supplier in the event of a manufacturer's breach, any transfer of production would cause significant production delays and additional expense to us to scale up production at a new facility and to apply for regulatory licensure at that new facility. In addition, we cannot assure you that suitable manufacturing partners or alternative suppliers will be available for our products under development if present arrangements are not satisfactory. Our agreements with certain of the suppliers of the veterinary medical devices require us to meet minimum annual sales levels to maintain our position as the exclusive distributor of these devices. We cannot assure that we will meet these minimum sales levels in 2000, or in the future, and maintain exclusivity over the distribution and sale of these products. If we are not the exclusive distributor of these products, competition may increase. Our manufacturing facilities are subject to governmental regulation. Our manufacturing facilities and those of any third-party manufacturers we may use are subject to the requirements of and periodic regulatory inspections by one or more of the FDA, USDA and other federal, state and foreign regulatory agencies. We cannot assure you that we or our contractors will continue to satisfy these regulatory requirements. Any failure to do so could substantially harm our business, financial condition or results of operations. We cannot assure you that we will not incur significant costs to comply with laws and regulations in the future or that new laws and regulations will not substantially harm our business. We depend on partners in our research and development activities. For certain of our proposed products, we are dependent on collaborative partners to successfully and timely perform research and development activities on our behalf. We cannot assure you that these collaborative partners will complete research and development activities on our behalf in a timely fashion, or at all. If our collaborative partners fail to complete research and development activities, or fail to complete them in a timely fashion, our business could be substantially harmed. We depend on key personnel for our future success. Our future success is substantially dependent on the efforts of our senior management and scientific team. The loss of the services of members of our 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 our business, we depend substantially on our ability to attract and retain qualified scientific 21 22 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 our activities. If we lose the services of, or fail to recruit, key scientific and technical personnel, our business could be substantially harmed. We must manage our growth effectively. We anticipate that our business will grow as we develop and commercialize new products, and that this growth will result in an increase in responsibilities for both existing and new management personnel. In order to manage growth effectively, we will need to continue to implement and improve our operational, financial and management information systems, to train, motivate and manage our current employees and to hire new employees. We cannot assure you that we will be able to manage our expansion effectively. Failure to do so could substantially harm our business. We may face product liability litigation and the extent of our insurance coverage is limited. The testing, manufacturing and marketing of our current products as well as those currently under development entail an inherent risk of product liability claims and associated adverse publicity. To date, we have not experienced any material product liability claims, but any claim arising in the future could substantially harm our business. Potential product liability claims may exceed the amount of our insurance coverage or may be excluded from coverage under the terms of the policy. We cannot assure you that we will be able to continue to obtain adequate insurance at a reasonable cost, if at all. In the event that we are held liable for a claim against which we are not indemnified or for damages exceeding the limits of our insurance coverage or which results in significant adverse publicity against us, our business could be substantially harmed. Side effects of our products may generate adverse publicity. Following the introduction of a product, adverse side effects may be discovered that make a product no longer commercially viable. Publicity regarding such adverse effects could affect sales of our other products for an indeterminate time period. We are dependent on the acceptance of our products by both veterinarians and pet owners. If we fail to engender confidence in our products and services, our ability to attain and sustain market acceptance of our products could be substantially harmed. We may be held liable for the release of hazardous materials. Our products and development programs involve the controlled use of hazardous and biohazardous materials, including chemicals, infectious disease agents and various radioactive compounds. Although we believe that our safety procedures for handling and disposing of such materials comply with the standards prescribed by applicable local, state and federal regulations, we cannot completely eliminate the risk of accidental contamination or injury from these materials. In the event of such an accident, we could be held liable for any damages or fines that result. Our liability for the release of hazardous materials could exceed our resources. We may incur substantial costs to comply with environmental regulations as we expand our manufacturing capacity. We expect to continue to experience volatility in our stock price. The securities markets have from time to time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. The market prices of securities of many publicly-held biotechnology companies have in the past been, and can in the future be expected to be, especially volatile. The market price of our common stock may fluctuate substantially due to factors such as: o announcements of technological innovations or new products by us or by our competitors; o releases of reports by securities analysts; o developments or disputes concerning patents or proprietary rights; o regulatory developments; o changes in regulatory policies; o economic and other external factors; and o quarterly fluctuations in our financial results. 22 23 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk represents the risk of loss that may impact the financial position, results of operations or cash flows due to adverse changes in financial and commodity market prices and rates. We are exposed to market risk in the areas of changes in United States and foreign interest rates and changes in foreign currency exchange rates as measured against the United States dollar. These exposures are directly related to our normal operating and funding activities. Historically and as of June 30, 2000, we have not used derivative instruments or engaged in hedging activities. Interest Rate Risk The interest payable on our revolving line of credit and certain other borrowings is variable based on the United States prime rate and, therefore, affected by changes in market interest rates. At June 30, 2000, approximately $4.5 million was outstanding on these lines of credit and other borrowings with a weighted average interest rate of 10.2%. We manage interest rate risk by investing excess funds principally in cash equivalents or marketable securities which bear interest rates that reflect current market yields. Additionally, we monitor interest rates and at June 30, 2000 had sufficient cash balances to pay off the lines of credit should interest rates increase significantly. As a result, we do not believe that reasonably possible near-term changes in interest rates will result in a material effect on our future earnings, financial position or cash flows. Foreign Currency Risk At June 30, 2000, we had wholly-owned subsidiaries located in Switzerland and France. Sales from these operations are denominated in Swiss Francs, French Francs or Euros, thereby creating exposures to changes in exchange rates. The changes in the Swiss/U.S. exchange rate, French/U.S. exchange rate or Euro/U.S. exchange rate may positively or negatively affect our sales, gross margins and retained earnings. We do not believe that reasonably possible near-term changes in exchange rates will result in a material effect on future earnings, fair values or cash flows, and therefore, have chosen not to enter into foreign currency hedging instruments. There can be no assurance that such an approach will be successful, especially in the event of a significant and sudden decline in the value of the Swiss Franc, French Franc or Euro. PART II. OTHER INFORMATION ITEM 2. (c) CHANGES IN SECURITIES AND USE OF PROCEEDS Between October 1999 and May 2000, the Company issued an aggregate of 3,525 shares of Common Stock to consultants in consideration of services rendered in accordance with the terms of their respective consulting agreements between the Company and the consultants. The Company relied upon the exemption provided by Section 4(2) of the Securities Act. In January 2000, the Company issued 4,000 shares of Common Stock to a product development services provider in consideration of the completion of certain research projects. The Company relied upon the exemption provided by Section 4(2) of the Securities Act. 23 24 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's 2000 annual meeting of stockholders (the "2000 Annual Meeting") was held on May 24, 2000 in Fort Collins, Colorado. Four proposals, as described in the Company's Proxy Statement dated April 4, 2000, were voted on at the meeting. Following is a brief description of the matters voted upon and the results of the voting: 1. Proposal to elect three Class III directors for three year terms expiring at the Company's annual meeting in 2003. All directors were elected. The shares were voted as follows:
Nominee Number of Shares ------- ---------------- Lyle A. Hohnke For 27,082,636 Withheld 651,091 Denis H. Pomroy For 27,225,616 Withheld 508,111 Lynnor B. Stevenson For 27,225,616 Withheld 508,111
2. Amendment to the Company's Certificate of Incorporation to increase the number of authorized shares of common stock of the Company from 40 million to 75 million.
For Against Abstain 25,164,744 1,859,758 223,455
3. Amendment to the Company's Certificate of Incorporation to modify and delete certain of the supermajority provisions therein.
For Against Abstain 23,591,837 656,188 14,696
4. Amendment to the Company's 1997 Employee Stock Purchase Plan to increase the number of shares reserved for issuance under the Plan by 500,000.
For Against Abstain 21,561,711 5,460,998 225,248
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits See Exhibit Index on Page 25 (b) Reports on Form 8-K No reports on Form 8-K were filed by the Company during the quarter ended June 30, 2000. 24 25 EXHIBIT INDEX
Exhibit Number Description of Document - ------- ----------------------- 3.1(d) Restated Certificate of Incorporation 3.2 Bylaws 10.39 Second Amended and Restated Credit and Security Agreement by and between Heska Corporation, Diamond Animal Health, Inc., Center Laboratories, Inc. and Wells Fargo Business Credit, Inc., dated as of June 14, 2000 10.40 Employment Agreement by and between Registrant and Dan T. Stinchcomb dated as of May 1, 2000 10.41 Employment Agreement by and between Registrant and Carol Talkington Verser dated as of May 1, 2000 27 Financial Data Schedule
- ---------- 25 26 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: August 14, 2000 By /s/ Ronald L. Hendrick ---------------------------------------------- RONALD L. HENDRICK Executive Vice President and Chief Financial Officer (on behalf of the Registrant and as the Registrant's Principal Financial and Accounting Officer) 26 27 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3.1(d) Restated Certificate of Incorporation 3.2 Bylaws 10.39 Second Amended and Restated Credit and Security Agreement by and between Heska Corporation, Diamond Animal Health, Inc., Center Laboratories, Inc. and Wells Fargo Business Credit, Inc., dated as of June 14, 2000 10.40 Employment Agreement by and between Registrant and Dan T. Stinchcomb dated as of May 1, 2000 10.41 Employment Agreement by and between Registrant and Carol Talkington Verser dated as of May 1, 2000 27 Financial Data Schedule
EX-3.1(D) 2 ex3-1d.txt RESTATED CERTIFICATE OF INCORPORATION FOR HESKA 1 EXHIBIT 3.1(d) RESTATED CERTIFICATE OF INCORPORATION OF HESKA CORPORATION HESKA CORPORATION, a corporation organized and existing under the laws of the State of Delaware, hereby certifies as follows: FIRST: The name of this corporation is Heska Corporation. SECOND: The original Certificate of Incorporation of the corporation was filed with the Secretary of State of the State of Delaware on March 27, 1997 and the original name of the corporation was Heska Merger Corporation. A Restated Certificate of Incorporation of the corporation was filed with the Secretary of State of the State of Delaware on May 28, 1997. A Certificate of Merger whereby Heska Corporation, a California corporation, was merged with and into this corporation and this corporation's name was changed to Heska Corporation was filed with the Secretary of State of the State of Delaware on May 29, 1997. A Restated Certificate of Incorporation was filed with the Secretary of State of the State of Delaware on July 7, 1997. THIRD: The Restated Certificate of Incorporation of said corporation shall be amended and restated to read in full as follows: ARTICLE I The name of this corporation is HESKA CORPORATION. ARTICLE II The registered office of the corporation within the State of Delaware is located at 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. ARTICLE III The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of Delaware. -1- 2 ARTICLE IV A. Authorized Stock. This corporation is authorized to issue two classes of shares, to be designated Common Stock and Preferred Stock, respectively. This corporation is authorized to issue seventy-five million (75,000,000) shares of Common Stock, $.001 par value per share, and twenty-five million (25,000,000) shares of Preferred Stock, $.001 par value per share. B. Preferred Stock. The Preferred Stock may be issued in any number of series, as determined by the Board of Directors. The Board of Directors may by resolution fix the designation and number of shares of any such series, and may determine, alter, or revoke the rights, preferences, privileges and restrictions granted to or imposed upon any wholly unissued series. The Board of Directors may thereafter in the same manner, within the limits and restrictions stated in any resolution or resolutions of the Board of Directors originally fixing the number of shares constituting any series, increase or decrease the number of shares of any such series (but not below the number of shares of that series then outstanding). In case the number of shares of any series shall be decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. C. Common Stock. 1. Relative Rights of Preferred Stock and Common Stock. All preferences, voting powers, relative, participating, optional or other special rights and privileges, and qualifications, limitations or restrictions of the Common Stock are expressly made subject and subordinate to those that may be fixed with respect to any shares of the Preferred Stock. 2. Voting Rights. Except as otherwise required by law or this Restated Certificate of Incorporation, each holder of Common Stock shall have one vote in respect of each share of stock held by such holder of record on the books of the corporation for the election of directors and on all matters submitted to a vote of stockholders of the corporation. 3. Dividends. Subject to the preferential rights of the Preferred Stock, if any, the holders of shares of Common Stock shall be entitled to receive, when and if declared by the Board of Directors, out of the assets of the corporation which are by law available therefor, dividends payable either in cash, in property or in shares of capital stock. 4. Liquidation, Dissolution or Winding Up. In the event of any dissolution, liquidation or winding up of the affairs of the corporation, after distribution in full of the preferential amounts, if any, to be distributed to the holders of shares of the Preferred Stock, holders of Common Stock shall be entitled, unless otherwise provided by law or this -2- 3 Restated Certificate of Incorporation, to receive all of the remaining assets of the corporation of whatever kind available for distribution to stockholders ratably in proportion to the number of shares of Common Stock held by them respectively. ARTICLE V The corporation is to have perpetual existence. ARTICLE VI A. Classified Board. The Board of Directors shall be divided into three classes, designated Class I, Class II and Class III, as nearly equal in number as possible, and the term of office of directors of one class shall expire at each annual meeting of stockholders, and in all cases as to each director when such director's successor shall be elected and shall qualify or upon such director's earlier resignation, removal from office, death or incapacity. Additional directorships resulting from an increase in number of directors shall be apportioned among the classes as equally as possible. The initial term of office of directors of Class I shall expire at the annual meeting of stockholders in 1998; that of Class II shall expire at the annual meeting in 1999; and that of Class III shall expire at the annual meeting in 2000; and in all cases as to each director when such director's successor shall be elected and shall qualify or upon such director's earlier resignation, removal from office, death or incapacity. At each annual meeting of stockholders, beginning with the annual meeting of stockholders in 1998, the number of directors equal to the number of directors of the class whose term expires at the time of such meeting (or, if less, the number of directors properly nominated and qualified for election) shall be elected to hold office until the third succeeding annual meeting of stockholders after their election. B. Changes. The Board of Directors of this corporation, by amendment to the corporation's bylaws, is expressly authorized to change the number of directors in any or all of the classes of directors without the consent of the stockholders. C. Elections. Elections of directors need not be by written ballot unless the Bylaws of the corporation shall so provide. D. Vote Required to Amend or Repeal. The affirmative vote of the holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting power of all of the then outstanding shares of the stock of the corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required to amend in any respect or repeal this Article VI. -3- 4 ARTICLE VII A. Special Meetings of Stockholders. Special meetings of the stockholders of the corporation may be called for any purpose or purposes, unless otherwise prescribed by statute or by this Restated Certificate of Incorporation, only at the request of the Chairman of the Board of Directors, the Chief Executive Officer or President of the corporation or by a resolution duly adopted by the affirmative vote of a majority of the Board of Directors. ARTICLE VIII A. Amend or Repeal Bylaws. The Board of Directors is expressly empowered to adopt, amend or repeal the Bylaws of the corporation; provided, however, that any adoption, amendment or repeal of the Bylaws of the corporation by the Board of Directors shall require the approval of at least sixty-six and two-thirds percent (66 2/3%) of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any resolution providing for adoption, amendment or repeal is presented to the Board of Directors). The stockholders shall also have the power to adopt, amend or repeal the Bylaws of the corporation, provided, however, that in addition to any vote of the holders of any class or series of stock of the corporation required by law, the affirmative vote of the holders of more than fifty percent (50%) of the voting power of all of the then outstanding shares of the stock of the corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required for such adoption, amendment or repeal by the stockholders of any provisions of the Bylaws of the corporation. Notwithstanding the foregoing sentence, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the voting power of all of the then outstanding shares of the stock of the corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required for the amendment or repeal of Article 3.1 of the Bylaws of the corporation. ARTICLE IX The books of the corporation may be kept at such place within or without the State of Delaware as the bylaws of the corporation may provide or as may be designated from time to time by the board of directors of the corporation. -4- 5 ARTICLE X Whenever a compromise or arrangement is proposed between the corporation and its creditors or any class of them and/or between the corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of the corporation or of any creditor or stockholder thereof or on the application of any receivers appointed for the corporation under the provisions of section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for the corporation under the provisions of section 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or the stockholders or class of stockholders of the corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority, in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of the corporation, as the case may be, and also on the corporation. ARTICLE XI A. Limitation on Liability. A director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (1) for any breach of the director's duty of loyalty to the corporation and its stockholders; (2) for acts or omissions not in good faith or which involve intentional misconduct or knowing violations of law; (3) under Section 174 of the Delaware General Corporation Law; or (4) for any transaction from which the director derived an improper personal benefit. If the Delaware General Corporation Law hereafter is amended to further eliminate or limit the liability of directors, then the liability of a director of the corporation, in addition to the limitation on personal liability provided herein, shall be limited to the fullest extent permitted by the amended Delaware General Corporation Law. B. Indemnification. The corporation is authorized to indemnify the directors and officers of this corporation to the fullest extent permissible under Delaware law. C. Insurance. The corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the corporation or another corporation, partnership, joint venture, trust or other enterprise against any such expense, -5- 6 liability or loss, whether or not the corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. D. Repeal and Modification. Any repeal or modification of the foregoing provisions of this Article XI shall not adversely affect any right or protection of any director, officer, employee or agent of the corporation existing at the time of such repeal or modification. ARTICLE XII The corporation reserves the right to amend or repeal any provision contained in this Restated Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon a stockholder herein are granted subject to this reservation. * * * * * Four: This Restated Certificate of Incorporation was duly adopted by the Board of Directors of this corporation. Five: This Restated Certificate of Incorporation was duly adopted by written consent of the stockholders of the corporation in accordance with Sections 228, 242 and 245 of the General Corporation Law of the State of Delaware and written notice of such action has been given as provided in Section 228. IN WITNESS WHEREOF, Heska Corporation has caused this certificate to be signed by the undersigned officer, thereunto duly authorized, this ____day of _____, 2000. By: ----------------------------- Name: Title: -6- EX-3.2 3 ex3-2.txt HESKA BYLAWS 1 EXHIBIT 3.2 BYLAWS OF HESKA CORPORATION (A DELAWARE CORPORATION) 2 TABLE OF CONTENTS
Page ---- ARTICLE 1.......................................................................................................1 1.1 Principal Office.....................................................................................1 1.2 Additional Offices...................................................................................1 ARTICLE 2.......................................................................................................1 2.1 Place of Meeting.....................................................................................1 2.2 Annual Meeting.......................................................................................1 2.3 Special Meetings.....................................................................................2 2.4 Action Without a Meeting.............................................................................2 2.5 Notice of Meetings...................................................................................2 2.6 Business Matter of a Special Meeting.................................................................3 2.7 List of Stockholders.................................................................................3 2.8 Organization and Conduct of Business.................................................................3 2.9 Quorum and Adjournments..............................................................................3 2.10 Voting Rights........................................................................................4 2.11 Majority Vote........................................................................................4 2.12 Record Date for Stockholder Notice and Voting........................................................4 2.13 Proxies..............................................................................................5 2.14 Inspectors of Election...............................................................................5 ARTICLE 3.......................................................................................................5 3.1 Number, Election, Tenure and Qualifications..........................................................5 3.2 Vacancies............................................................................................6 3.3 Resignation and Removal..............................................................................7 3.4 Powers...............................................................................................7 3.5 Place of Meetings....................................................................................7 3.6 Annual Meetings......................................................................................7 3.7 Regular Meetings.....................................................................................7 3.8 Special Meetings.....................................................................................7 3.9 Quorum and Adjournments..............................................................................7 3.10 Action Without Meeting...............................................................................8 3.11 Telephone Meetings...................................................................................8 3.12 Waiver of Notice.....................................................................................8 3.13 Fees and Compensation of Directors...................................................................8 3.14 Rights of Inspection.................................................................................8 ARTICLE 4.......................................................................................................8 4.1 Selection............................................................................................8 4.2 Power................................................................................................8 4.3 Committee Minutes....................................................................................9 ARTICLE 5.......................................................................................................9 5.1 Officers Designated..................................................................................9 5.2 Appointment of Officers..............................................................................9
i 3 5.3 Subordinate Officers.................................................................................9 5.4 Removal and Resignation of Officers..................................................................9 5.5 Vacancies in Offices................................................................................10 5.6 Compensation........................................................................................10 5.7 The Chairman of the Board...........................................................................10 5.8 The President.......................................................................................10 5.9 The Vice President..................................................................................10 5.10 The Secretary.......................................................................................10 5.11 The Assistant Secretary.............................................................................11 5.12 The Chief Financial Officer.........................................................................11 ARTICLE 6......................................................................................................11 6.1 Certificates for Shares.............................................................................11 6.2 Signatures on Certificates..........................................................................12 6.3 Transfer of Stock...................................................................................12 6.4 Registered Stockholders.............................................................................12 6.5 Lost, Stolen or Destroyed Certificates..............................................................12 ARTICLE 7......................................................................................................12 7.1 Dividends...........................................................................................12 7.2 Dividend Reserve....................................................................................12 7.3 Checks..............................................................................................13 7.4 Corporate Seal......................................................................................13 7.5 Execution of Corporate Contracts and Instruments....................................................13 7.6 Representation of Shares of Other Corporations......................................................13 ARTICLE 8......................................................................................................13 8.1 Stock Options.......................................................................................13 8.2 Amendments..........................................................................................14
ii 4 ARTICLE I Offices 1.1 Principal Office. The initial registered office of the corporation shall be 1209 Orange Street, Wilmington, Delaware, and the name of the initial registered agent in charge thereof is The Corporation Trust Company. 1.2 Additional Offices. The corporation may also have offices at such other places, either within or without the State of Delaware, as the Board of Directors (the "Board") may from time to time designate or the business of the corporation may require. ARTICLE 2 Meeting of Stockholders 2.1 Place of Meeting. Meetings of stockholders may be held at such place, either within or without of the State of Delaware, as may be designated by or in the manner provided in these Bylaws, or, if not so designated, at the registered office of the corporation or the principal executive offices of the corporation. 2.2 Annual Meeting. Annual meetings of stockholders shall be held each year at such date and time as shall be designated from time to time by the Board and stated in the notice of the meeting. At such annual meetings, the stockholders shall elect by a plurality vote the number of directors equal to the number of directors of the class whose term expires at such meetings (or, if fewer, the number of directors properly nominated and qualified for election) to hold office until the third succeeding annual meeting of stockholders after their election. The stockholders shall also transact such other business as may properly be brought before the meetings. To be properly brought before the annual meeting, business must be either (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors or the President, (b) otherwise properly brought before the meeting by or at the direction of the Board of Directors or the President, or (c) otherwise properly brought before the meeting by a stockholder of record. In addition to any other applicable requirements, for business to be properly brought before the annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, a stockholder's notice must be delivered personally or deposited in the United States mail, or delivered to a common carrier for transmission to the recipient or actually transmitted by the person giving the notice by electronic means to the recipient or sent by other means of written communication, postage or delivery charges prepaid in all such cases, and received at the principal executive offices of the corporation, addressed to the attention of the Secretary of the corporation, not less than 60 days nor more than 90 days prior to the scheduled date of the meeting (regardless of any postponements, deferrals or adjournments of that meeting to a later date); provided, however, that in the event that less than 70 days' notice or prior public disclosure of the date of the scheduled meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the earlier of (a) the close of business on the 10th day following the day on which such notice of the date of the 1 5 scheduled annual meeting was mailed or such public disclosure was made, whichever first occurs, and (b) two days prior to the date of the scheduled meeting. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and record address of the stockholder proposing such business, (iii) the class, series and number of shares of the corporation that are owned beneficially by the stockholder, and (iv) any material interest of the stockholder in such business. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at the annual meeting except in accordance with the procedures set forth in this Section; provided, however, that nothing in this Section shall be deemed to preclude discussion by any stockholder of any business properly brought before the annual meeting. The Chairman of the Board of the corporation (or such other person presiding at the meeting in accordance with these Bylaws) shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section, and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. 2.3 Special Meetings. Special meetings of the stockholders may be called for any purpose or purposes, unless otherwise prescribed by the statute or by the Restated Certificate of Incorporation, only at the request of the Chairman of the Board of Directors, by the President of the corporation or by a resolution duly adopted by the affirmative vote of a majority of the Board of Directors. Such request shall state the purpose or purposes of the proposed meeting. Business transacted at any special meeting shall be limited to matters relating to the purpose or purposes stated in the notice of meeting. 2.4 Action Without a Meeting. Any action which may be taken at any annual or special meeting of the stockholders of this corporation may be taken without a meeting, without prior notice, and without a vote, if a consent or consents in writing, setting forth the action or actions so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Such consent or consents shall be delivered to the corporation by hand or certified mail, return receipt requested, to its principal executive office, or to an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. 2.5 Notice of Meetings. Written notice of stockholders' meetings, stating the place, date and time of the meeting and, in the case of a special meeting, the purpose or purposes for which such special meeting is called, shall be given to each stockholder entitled to vote at such meeting not less than ten (10) nor more than sixty (60) days prior to the meeting. When a meeting is adjourned to another place, date or time, written notice need not be given of the adjourned meeting if the place, date and time thereof are announced at the meeting at which the adjournment is taken; provided, however, that if the date of any adjourned meeting is more than thirty (30) days after the date for which the meeting was originally noticed, or if a new record date is fixed for the adjourned meeting, written notice of the place, date and time of the adjourned 2 6 meeting shall be given in conformity herewith. At any adjourned meeting, any business may be transacted which might have been transacted at the original meeting. Whenever, under the provisions of Delaware law or of the Restated Certificate of Incorporation or of these Bylaws, notice is required to be given to any stockholder it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such director or stockholder, at his or her address as it appears on the records of the corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Whenever any notice is required to be given under the provisions of Delaware law or of the Restated Certificate of Incorporation or of these Bylaws, a waiver thereof in writing, signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. 2.6 Business Matter of a Special Meeting. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice, except to the extent such notice is waived or is not required. 2.7 List of Stockholders. The officer in charge of the stock ledger of the corporation or the transfer agent shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten (10) days prior to the meeting, at a place within the city where the meeting is to be held, which place, if other than the place of the meeting, shall be specified in the notice of the meeting. The list shall also be produced and kept at the place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present in person thereat. 2.8 Organization and Conduct of Business. The Chairman of the Board or, in his or her absence, the President of the corporation or, in their absence, such person as the Board may have designated or, in the absence of such a person, such person as may be chosen by the holders of a majority of the shares entitled to vote who are present, in person or by proxy, shall call to order any meeting of the stockholders and act as Chairman of the meeting. In the absence of the Secretary of the corporation, the Secretary of the meeting shall be such person as the Chairman appoints. The Chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussion as seems to him or her in order. 2.9 Quorum and Adjournments. Except where otherwise provided by law or the Restated Certificate of Incorporation or these Bylaws, the holders of a majority of the stock issued and outstanding and entitled to vote, present in person or represented in proxy, shall constitute a quorum at all meetings of the stockholders. The stockholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the 3 7 withdrawal of enough stockholders to have less than a quorum if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. At such adjourned meeting at which a quorum is present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. If, however, a quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote thereat who are present in person or represented by proxy shall have the power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. 2.10 Voting Rights. Unless otherwise provided in the Restated Certificate of Incorporation, each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of the capital stock having voting power held by such stockholder. 2.11 Majority Vote. When a quorum is present at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes or of the Restated Certificate of Incorporation or of these Bylaws, a different vote is required in which case such express provision shall govern and control the decision of such question. 2.12 Record Date for Stockholder Notice and Voting. (i) For purposes of determining the stockholders entitled to notice of any meeting or to vote, or entitled to receive payment of any dividend or other distribution, or entitled to exercise any right in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board may fix, in advance, a record date, which shall not be more than sixty (60) days nor less than ten (10) days before the date of any such meeting nor more than sixty (60) days before any other action. If the Board does not so fix a record date, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. (ii) For purposes of determining the stockholders entitled to consent to corporate action in writing without a meeting, the board of directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the board of directors, and which date shall not be more than ten (10) days after the date upon which the resolution fixing such record date is adopted by the board of directors. If no record date has been fixed by the board of directors, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the board of directors is required under Delaware law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation by hand or certified mail, return receipt requested, to its principal executive office, or to an officer or agent of the corporation having custody of the 4 8 book in which proceedings of meetings of stockholders are recorded. If no record date has been fixed by the board of directors and prior action by the board of directors is required under Delaware law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be the close of business on the day on which the board of directors adopts the resolution taking such prior action. 2.13 Proxies. Every person entitled to vote for directors or on any other matter shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the Secretary of the corporation. A proxy shall be deemed signed if the stockholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the stockholder or the stockholder's attorney-in-fact. A validly executed proxy which does not state that it is irrevocable shall continue in full force and effect unless (i) revoked by the person executing it, before the vote pursuant to that proxy, by a writing delivered to the corporation stating that the proxy is revoked or by a subsequent proxy executed by, or attendance at the meeting and voting in person by, the person executing the proxy; or (ii) written notice of the death or incapacity of the maker of that proxy is received by the corporation before the vote pursuant to that proxy is counted; provided, however, that no proxy shall be valid after the expiration of three years from the date of the proxy, unless otherwise provided in the proxy. 2.14 Inspectors of Election. The corporation shall, in advance of any meeting of stockholders, appoint one or more inspectors of election to act at the meeting and make a written report thereof. The corporation may designate one or more persons to act as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. ARTICLE 3 Directors 3.1 Number, Election, Tenure and Qualifications. The Board of Directors of the corporation shall consist of not less than five (5) members nor more than nine (9) members and shall be divided into three classes, designated as Class I, Class II and Class III, as nearly equal in number as possible. The initial Board of Directors shall consist of seven (7) members, with Class I consisting of two (2) directors, Class II consisting of two (2) directors and Class III consisting of three (3) directors, and the exact number of members of any future Board of Directors, and the exact number of directors in each Class, shall be determined from time to time by resolution of the Board of Directors. Notwithstanding the foregoing, additional directorships resulting from an increase in the number of directors shall be apportioned among the classes as equally as possible. Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors. Nominations of persons for election to the Board of Directors at the annual meeting, by or at the direction of the Board of Directors, may be made by any 5 9 nominating committee or person appointed by the Board of Directors; nominations may also be made by any stockholder of record of the corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the corporation. To be timely, a stockholder's notice shall be delivered personally or deposited in the United States mail, or delivered to a common carrier for transmission to the recipient or actually transmitted by the person giving the notice by electronic means to the recipient or sent by other means of written communication, postage or delivery charges prepaid in all such cases, and received at the principal executive offices of the corporation addressed to the attention of the Secretary of the corporation not less than 60 days nor more than 90 days prior to the scheduled date of the meeting (regardless of any postponements, deferrals or adjournments of that meeting to a later date); provided, however, that, in the case of an annual meeting and in the event that less than 70 days' notice or prior public disclosure of the date of the scheduled meeting is given or made to stockholders, notice by the stockholder to be timely must be so received not later than the earlier of (a) the close of business on the 10th day following the day on which such notice of the date of the scheduled meeting was mailed or such public disclosure was made, whichever first occurs, or (b) two days prior to the date of the scheduled meeting. Such stockholder's notice to the Secretary shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a director, (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class, series and number of shares of capital stock of the corporation that are owned beneficially by the person, (iv) a statement as to the person's citizenship, and (v) any other information relating to the person that is required to be disclosed in solicitations for proxies for election of directors pursuant to Section 14 of the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder; and (b) as to the stockholder giving the notice, (i) the name and record address of the stockholder and (ii) the class, series and number of shares of capital stock of the corporation that are owned beneficially by the stockholder. The corporation may require any proposed nominee to furnish such other information as may reasonably be required by the corporation to determine the eligibility of such proposed nominee to serve as director of the corporation. No person shall be eligible for election as a director of the corporation unless nominated in accordance with the procedures set forth herein. In connection with any annual meeting, the Chairman of the Board of Directors (or such other person presiding at such meeting in accordance with these Bylaws) shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. Directors shall serve as provided in the Restated Certificate of Incorporation of the corporation. Directors need not be stockholders. 3.2 Vacancies. Vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, though less than a quorum, or by a sole remaining director, and the directors so chosen shall hold office until the next annual election at which the term of the class to which they have been elected expires and until their successors are duly elected and shall qualify, unless sooner displaced. If there are no 6 10 directors in office, then an election of directors may be held in the manner provided by statute. In the event of a vacancy in the Board of Directors, the remaining directors, except as otherwise provided by law or these bylaws, may exercise the powers of the full board until the vacancy is filled. 3.3 Resignation and Removal. Any director may resign at any time upon written notice to the corporation at its principal place of business or to the President or the Secretary. Such resignation shall be effective upon receipt of such notice unless the notice specifies such resignation to be effective at some other time or upon the happening of some other event. Any director or the entire Board of Directors may be removed, but only for cause, by the holders of a majority of the shares then entitled to vote at an election of directors, unless otherwise specified by law or the Restated Certificate of Incorporation. 3.4 Powers. The business of the corporation shall be managed by or under the direction of the Board which may exercise all such powers of the corporation and do all such lawful acts and things which are not by statute or by the Restated Certificate of Incorporation or by these Bylaws directed or required to be exercised or done by the stockholders. 3.5 Place of Meetings. The Board may hold meetings, both regular and special, either within or without the State of Delaware. 3.6 Annual Meetings. The annual meetings of the Board shall be held immediately following the annual meeting of stockholders, and no notice of such meeting shall be necessary to the Board, provided a quorum shall be present. The annual meetings shall be for the purposes of organization, and an election of officers and the transaction of other business. 3.7 Regular Meetings. Regular meetings of the Board may be held without notice at such time and place as may be determined from time to time by the Board. 3.8 Special Meetings. Special meetings of the Board may be called by the Chairman of the Board, the President or by a majority of the Board upon one (1) day's notice to each director and can be delivered either personally, or by telephone, express delivery service (so that the scheduled delivery date of the notice is at least one (1) day in advance of the meeting), telegram or facsimile transmission, and on five (5) day's notice, by mail. The notice need not describe the purpose of the special meeting. 3.9 Quorum and Adjournments. At all meetings of the Board, a majority of the directors then in office shall constitute a quorum for the transaction of business, and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board, except as may otherwise be specifically provided by law or the Restated Certificate of Incorporation. If a quorum is not present at any meeting of the Board, the directors present may adjourn the meeting from time to time, without notice other than announcement at the meeting at which the adjournment is taken, until a quorum shall be present. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved of by at least a majority of the required quorum for that meeting. 7 11 3.10 Action Without Meeting. Unless otherwise restricted by the Restated Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board or of any committee thereof may be taken without a meeting, if all members of the Board or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. 3.11 Telephone Meetings. Unless otherwise restricted by the Restated Certificate of Incorporation or these Bylaws, any member of the Board or any committee may participate in a meeting by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. 3.12 Waiver of Notice. Notice of a meeting need not be given to any director who signs a waiver of notice or a consent to holding the meeting or an approval of the minutes thereof, whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to such director. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. 3.13 Fees and Compensation of Directors. Unless otherwise restricted by the Restated Certificate of Incorporation or these Bylaws, the Board shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the Board and may be paid a fixed sum for attendance at each meeting of the Board or a stated salary as director. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. 3.14 Rights of Inspection. Any director shall have the right to examine the corporation's stock ledger, a list of its stockholders and its other books and records for a purpose reasonably related to his or her position as a director. ARTICLE 4 Committees of Directors 4.1 Selection. The Board may, by resolution passed by a majority of the entire Board, designate one or more committees, each committee to consist of one or more of the directors of the corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or she or they constitute a quorum, may unanimously appoint another member of the Board to act at the meeting in the place of any such absent or disqualified member. 4.2 Power. Any such committee, to the extent provided in the resolution of the Board, shall have and may exercise all the powers and authority of the Board in the management of the business 8 12 and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to amending the Restated Certificate of Incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the Board as provided in Section 151(a) of the General Corporation Law of Delaware, fix any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation), adopting an agreement of merger or consolidation, recommending to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, recommending to the stockholders a dissolution of the corporation or a revocation of dissolution, removing or indemnifying directors or amending the Bylaws of the corporation; and, unless the resolution or the Restated Certificate of Incorporation expressly so provides, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock or to adopt a certificate of ownership and merger. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the Board. 4.3 Committee Minutes. Each committee shall keep regular minutes of its meetings and report the same to the Board when required. ARTICLE 5 Officers 5.1 Officers Designated. The officers of the corporation shall be chosen by the Board and shall be a President, a Secretary and a Chief Financial Officer. The Board may also choose a Chairman of the Board, one or more Vice Presidents, and one or more assistant Secretaries. Any number of offices may be held by the same person, unless the Restated Certificate of Incorporation or these Bylaws otherwise provide. 5.2 Appointment of Officers. The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Section 5.3 or 5.5 of this Article 5, shall be chosen in such manner and shall hold their offices for such terms as are prescribed by these Bylaws or determined by the board of directors. Each officer shall hold his or her office until his or her successor is elected and qualified or until his or her earlier resignation or removal. This section does not create any rights of employment or continued employment. The corporation may secure the fidelity of any or all of its officers or agents by bond or otherwise. 5.3 Subordinate Officers. The Board may appoint, and may empower the President to appoint, such other officers and agents as the business of the corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in the Bylaws or as the Board may from time to time determine. 5.4 Removal and Resignation of Officers. Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by an affirmative vote of the majority of the Board, at any regular or special meeting of the Board, or, 9 13 except in case of an officer chosen by the Board, by any officer upon whom such power of removal may be conferred by the Board. Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. 5.5 Vacancies in Offices. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these Bylaws for regular appointment to that office. 5.6 Compensation. The salaries of all officers of the corporation shall be fixed from time to time by the Board and no officer shall be prevented from receiving a salary because he is also a director of the corporation. 5.7 The Chairman of the Board. The Chairman of the Board, if such an officer be elected, shall, if present, perform such other powers and duties as may be assigned to him from time to time by the Board. If there is no President, the Chairman of the Board shall also be the Chief Executive Officer of the Corporation and shall have the powers and duties prescribed in Section 5.8 of this Article 5. 5.8 The President. Subject to such supervisory powers, if any, as may be given by the Board to the Chairman of the Board, if there be such an officer, the President shall be the Chief Executive Officer of the Corporation, shall preside at all meetings of the stockholders and in the absence of the Chairman of the Board, or if there be none, at all meetings of the Board, shall have general and active management of the business of the Corporation and shall see that all orders and resolutions of the Board are carried into effect. He or she shall execute bonds, mortgages and other contracts requiring a seal, under the seal of the Corporation, except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be expressly delegated by the Board to some other officer or agent of the Corporation. 5.9 The Vice President. The Vice President (or in the event there be more than one, the Vice Presidents in the order designated by the directors, or in the absence of any designation, in the order of their election), shall, in the absence of the President or in the event of his or her disability or refusal to act, perform the duties of the President, and when so acting, shall have the powers of and subject to all the restrictions upon the President. The Vice President(s) shall perform such other duties and have such other powers as may from time to time be prescribed for them by the Board, President, the Chairman of the Board or these Bylaws. 5.10 The Secretary. The Secretary shall attend all meetings of the Board and the stockholders and record all votes and the proceedings of the meetings in a book to be kept for that purpose and shall perform like duties for the standing committees, when required. The Secretary shall give, or cause to be given, notice of all meetings of stockholders and special meetings of the Board, and shall perform such other duties as may from time to time be prescribed by the Board, the 10 14 Chairman of the Board or the President, under whose supervision he or she shall act. The Secretary shall have custody of the seal of the corporation, and the Secretary, or an Assistant Secretary, shall have authority to affix the same to any instrument requiring it, and, when so affixed, the seal may be attested by his or her signature or by the signature of such Assistant Secretary. The Board may give general authority to any other officer to affix the seal of the corporation and to attest the affixing thereof by his or her signature. The Secretary shall keep, or cause to be kept, at the principal executive office or at the office of the corporation's transfer agent or registrar, as determined by resolution of the Board, a share register, or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates issued for the same and the number and date of cancellation of every certificate surrendered for cancellation. 5.11 The Assistant Secretary. The Assistant Secretary, or if there be more than one, the Assistant Secretaries in the order designated by the Board (or in the absence of any designation, in the order of their election) shall, in the absence of the Secretary or in the event of his or her inability or refusal to act, perform the duties and exercise the powers of the Secretary and shall perform such other duties and have such other powers as may from time to time be prescribed by the Board. 5.12 The Chief Financial Officer. The Chief Financial Officer shall have the custody of the Corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the Board. The Chief Financial Officer shall disburse the funds of the corporation as may be ordered by the Board, taking proper vouchers for such disbursements, and shall render to the President and the Board, at its regular meetings, or when the Board so requires, an account of all his or her transactions as Chief Financial Officer and of the financial condition of the corporation. ARTICLE 6 Stock Certificates 6.1 Certificates for Shares. The shares of the corporation shall be represented by certificates or shall be uncertificated. Certificates shall be signed by, or in the name of the corporation by, the Chairman of the Board, the President or a Vice President and by the Chief Financial Officer, the Secretary or an Assistant Secretary of the corporation. Within a reasonable time after the issuance or transfer of uncertificated stock, the corporation shall send to the registered owner thereof a written notice containing the information required by the General Corporation Law of the State of Delaware or a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. 11 15 6.2 Signatures on Certificates. Any or all of the signatures on a certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. 6.3 Transfer of Stock. Upon surrender to the corporation or the transfer agent of the corporation of a certificate of shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Upon receipt of proper transfer instructions from the registered owner of uncertificated share, such uncertificated shares shall be canceled and issuance of new equivalent uncertificated shares or certificated shares shall be made to the person entitled thereto and the transaction shall be recorded upon the books of the corporation. 6.4 Registered Stockholders. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a percent registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. 6.5 Lost, Stolen or Destroyed Certificates. The Board may direct that a new certificate or certificates be issued to replace any certificate or certificates theretofore issued by the corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing the issue of a new certificate or certificates, the Board may, in its discretion and as a condition precedent to the issuance thereof, require the owner of the lost, stolen or destroyed certificate or certificates, or his or her legal representative, to advertise the same in such manner as it shall require, and/or to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen or destroyed. ARTICLE 7 General Provisions 7.1 Dividends. Dividends upon the capital stock of the corporation, subject to any restrictions contained in the General Corporation Law of the State of Delaware or the provisions of the Restated Certificate of Incorporation, if any, may be declared by the Board at any regular or special meeting. Dividends may be paid in cash, in property or in shares of the capital stock, subject to the provisions of the Restated Certificate of Incorporation. 7.2 Dividend Reserve. Before payment of any dividend, there may be set aside out of any funds of the corporation available for dividends such sum or sums as the directors from time to 12 16 time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the corporation, or for such other purpose as the directors shall think conducive to the interest of the corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. 7.3 Checks. All checks or demands for money and notes of the corporation shall be signed by such officer or officers or such other person or persons as the Board may from time to time designate. 7.4 Corporate Seal. The Board may provide a suitable seal, containing the name of the corporation, which seal shall be in charge of the Secretary. If and when so directed by the Board or a committee thereof, duplicates of the seal may be kept and used by the Chief Financial Officer or by any Assistant Secretary. 7.5 Execution of Corporate Contracts and Instruments. The Board, except as otherwise provided in these Bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the Board or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 7.6 Representation of Shares of Other Corporations. The President or any Vice President or the Secretary or any Assistant Secretary of this corporation is authorized to vote, represent and exercise on behalf of this corporation all rights incident to any and all shares of any corporation or corporations standing in the name of this corporation. The authority herein granted to said officers to vote or represent on behalf of this corporation any and all shares held by this corporation in any other corporation or corporations may be exercised either by such officers in person or by any other person authorized so to do by proxy or power of attorney duly executed by said officers ARTICLE 8 Miscellaneous 8.1 Stock Options. Without the affirmative vote of the holders of more than fifty percent (50%) of the voting power of all of the then outstanding shares of the stock of the corporation entitled to vote generally in the election of directors, voting together as a single class, the corporation shall not grant to any officer of the corporation any stock options at less than the closing market price on the date of grant or reduce the price of any options which either (i) were granted as a non-qualified stock option grant to an incoming employee or vendor or (ii) were granted under any of the corporation's existing or future stock option plans, provided, however, that the foregoing shall not preclude the corporation from issuing new, lower priced options issued from a stock option plan to persons holding higher priced options from such plan, provided further, however, that if such new lower priced options are granted in exchange for such higher priced options, the shares covered by such higher priced options shall be canceled or surrendered and not available for re-grant under such stock option plan. 13 17 8.2 Amendments. The Board of Directors is expressly empowered to adopt, amend or repeal these Bylaws, provided, however, that any adoption, amendment or repeal of these Bylaws by the Board of Directors shall require the approval of at least sixty-six and two-thirds percent (66-2/3%) of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any resolution providing for adoption, amendment or repeal is presented to the board). The stockholders shall also have power to adopt, amend or repeal these Bylaws, provided, however, that in addition to any vote of the holders of any class or series of stock of this corporation required by law or by the Restated Certificate of Incorporation of this corporation, the affirmative vote of the holders of more than fifty percent (50%) of the voting power of all of the then outstanding shares of the stock of the corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required for such adoption, amendment or repeal by the stockholders of any provisions of these Bylaws. Notwithstanding the foregoing sentence, the affirmative vote of the holders of at least sixty-six and two-thirds percent (66 2/3%) of the voting power of all of the then outstanding shares of the stock of the corporation entitled to vote generally in the election of directors, voting together as a single class, shall be required for the amendment or repeal of Article 3.1 of these Bylaws. Notwithstanding the foregoing paragraph or any provision of the Restated Certificate of Incorporation, Section 8.1 of these Bylaws may only be amended by the affirmative vote of the holders of more than fifty percent (50%) of the voting power of all of the then outstanding shares of the stock of the corporation entitled to vote generally in the election of directors, voting together as a single class. 14 EX-10.39 4 ex10-39.txt 2ND AMENDED/RESTATED CREDIT & SECURITY AGREEMENT 1 EXHIBIT 10.39 -------------------------------- -------------------------------- SECOND AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT BY AND BETWEEN HESKA CORPORATION, DIAMOND ANIMAL HEALTH, INC., CENTER LABORATORIES, INC. AND WELLS FARGO BUSINESS CREDIT, INC. Dated as of: JUNE 14, 2000 -------------------------------- -------------------------------- 2 SECOND AMENDED AND RESTATED CREDIT AND SECURITY AGREEMENT Dated as of June 14, 2000 HESKA CORPORATION, a Delaware corporation ("Heska"), DIAMOND ANIMAL HEALTH, INC., an Iowa corporation ("Diamond"), and CENTER LABORATORIES, INC., a Delaware corporation ("Center") (each of Heska, Diamond, and Center may be referred to herein individually as a "Borrower" and collectively as the "Borrowers") and WELLS FARGO BUSINESS CREDIT, INC., a Minnesota corporation formerly known as Norwest Business Credit, Inc. (the "Lender"), hereby agree as follows: ARTICLE I DEFINITIONS Section 1.1 Definitions. For all purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires: (a) the terms defined in this Article have the meanings assigned to them in this Article, and include the plural as well as the singular; and (b) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP. "Accounts" for a Borrower means all of such Borrower's accounts, as such term is defined in the UCC, including without limitation the aggregate unpaid obligations of customers and other account debtors to such Borrower arising out of the sale or lease of goods or rendition of services by such Borrower on an open account or deferred payment basis. "Advance" means a Revolving Advance, a Term Loan A Advance, or a Term Loan B Advance. "Affiliate" or "Affiliates", for any Borrower, means any Person controlled by, controlling or under common control with such Borrower, including (without limitation) any Subsidiary of such Borrower. For purposes of this definition, "control," when used with respect to any specified Person, means the power to direct 3 the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise. "Aggregate Borrowing Base" means at any time the lesser of (a) the Maximum Line or (b) the sum of each Borrower's Borrowing Base. "Agreement" means this Second Amended and Restated Credit and Security Agreement, as amended, supplemented or restated from time to time. "Availability" for a Borrower means the difference of (i) such Borrower's Borrowing Base and (ii) the sum of (A) the outstanding principal balance of such Borrower's Revolving Note and (B) such Borrower's L/C Amount. "Banking Day" means a day other than a Saturday, Sunday or other day on which banks are generally not open for business in Denver, Colorado and Minneapolis, Minnesota. "Book Net Worth" of a Borrower means the aggregate of the common and preferred stockholders' equity in such Borrower, determined in accordance with GAAP. "Borrowing Base" for a Borrower means, at any time the lesser of: (a) the Maximum Line; or (b) subject to change from time to time in the Lender's sole discretion: (i) 85% of Eligible Accounts of such Borrower, plus (ii) the lesser of (A) the sum of (1) 30% of Eligible Inventory of such Borrower consisting of raw materials plus (2) 50% of Eligible Inventory of such Borrower consisting of finished goods, or (B) the difference of (1) $6,000,000 less (2) the aggregate amount of Advances made to all Borrowers other than such Borrower in reliance on Eligible Inventory, less (iii) for any Borrower other than Heska, the principal sum of all outstanding Advances made to Heska in reliance on such Borrower's Borrowing Base. "Capital Expenditures" for any Borrower for a period means any expenditure of money for the purchase or construction of assets, or for improvements or additions thereto during such period, which are capitalized on such Borrower's balance sheet, whether financed or unfinanced. - 3 4 "Cash" means instantly available cash and cash equivalents (including, without limitation, investments permitted by Section 7.4(a)(i) and the investments identified at item (i) on Schedule 7.4). "Center Revolving Note" means the revolving promissory note of Center and Heska of even date herewith, in the form attached as Exhibit C. "Collateral" means all of each Borrower's Equipment, General Intangibles, Inventory, Receivables, Investment Property, all sums on deposit in any Collateral Account, and any items in any Lockbox; together with (i) all substitutions and replacements for and products of any of the foregoing; (ii) proceeds of any and all of the foregoing; (iii) in the case of all tangible goods, all accessions; (iv) all accessories, attachments, parts, equipment and repairs now or hereafter attached or affixed to or used in connection with any tangible goods; (v) all warehouse receipts, bills of lading and other documents of title now or hereafter covering such goods; and (vi) all amounts on deposit in any Special Account. Notwithstanding the foregoing, except to the extent necessary for the Lender to fully exercise its rights and remedies hereunder with respect to Inventory and other tangible collateral of the Borrowers, the term "Collateral" shall not include any Intellectual Property License to the extent granting a security interest therein is prohibited by or would constitute a default under any such license (but only to the extent such prohibition is enforceable under applicable law). "Collateral Account" for Diamond has the meaning given in such Borrower's Collateral Account Agreement and for Heska and Center has the same meaning as the "Lender Account" in the Lockbox Agreement of each such Borrower. "Collateral Account Agreement" for Diamond means the Collateral Account Agreement dated as of October 16, 1997, by and among such Borrower, Norwest Bank Iowa, NA, and the Lender. "Commitment" means the Lender's commitment to make Advances to or for the Borrowers' account pursuant to Article II. "Credit Facility" means the credit facility being made available to the Borrowers by the Lender pursuant to Article II. "Debt" of any Person means all items of indebtedness or liability which in accordance with GAAP would be included in determining total liabilities as shown on the liabilities side of a balance sheet of that Person as at the date as of which Debt is to be determined. For purposes of determining a Person's aggregate Debt at any time, - 4 5 "Debt" shall also include the aggregate payments required to be made by such Person at any time under any lease that is considered a capitalized lease under GAAP. "Default" means an event that, with giving of notice or passage of time or both, would constitute an Event of Default. "Default Period" means any period of time beginning on the day on which a Default or Event of Default has occurred and ending on the date the Lender notifies the Borrowers in writing that such Default or Event of Default has been cured or waived. "Default Rate" means, (i) with respect to the Revolving Advances, an annual rate equal to three percent (3.0%) over the Revolving Floating Rate, which rate shall change when and as the Revolving Floating Rate changes, and (ii) with respect to the Term Advances, an annual rate equal to three percent (3.0%) over the Term Floating Rate, which rate shall change when and as the Term Floating Rate changes. "Diamond Revolving Note" means the revolving promissory note of Diamond and Heska of even date herewith, in the form attached as Exhibit B. "Discretionary Reduction" means any of the following that is unilaterally adopted by the Lender through the exercise of its sole discretion: (a) a reduction (in accordance with subsection (b) of the definition of Borrowing Base) in any advance rate under any Borrower's Borrowing Base; (b) disqualification (in accordance with subsection (xiv) of the definition of Eligible Accounts) of any Account that would otherwise have been an Eligible Account; or (c) disqualification (in accordance with subsection (x) of the definition of Eligible Inventory) of any Inventory that would otherwise have been Eligible Inventory. "Discretionary Reduction Date" means any date on which the Aggregate Borrowing Base is at least $3,000,000 less than it would have been had no Discretionary Reductions been adopted. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Eligible Accounts" for a Borrower means all unpaid Accounts of such Borrower, net of any credits, except the following shall not in any event be deemed Eligible Accounts: (i) That portion of Accounts with terms of 60 days or less that are over 60 days past due, and all other Accounts over 90 days past invoice date; - 5 6 (ii) That portion of Accounts that is disputed or subject to a claim of offset or a contra account (up to the amount of such dispute), including that portion of Accounts due from customers who have made prepayments, up to the amount of the prepayment; (iii) That portion of Accounts not yet earned by the final delivery of goods or rendition of services, as applicable, by the Borrower to the customer; (iv) Accounts owed by any unit of government, whether foreign or domestic (provided, however, that there shall be included in Eligible Accounts that portion of Accounts owed by such units of government for which the Borrower has provided evidence satisfactory to the Lender that (A) the Lender has a first priority perfected security interest and (B) such Accounts may be enforced by the Lender directly against such unit of government under all applicable laws); (v) Accounts owed by an account debtor located outside the United States and Canada which are not (A) backed by a bank letter of credit naming the Lender as beneficiary or assigned to the Lender, in the Lender's possession and acceptable to the Lender in all respects, in its reasonable discretion, or (B) covered by a foreign receivables insurance policy acceptable to the Lender in its sole discretion; (vi) Accounts owed by an account debtor that the Borrower has learned or has determined to be insolvent, is the subject of bankruptcy proceedings or has gone out of business; (vii) Accounts owed by a shareholder, Subsidiary, Affiliate, officer or employee of the Borrower; (viii) Accounts not subject to a duly perfected security interest in the Lender's favor or which are subject to any lien, security interest or claim in favor of any Person, other than Permitted Liens; (ix) That portion of Accounts that has been restructured, extended, amended or modified; (x) That portion of Accounts that constitutes advertising, finance charges, service charges or sales or excise taxes; (xi) Accounts owed by an account debtor, regardless of whether otherwise eligible, if 10% or more of the total amount due under Accounts from such debtor is ineligible under clauses (i), (ii) or (ix) above; (xii) That portion of the aggregate Accounts of a single customer owed to all Borrowers in the aggregate that exceeds 15% of all Accounts of all Borrowers in the aggregate; - 6 7 (xiii) That portion of Accounts that arises from research contracts; (xiv) Accounts, or portions thereof, otherwise deemed ineligible by the Lender in its sole discretion. "Eligible Inventory" for a Borrower means all Inventory of such Borrower, at the lower of cost or market value as determined in accordance with GAAP; provided, however, that the following shall not in any event be deemed Eligible Inventory: (i) Inventory that is: in-transit; located at any warehouse, job site or other premises not approved by the Lender in writing; located outside of the states, or localities, as applicable, in which the Lender has filed financing statements to perfect a first priority security interest in such Inventory; covered by any negotiable or non-negotiable warehouse receipt, bill of lading or other document of title; on consignment from or to any Person or subject to any bailment unless such consignee or bailee has executed an agreement with the Lender; (ii) Supplies, packaging or parts Inventory; (iii) Work-in-process Inventory; (iv) Inventory that is damaged, obsolete, or not currently saleable in the normal course of the Borrower's operations; (v) Inventory that the Borrower has returned, has attempted to return, is in the process of returning or intends to return to the vendor thereof; (vi) Inventory that is perishable or live; provided, however, that Inventory with an expiration date shall be deemed Eligible Inventory, up to 90 days before the expiration date of such Inventory; (vii) Inventory that is subject to a security interest in favor of any Person other than the Lender, except for Permitted Liens; (vii) Inventory manufactured by any Borrower pursuant to a license that (A) prohibits the Lender from exercising its rights against such Inventory or (B) restricts such Borrower's ability to grant the Lender the right to sell such Inventory, in either case unless the applicable licensor has agreed in writing to permit the Lender to exercise its rights and remedies against such Inventory; (viii) Sample Inventory; and (ix) Inventory otherwise deemed ineligible by the Lender in its sole discretion. "Environmental Laws" has the meaning specified in Section 5.12. - 7 8 "Equipment" of a Borrower means all of such Borrower's equipment, as such term is defined in the UCC, whether now owned or hereafter acquired, including but not limited to all present and future machinery, vehicles, furniture, fixtures, manufacturing equipment, shop equipment, office and recordkeeping equipment, parts, tools, supplies, and including specifically (without limitation) the goods described in any equipment schedule or list herewith or hereafter furnished to the Lender by any Borrower. "Event of Default" has the meaning specified in Section 8.1. "Existing Revolving Advances" has the meaning specified in Section 2.1. "Excess Collateral Base" for a Borrower means the difference of (i) such Borrower's Borrowing Base calculated without taking into account the limitation imposed by the Maximum Line, and (ii) the sum of (A) the outstanding principal balance of such Borrower's Revolving Note and (B) such Borrower's L/C Amount. "Expanded Heska Borrowing Base" on a given date means the lesser of (a) the Maximum Line or (b) subject to change from time to time in the Lender's sole discretion, the sum of (i) Heska's Borrowing Base, plus (ii) for each Borrower other than Heska, the lesser of (A) such Borrower's Availability as of such date or (B) the amount by which the Tangible Net Worth of such Borrower on such date exceeds $2,000,000. "Factory Mortgage" means the Combination Mortgage, Assignment of Rents and Fixture Financing Statement, executed by the Borrower for the benefit of the Lender, dated as of September 8, 1998, concerning the Factory Mortgaged Property, as amended by a First Amendment to Combination Mortgage, Assignment of Rents and Fixture Financing Statement of even date herewith. "Factory Mortgaged Property" means Mortgaged Property as defined in the Factory Mortgage. "Farm Mortgage" means the Combination Mortgage, Assignment of Rents and Fixture Financing Statement, executed by the Borrower for the benefit of the Lender, dated as of September 8, 1998, concerning the Farm Mortgaged Property, as amended by a First Amendment to Combination Mortgage, Assignment of Rents and Fixture Financing Statement of even date herewith. "Farm Mortgaged Property" means Mortgaged Property as defined in the Farm Mortgage. "Funding Date" has the meaning given in Section 2.2. - 8 9 "GAAP" means generally accepted accounting principles, applied on a basis consistent with the accounting practices applied in the financial statements described in Section 5.5. "General Intangibles" of a Borrower means all of such Borrower's general intangibles, as such term is defined in the UCC, whether now owned or hereafter acquired, including (without limitation) all present and future patents, patent applications, copyrights, trademarks, trade names, trade secrets, customer or supplier lists and contracts, manuals, operating instructions, permits, franchises, the right to use the Borrower's name, and the goodwill of the Borrower's business. "Guarantors" shall mean Diamond, Center, and any other Person who executes a guaranty of all or any part of the Obligations for the benefit of the Lender. "Hazardous Substance" has the meaning given in Section 5.12. "Heska Revolving Note" means Heska's revolving promissory note of even date herewith, in the form attached as Exhibit A. "Inactive Period" means a period beginning on the date of this Agreement and ending on the date that the Lender gives notice to the Borrower that an audit has been completed and all outstanding audit issues with respect to the Borrowers' Collateral have been resolved to the Lender's satisfaction; provided, however, that the Lender shall use commercially reasonable efforts to cooperate with the Borrowers in resolving such issues in an efficient manner. "Intellectual Property License" means a license owned by any Borrower, which license allows such Borrower the use of any patent, trademark, trade name, or copyrighted material owned by a Person that is not a Borrower. "Inventory" of a Borrower means all of such Borrower's inventory, as such term is defined in the UCC, whether now owned or hereafter acquired, whether consisting of whole goods, spare parts or components, supplies or materials, whether acquired, held or furnished for sale, for lease or under service contracts or for manufacture or processing, and wherever located. "Investment Property" of a Borrower means all of such Borrower's investment property, as such term is defined in the UCC, whether now owned or hereafter acquired, including but not limited to all securities, security entitlements, securities accounts, commodity contracts, commodity accounts, stocks, bonds, mutual fund shares, money market shares and U.S. Government securities. "Issuer" means the issuer of any Letter of Credit. - 9 10 "L/C Amount" for a Borrower means the sum of (i) the Aggregate Face Amount of any issued and outstanding Letters of Credit for which the Borrower is the account party and (ii) the unpaid amount of the Obligation of Reimbursement with respect to such Letters of Credit. "L/C Application" means an application and agreement for Letters of Credit in a form acceptable to the Issuer and the Lender. "Letter of Credit" has the meaning given it in Section 2.18. "Liquidity" means the sum of Cash plus Excess Collateral Base. "Loan Documents" means this Agreement, the Notes and the Security Documents. "Lockbox" for any Borrower has the meaning given in such Borrower's Lockbox Agreement. "Lockbox Agreement" for Diamond means the Agreement as to Lockbox Service by and among such Borrower, Norwest Bank Iowa, NA, and the Lender, dated as of October 16, 1997, and for Heska and Center means the Lockbox and Collection Account Agreement among such Borrower, Regulus West LLC ("Regulus"), Wells Fargo Bank, NA, and Lender, dated as of the date hereof. "Maturity Date" means May 31, 2002. "Maximum Line" means $10,000,000, unless said amount is reduced pursuant to Section 2.12, in which event it means the amount to which said amount is reduced. "Minimum Interest Charge" has the meaning given in Section 2.8(d). "Net Income" for a Borrower means, for any period, after-tax net income from continuing operations (that is, not including extraordinary items, or gains or losses from unusual items or discontinued operations), in each case for such Borrower for such period, as determined in accordance with GAAP. "Note" means the Revolving Note, the Term Loan A Note, or the Term Loan B Note and "Notes" means the Revolving Note, the Term Loan A Note, and the Term Loan B Note. "Obligation of Reimbursement" has the meaning given in Section 2.19. - 10 11 "Obligations" means each and every debt, liability and obligation of every type and description which any Borrower may now or at any time hereafter owe to the Lender, related to the indebtedness arising under this Agreement, the Notes or any other agreement between any such Borrower and the Lender, entered into in connection with the Credit Facility, including without limitation the Obligation of Reimbursement. "Old Credit Documents" means that certain Amended and Restated Credit and Security Agreement dated as of September 8, 1998 by and between Diamond and the Lender, as amended by a First Amendment to Credit and Security Agreement, dated as of August 26, 1999. "Old Revolving Note" means Diamond's revolving promissory note dated as of September 8, 1998, payable to the order of the Lender in the original principal amount of $2,500,000. "Old Term Loan A Note" means Diamond's promissory note dated as of September 8, 1998, payable to the order of the Lender in the original principal amount of $1,600,000. "Old Term Loan B Note" means Diamond's promissory note dated as of September 8, 1998, payable to the order of the Lender in the original principal amount of $2,570,000. "Other Lender" means a lender who is providing equipment financing to the Borrower, where a condition of such financing is that no other security interests can be granted in such equipment (other than nonconsensual liens) while the underlying debt is still outstanding. "Permitted Lien" has the meaning given in Section 7.1. "Person" means any individual, corporation, partnership, joint venture, limited liability company, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Plan" means an employee benefit plan or other plan maintained for the Borrower's employees and covered by Title IV of ERISA. "Premises" means all premises where any Borrower conducts its business and has any rights of possession, including (without limitation) the premises legally described in Exhibit F attached hereto. - 11 12 "Prime Rate" means the rate publicly announced from time to time by Wells Fargo Bank, N.A. as its "prime rate" or, if such bank ceases to announce a rate so designated, any similar successor rate designated by the Lender. "Receivables" of a Borrower means each and every right of such Borrower to the payment of money, whether such right to payment now exists or hereafter arises, whether such right to payment arises out of a sale, lease or other disposition of goods or other property, out of a rendering of services, out of a loan, out of the overpayment of taxes or other liabilities, or otherwise arises under any contract or agreement, whether such right to payment is created, generated or earned by such Borrower or by some other person who subsequently transfers such person's interest to such Borrower, whether such right to payment is or is not already earned by performance, and howsoever such right to payment may be evidenced, together with all other rights and interests (including all liens and security interests) which such Borrower may at any time have by law or agreement against any account debtor or other obligor obligated to make any such payment or against any property of such account debtor or other obligor; all including but not limited to all present and future accounts, contract rights, loans and obligations receivable, chattel papers, bonds, notes and other debt instruments, tax refunds and rights to payment in the nature of general intangibles. "Reportable Event" shall have the meaning assigned to that term in Title IV of ERISA. "Revolving Advance" has the meaning given in Section 2.2. "Revolving Floating Rate" means an annual rate equal to the sum of the Prime Rate plus the Spread, which annual rate shall change when and as the Prime Rate changes. "Revolving Note" means the Heska Revolving Note, the Diamond Revolving Note, and the Center Revolving Note. "Security Documents" means this Agreement, each Collateral Account Agreement, each Lockbox Agreement, the Factory Mortgage, the Farm Mortgage, and any other document delivered to the Lender from time to time to secure the Obligations, as the same may hereafter be amended, supplemented or restated from time to time. "Security Interest" has the meaning given in Section 3.1. - 12 13 "Special Account" means a specified cash collateral account maintained by a financial institution acceptable to the Lender in connection with Letters of Credit, as contemplated by Sections 2.20 and 3.8. "Spread" has the meaning given in Section 2.7. "Subsidiary" of any Borrower means any corporation of which more than 50% of the outstanding shares of capital stock having general voting power under ordinary circumstances to elect a majority of the board of directors of such corporation, irrespective of whether or not at the time stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency, is at the time directly or indirectly owned by such Borrower, by such Borrower and one or more other Subsidiaries, or by one or more other Subsidiaries. "Tangible Net Worth" of a Borrower means the difference between (i) the tangible assets of such Borrower, which, in accordance with GAAP are tangible assets, after deducting adequate reserves in each case where, in accordance with GAAP, a reserve is proper and (ii) all Debt of such Borrower; provided, however, that notwithstanding the foregoing in no event shall there be included as such tangible assets patents, trademarks, trade names, copyrights, licenses, goodwill, receivables from Affiliates, directors, officers or employees, prepaid expenses, deposits, deferred charges or treasury stock or any securities or Debt of such Borrower or any other securities unless the same are readily marketable in the United States of America or entitled to be used as a credit against federal income tax liabilities, and any other assets designated from time to time by the Lender, in its reasonable discretion. "Tax Expense" for a Borrower as of any date means state and federal income taxes recorded by such Borrower for the year-to-date period ending on such date. "Term Advances" means the Term Loan A Advance and the Term Loan B Advances. "Term Floating Rate" means an annual rate equal to the sum of the Prime Rate plus the Spread, which annual rate shall change when and as the Prime Rate changes. "Term Loan A Advance" has the meaning specified in Section 2.3. "Term Loan A Note" means the promissory note, payable to the order of the Lender in substantially the form of Exhibit D hereto and any note or notes issued in substitution therefor, as the same may hereafter be amended, supplemented or restated from time to time. "Term Loan B Advance" has the meaning specified in Section 2.5. - 13 14 "Term Loan B Note" means the promissory note, payable to the order of the Lender in substantially the form of Exhibit E hereto and any note or notes issued in substitution therefor, as the same may hereafter be amended, supplemented or restated from time to time. "Termination Date" means the earliest of (i) the Maturity Date, (ii) the date the Borrower terminates the Credit Facility, or (iii) the date the Lender demands payment of the Obligations after an Event of Default pursuant to Section 8.2 "UCC" means the Uniform Commercial Code as in effect from time to time in the state designated in Section 9.15 as the state whose laws shall govern this Agreement, or in any other state whose laws are held to govern this Agreement or any portion hereof. "Wells Fargo Bank" means Wells Fargo Bank West, National Association. Section 1.2 Cross References. All references in this Agreement to Articles, Sections and subsections, shall be to Articles, Sections and subsections of this Agreement unless otherwise explicitly specified. ARTICLE II AMOUNT AND TERMS OF THE CREDIT FACILITY Section 2.1 Existing Advances. (a) EXISTING REVOLVING ADVANCES. The Lender has made various revolving advances to Diamond (the "Existing Revolving Advances") as evidenced by the Old Credit Documents. As of June 13, 2000, the outstanding principal balance of the Existing Revolving Advances was $1,240,034.96. Upon execution and delivery of this Agreement, the Existing Revolving Advances shall be deemed to be Revolving Advances pursuant to Section 2.2 and repayable in accordance with the Diamond Revolving Note. To the extent the Diamond Revolving Note evidences the Existing Revolving Advances, the Diamond Revolving Note shall be issued in substitution for and replacement of but not in payment of the Old Revolving Note. (b) EXISTING TERM ADVANCES. In addition to the foregoing, the Lender has made a Term Loan A Advance to Diamond in the amount of $1,600,000 and a Term Loan B Advance to Diamond in the amount of $2,250,000, each as evidenced by the Old Credit Documents. As of June 13, 2000, the outstanding principal balance of the Term Loan A Advance was $1,040,000.14, and the outstanding principal balance of the Term Loan B Advance was $2,062,500. The Term Loan A Note shall be issued in substitution for and - 14 15 replacement of, but not in payment of, the Old Term Loan A Note, and the Term Loan B Note shall be issued in substitution for and replacement of, but not in payment of, the Old Term Loan B Note. Section 2.2 Revolving Advances. The Lender agrees, on the terms and subject to the conditions herein set forth, to make advances (the "Revolving Advances") to any Borrower from time to time from the date the Inactive Period ends (the "Funding Date") to the Termination Date, on the terms and subject to the conditions herein set forth. The Lender shall have no obligation to make a Revolving Advance to a Borrower if, after giving effect to such requested Revolving Advance, (a) the sum of the outstanding and unpaid Revolving Advances would exceed the Aggregate Borrowing Base, (b) the sum of the outstanding and unpaid Revolving Advances to any Borrower other than Heska would exceed such Borrower's Borrowing Base, (c) the sum of the outstanding and unpaid Revolving Advances to Heska would exceed the Expanded Heska Borrowing Base, or (d) during any Default Period, the sum of the outstanding and unpaid Revolving Advances to Heska would exceed Heska's Borrowing Base. Each Borrower's obligation to pay the Revolving Advances shall be evidenced by such Borrower's Revolving Note and shall be secured by the Collateral as provided in Article III and the Mortgaged Property as defined in each of the Factory Mortgage and the Farm Mortgage. Within the limits set forth in this Section 2.2, each Borrower may borrow, prepay pursuant to Section 2.12 and reborrow. Each Borrower agrees to comply with the following procedures in requesting Revolving Advances under this Section 2.2: (a) Such Borrower shall make each request for a Revolving Advance to the Lender before 11:00 a.m. (Denver time) of the day of the requested Revolving Advance. Requests may be made in writing or by telephone, specifying the date of the requested Revolving Advance and the amount thereof. Each request shall be by (i) any officer of such Borrower; or (ii) any person designated as such Borrower's agent by any officer of such Borrower in a writing delivered to the Lender; or (iii) any person whom the Lender reasonably believes to be an officer of such Borrower or such a designated agent. (b) Upon fulfillment of the applicable conditions set forth in Article IV, the Lender shall disburse the proceeds of the requested Revolving Advance by crediting the same to such Borrower's demand deposit account maintained with Wells Fargo Bank unless the Lender and the Borrower shall agree in writing to another manner of disbursement. Upon the Lender's request, such Borrower shall promptly confirm each telephonic request for an Advance by executing and delivering an appropriate confirmation certificate to the Lender. Each Borrower shall repay all such Advances even if the Lender does not receive such confirmation and even if the person requesting such Advance was not in fact authorized to do so. Any request for an Advance by a Borrower, whether written or telephonic, shall be deemed to be a - 15 16 representation by such Borrower that the conditions set forth in Section 4.2 have been satisfied as of the time of the request. Section 2.3 Term Loan A Advance. The Lender has previously made an advance to Diamond in the amount of $1,600,000 (the "Term Loan A Advance"). The Borrowers' obligation to pay the Term Loan A Advance shall be evidenced by the Term Loan A Note and shall be secured by the Collateral as provided in Article III and the Mortgaged Property as defined in each of the Factory Mortgage and the Farm Mortgage. Section 2.4 Payment of Term Loan A Note. The outstanding principal balance of the Term Loan A Note shall be due and payable as follows: (a) On June 1, 2000 and the first day of each month thereafter, in monthly installments of $18,667; and (b) On the Maturity Date, the entire unpaid principal balance of the Term Loan A Note, and all unpaid interest accrued thereon, shall in any event be due and payable. Section 2.5 Term Loan B Advances. The Lender has previously made advances to Diamond in the amount of $2,250,000 (the "Term Loan B Advances"). The Borrowers' obligation to pay the Term Loan B Advances shall be evidenced by the Term Loan B Note and shall be secured by the Collateral as provided in Article III and the Mortgaged Property as defined in each of the Factory Mortgage and the Farm Mortgage. Section 2.6 Payment of Term Loan B Note. The outstanding principal balance of the Term Loan B Note shall be due and payable as follows: (a) On June 1, 2000 and the first day of each month thereafter, in monthly installments of $17,658; and (b) On the Maturity Date, the entire unpaid principal balance of the Term Loan B Note, and all unpaid interest accrued thereon, shall in any event be due and payable. Section 2.7 Spread. The spread (the "Spread") means, with respect to calculation of the Revolving Floating Rate, one percent (1.0%), and with respect to calculation of the Term Floating Rate, one and one-quarter percent (1.25%). Section 2.8 Interest; Minimum Interest Charge; Default Interest; Participations; Usury. Interest accruing on the Notes shall be due and payable in arrears on the first day of each month. - 16 17 (a) REVOLVING NOTE. Except as set forth in Sections 2.8(e), 2.8(f) and 2.8(g), the outstanding principal balance of the Revolving Note shall bear interest at the Revolving Floating Rate. (b) TERM LOAN A NOTE. Except as set forth in Sections 2.8(e), 2.8(f) and 2.8(g), the outstanding principal balance of the Term Loan A Note shall bear interest at the Term Floating Rate. (c) TERM LOAN B NOTE. Except as set forth in Sections 2.8(e), 2.8(f) and 2.8(g), the outstanding principal balance of the Term Loan B Note shall bear interest at the Term Floating Rate. (d) MINIMUM INTEREST CHARGE. Notwithstanding Sections 2.8(a), 2.8(b), 2.8(c) and 2.8(e), the Borrowers shall pay to the Lender interest of not less than $100,000 per calendar year (the "Minimum Interest Charge") during the term of this Agreement, and the Borrowers shall pay any deficiency between the Minimum Interest Charge and the amount of interest otherwise calculated under Sections 2.8(a), 2.8(b), or 2.8(c) on the date and in the manner provided in Section 2.10; provided, however, that if the period for which the Minimum Interest Charge is being calculated is shorter than one year, such amount shall be prorated on a per diem basis for such shorter period. (e) DEFAULT INTEREST RATE. At any time during any Default Period, in the Lender's sole discretion and without waiving any of its other rights and remedies, the principal of the Advances outstanding from time to time shall bear interest at the Default Rate, effective for any periods designated by the Lender from time to time during that Default Period. (f) PARTICIPATIONS. If any Person shall acquire a participation in the Advances under this Agreement, the Borrower shall be obligated to the Lender to pay the full amount of all interest calculated under this Section 2.8, along with all other fees, charges and other amounts due under this Agreement, regardless if such Person elects to accept interest with respect to its participation at a lower rate than the Revolving Floating Rate or the Term Floating Rate, or otherwise elects to accept less than its prorata share of such fees, charges and other amounts due under this Agreement. (g) USURY. In any event no rate change shall be put into effect which would result in a rate greater than the highest rate permitted by law. - 17 18 Section 2.9 Fees. (a) ORIGINATION FEE. The Borrower hereby agrees to pay the Lender a fully earned and non-refundable origination fee in the amount of $18,750, which fee is due and payable upon the execution of this Agreement. (b) UNUSED LINE FEE. For the purposes of this Section 2.11(b), "Unused Amount" means the Maximum Line reduced by (i) outstanding Revolving Advances and (ii) the L/C Amount. The Borrowers agree to pay to the Lender an unused line fee at the rate of one-quarter of one percent (0.25%) per annum on the average daily Unused Amount from the date of this Agreement to and including the Termination Date, due and payable monthly in arrears on the first day of the month and on the Termination Date. (C) AUDIT FEES. The Borrower hereby agrees to pay the Lender, on demand, audit fees in connection with any audits or inspections conducted by the Lender of any Collateral or the Borrower's operations or business at the rates established from time to time by the Lender as its audit fees (which fees are currently $70 per hour per auditor), together with all actual out-of-pocket costs and expenses incurred in conducting any such audit or inspection, such audits shall be conducted, at the least, on a quarterly basis; provided, however, that the Borrowers shall not have to reimburse the Lender for such fees, costs and expenses incurred during the Inactive Period except for audits conducted at the Borrowers' request to bring the Inactive Period to an end. In addition, except during Default Periods, the Borrowers shall not have to reimburse the Lender for such fees, costs and expenses to the extent they exceed $80,000 (including audits during the Inactive Period) during the period beginning on the date of this Agreement and ending on the first anniversary of this Agreement. If Center is sold, this limitation shall be renegotiated in a commercially reasonable manner by the Lender and the Borrowers. (d) LETTER OF CREDIT FEES. The Borrower agrees to pay the Lender a fee with respect to each Letter of Credit, if any, accruing on a daily basis and computed at the annual rate of two and one-half percent (2.5%) of the aggregate amount that may then be drawn on all issued and outstanding Letters of Credit assuming compliance with all conditions for drawing thereunder (the "Aggregate Face Amount"), from and including the date of issuance of such Letter of Credit until such date as such Letter of Credit shall terminate by its terms or be returned to the Lender, due and payable monthly in arrears on the first day of each month and on the Termination Date; provided, however that during Default Periods, in the Lender's sole discretion and without waiving any of its other rights and remedies, such fee shall increase to five and one-half percent (5.5%) of the Aggregate Face Amount. The foregoing fee shall be in - 18 19 addition to any and all fees, commissions and charges of any Issuer of a Letter of Credit with respect to or in connection with such Letter of Credit (e) LETTER OF CREDIT ADMINISTRATIVE FEES. The Borrower agrees to pay the Lender, on demand, the administrative fees charged by the Issuer in connection with the honoring of drafts under any Letter of Credit, amendments thereto, transfers thereof and all other activity with respect to the Letters of Credit at the then-current rates published by the Issuer for such services rendered on behalf of customers of the Issuer generally. Section 2.10 Computation of Interest and Fees; When Interest Due and Payable. Interest accruing on the outstanding principal balance of the Advances and fees hereunder outstanding from time to time shall be computed on the basis of actual number of days elapsed in a year of 360 days. Interest shall be payable in arrears on the first day of each month and on the Termination Date. Section 2.11 Capital Adequacy. If any Related Lender determines at any time that its Return has been reduced as a result of any Rule Change, such Related Lender may require the Borrower to pay it the amount necessary to restore its Return to what it would have been had there been no Rule Change. For purposes of this Section 2.11: (a) "Capital Adequacy Rule" means any law, rule, regulation, guideline, directive, requirement or request regarding capital adequacy, or the interpretation or administration thereof by any governmental or regulatory authority, central bank or comparable agency, whether or not having the force of law, that applies to any Related Lender. Such rules include rules requiring financial institutions to maintain total capital in amounts based upon percentages of outstanding loans, binding loan commitments and letters of credit. (b) "L/C Rule" means any law, rule, regulation, guideline, directive, requirement or request regarding letters of credit, or the interpretation or administration thereof by any governmental or regulatory authority, central bank or comparable agency, whether or not having the force of law, that applies to any Related Lender. Such rules include rules imposing taxes, duties or other similar charges, or mandating reserves, special deposits or similar requirements against assets of, deposits with or for the account of, or credit extended by any Related Lender, on letters of credit. - 19 20 (c) "Related Lender" includes (but is not limited to) the Lender, any parent corporation of the Lender and any assignee of any interest of the Lender hereunder and any participant in the loans made hereunder. (d) "Return" for any period, means the return as determined by a Related Lender on the Advances and Letters of Credit based upon its total capital requirements and a reasonable attribution formula that takes account of the Capital Adequacy Rules and the L/C Rules then in effect, costs of issuing or maintaining any Letter of Credit and amounts received or receivable under this Agreement or the Notes with respect to any Advance or Letter of Credit. Return may be calculated for each calendar quarter and for the shorter period between the end of a calendar quarter and the date of termination of whole of this Agreement. (e) "Rule Change" means any change in any Capital Adequacy Rule or L/C Rule occurring after the date of this Agreement, but the term does not include any changes in applicable requirements that at the Closing Date are scheduled to take place under the existing capital Adequacy Rules or L/C Rules or any increases in the capital that any Related Lender is required to maintain to the extent that the increases are required due to a regulatory authority's assessment of the financial condition of such Related Lender. The Lender will promptly notify the Borrower of any event of which it has knowledge, occurring after the date hereof, which will entitle the Lender to compensation pursuant to this Section 2.11. Certificates of any Related Lender sent to the Borrower from time to time claiming compensation under this Section 2.11, stating the reason therefor and setting forth in reasonable detail the calculation of the additional amount or amounts to be paid to the Related Lender hereunder to restore its Return shall be conclusive absent manifest error. In determining such amounts, the Related Lender may use any reasonable averaging and attribution methods. Section 2.12 Voluntary Prepayment; Reduction of the Maximum Line; Termination of the Credit Facility by the Borrower. Except as otherwise provided herein, each Borrower may prepay the Revolving Advances made to it in whole at any time or from time to time in part. Diamond may prepay the Term Loan A Advances (other than in accordance with Section 2.4) or prepay the Term Loan B Advances (other than in accordance with Section 2.6), or Heska may terminate the Credit Facility or reduce the Maximum Line at any time if it (i) gives the Lender at least 30 days' prior written notice and (ii) pays the Lender the prepayment, termination or line reduction fees in accordance with Section 2.13. Any prepayment of the Term Loan A Advances (other than in accordance with Section 2.4), any prepayment of the Term Loan B Advances (other than in accordance with Section 2.6), or reduction in the Maximum Line must be in an amount not less than $250,000 or an integral multiple thereof. If the Borrower reduces the Maximum Line to zero, all Obligations - 20 21 shall be immediately due and payable. Any partial prepayments of the Term Loan A Note (other than in accordance with Section 2.4), and any partial prepayments of the Term Loan B Note (other than in accordance with Section 2.6), shall be applied to principal payments due and owing in inverse order of their maturities. Upon termination of the Credit Facility and payment and performance of all Obligations, the Lender shall release or terminate the Security Interest and the Security Documents to which the Borrowers are entitled by law. Section 2.13 Termination, Line Reduction and Prepayment Fees; Waiver of Termination, Prepayment and Line Reduction Fees. (a) TERMINATION AND LINE REDUCTION FEES. If the Credit Facility is terminated for any reason as of a date other than the Maturity Date, or Heska reduces the Maximum Line, the Borrowers shall pay the Lender a fee in an amount equal to one percent (1.0%) of the Maximum Line (or the reduction, as the case may be). (b) PREPAYMENT FEES. If the Term Loan A Note or the Term Loan B Note is prepaid for any reason except in accordance with Sections 2.4 and 2.6, respectively, the Borrowers shall pay to the Lender a fee in an amount equal to one percent (1.0%) of the amount prepaid. (c) WAIVER OF TERMINATION AND LINE REDUCTION FEES. The Borrowers will not be required to pay the termination or line reduction fees otherwise due under this Section 2.13 if such termination or line reduction is made (i) because of refinancing of the Borrowers by an affiliate of the Lender, (ii) within 60 days after any demand for payment upon any Borrower in accordance with Section 2.11, or (iii) within 60 days after any Discretionary Reduction Date. Section 2.14 Mandatory Prepayment. Without notice or demand, if the outstanding principal balance of the Revolving Advances shall at any time exceed the Borrowing Base, the Borrower shall immediately (or, to the extent such condition is a result of a Discretionary Reduction, within 5 Business Days) prepay the Revolving Advances to the extent necessary to eliminate such excess. Any payment received by the Lender under Section 2.12 may be applied to the Obligations, in such order and in such amounts as the Lender, in its discretion, may from time to time determine; provided that any prepayment under Section 2.12 which the Borrower designates as a payment of the Revolving Advances, shall be applied to the Revolving Advances; provided, further, that any prepayment under Section 2.12 which the Borrower designates as a partial prepayment of the Term Loan A Note or the Term Loan B Note, shall be applied to principal installments of the Term Loan A Note or the Term Loan B Note respectively, in inverse order of maturity. Section 2.15 Payment. All payments to the Lender shall be made in immediately available funds and shall be applied to the Obligations upon receipt by the - 21 22 Lender. The Lender may hold all payments not constituting immediately available funds for three (3) days before applying them to the Obligations. Notwithstanding anything in Section 2.2, the Borrower hereby authorizes the Lender, in its discretion at any time or from time to time without the Borrower's request and even if the conditions set forth in Section 4.2 would not be satisfied, to make a Revolving Advance in an amount equal to the portion of the Obligations from time to time due and payable. Section 2.16 Payment on Non-Banking Days. Whenever any payment to be made hereunder shall be stated to be due on a day which is not a Banking Day, such payment may be made on the next succeeding Banking Day, and such extension of time shall in such case be included in the computation of interest on the Advances or the fees hereunder, as the case may be. Section 2.17 Liability Records. The Lender may maintain from time to time, at its discretion, liability records as to the Obligations. All entries made on any such record shall be presumed correct until the Borrower establishes the contrary. Upon the Lender's demand, the Borrower will admit and certify in writing the exact principal balance of the Obligations that the Borrower then asserts to be outstanding. Any billing statement or accounting rendered by the Lender shall be conclusive and fully binding on the Borrower unless the Borrower gives the Lender specific written notice of exception within 30 days after receipt. Section 2.18 Issuance of Letters of Credit. (a) Upon any Borrower's Request the Lender shall cause an Issuer to issue, from the Funding Date to the Termination Date, one or more documentary letters of credit (each, a "Letter of Credit") for such Borrower's account, provided that: (i) The Lender shall have no obligation to cause an Issuer to issue any Letter of Credit for the benefit of the Borrower if (A) a Default Period exists, or (B) the face amount of the Letter of Credit to be issued would exceed the lesser of: (1) $500,000 less the L/C Amount, or (2) the Borrowing Base less the sum of (a) all outstanding and unpaid Revolving Advances and (b) the L/C Amount. Each Letter of Credit, if any, shall be issued pursuant to a separate L/C Application entered by the Borrower and the Lender for the benefit of the Issuer, completed in a manner satisfactory to the Lender and the Issuer. The terms and conditions set forth in each such L/C Application shall supplement the terms and conditions hereof, but if the terms of any such L/C Application - 22 23 and the terms of this Agreement are inconsistent, the terms hereof shall control. (b) No Letter of Credit shall be issued with an expiry date later than the Maturity Date. (c) Any request for the issuance of a Letter of Credit under this Section 2.18 shall be deemed to be a representation by the Borrower that the statements set forth in Section 4.2 hereof are correct as of the time of the request. Section 2.19 Payment of Amounts Drawn Under Letters of Credit. The Borrower acknowledges that the Lender, as co-applicant, will be liable to the Issuer of any Letter of Credit for reimbursement of any and all draws thereunder and all other amounts required to be paid under the applicable L/C Application. Accordingly, the Borrower agrees to pay to the Lender any and all amounts required to be paid under the applicable L/C Application, when and as required to be paid thereby, and the amounts designated below, when and as designated: (a) The Borrower hereby agrees to pay the Lender on the day a draft is honored under any Letter of Credit a sum equal to all amounts drawn under such Letter of Credit plus any and all reasonable charges and expenses that the Issuer or the Lender may pay or incur relative to such draw, plus interest on all such amounts, charges and expenses as set forth below (all such amounts are hereinafter referred to as the "Obligation of Reimbursement"). (b) The Borrower hereby agrees to pay the Lender on demand interest on all amounts, charges and expenses payable by the Borrower to the Lender under this Section 2.19, accrued from the date any such draft, charge or expense is paid by the Issuer until payment in full by the Borrower at the Revolving Floating Rate. If the Borrower fails to pay to the Lender promptly the amount of its Obligation of Reimbursement in accordance with the terms hereof and the L/C Application pursuant to which such Letter of Credit was issued, the Lender is hereby irrevocably authorized and directed, in its sole discretion, to make a Revolving Advance in an amount sufficient to discharge the Obligation of Reimbursement, including all interest accrued thereon but unpaid at the time of such Revolving Advance, and such Revolving Advance shall be evidenced by the Revolving Note and shall bear interest as provided in Section 2.8 hereof. Section 2.20 Special Account. If this Credit Facility is terminated for any reason whatsoever, while any Letter of Credit is outstanding, the Borrower shall thereupon pay the Lender in immediately available funds for deposit in the Special Account an amount - 23 24 equal to the maximum aggregate amount available to be drawn under all Letters of Credit then outstanding, assuming compliance with all conditions for drawing thereunder. The Special Account shall be maintained for the Lender by any financial institution acceptable to the Lender. Any interest earned on amounts deposited in the Special Account shall be credited to the Special Account. Amounts on deposit in the Special Account may be applied by the Lender at any time or from time to time to the Borrower's Obligation of Reimbursement or any other Obligations, in the Lender's sole discretion, and shall not be subject to withdrawal by the Borrower so long as the Lender maintains a security interest therein. The Lender agrees to transfer any balance in the Special Account to the Borrower at such time as the Lender is required to release its security interest in the Special Account under applicable law. Section 2.21 Obligations Absolute. The obligations of the Borrower arising under Section 2.18 shall be absolute, unconditional and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement, under all circumstances whatsoever, including (without limitation) the following circumstances: (a) any lack of validity or enforceability of any Letter of Credit or any other agreement or instrument relating to any Letter of Credit (collectively the "Related Documents"); (b) any amendment or waiver of or any consent to departure from all or any of the Related Documents; (c) the existence of any claim, setoff, defense or other right which the Borrower may have at any time, against any beneficiary or any transferee of any Letter of Credit (or any persons or entities for whom any such beneficiary or any such transferee may be acting), or other person or entity, whether in connection with this Agreement, the transactions contemplated herein or in the Related Documents or any unrelated transactions; (d) any statement or any other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect whatsoever; (e) payment by or on behalf of the Issuer or the Lender under any Letter of Credit against presentation of a draft or certificate which does not strictly comply with the terms of such Letter of Credit; or (f) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing. - 24 25 ARTICLE III SECURITY INTEREST; OCCUPANCY; SETOFF Section 3.1 Grant of Security Interest. The Borrower hereby pledges, assigns and grants to the Lender a security interest (collectively referred to as the "Security Interest") in the Collateral, as security for the payment and performance of the Obligations; provided, however, that no security interest is granted in any Collateral specifically identified in the financing statements filed by the Other Lenders (the "Other Lender's Collateral"); provided, further, that the Borrower does grant a security interest in the Other Lender's Collateral after the related debt on such specific Other Lender's Collateral owed to the respective Other Lender has been satisfied, other than through a permitted secured refinancing of such indebtedness with another Other Lender. Section 3.2 Notification of Account Debtors and Other Obligors. The Lender may during any Default Period notify any account debtor or other person obligated to pay the amount due that such right to payment has been assigned or transferred to the Lender for security and shall be paid directly to the Lender. The Borrower will join in giving such notice if the Lender so requests. At any time after the Borrower or the Lender gives such notice to an account debtor or other obligor, the Lender may, but need not, in the Lender's name or in the Borrower's name, (a) demand, sue for, collect or receive any money or property at any time payable or receivable on account of, or securing, any such right to payment, or grant any extension to, make any compromise or settlement with or otherwise agree to waive, modify, amend or change the obligations (including collateral obligations) of any such account debtor or other obligor; and (b) as the Borrower's agent and attorney-in-fact, notify the United States Postal Service to change the address for delivery of the Borrower's mail to any address designated by the Lender, otherwise intercept the Borrower's mail, and receive, open and dispose of the Borrower's mail, applying all Collateral as permitted under this Agreement and holding all other mail for the Borrower's account or forwarding such mail to the Borrower's last known address. Section 3.3 Assignment of Insurance. As additional security for the payment and performance of the Obligations, the Borrower hereby assigns to the Lender any and all monies (including, without limitation, proceeds of insurance and refunds of unearned premiums) due or to become due under, and all other rights of the Borrower with respect to, any and all policies of insurance now or at any time hereafter covering the Collateral, to the extent such rights may be assigned in accordance with such policies, or any evidence thereof or any business records or valuable papers pertaining thereto, and the Borrower hereby directs the issuer of any such policy to pay all such monies directly to the Lender. At any time, after and during the continuance of an Event of Default, the Lender may (but need not), - 25 26 in the Lender's name or in the Borrower's name, execute and deliver proof of claim, receive all such monies, endorse checks and other instruments representing payment of such monies, and adjust, litigate, compromise or release any claim against the issuer of any such policy. Section 3.4 Occupancy (a) The Borrower hereby irrevocably grants to the Lender the right to take exclusive possession of the Premises at any time during a Default Period. (b) The Lender may use the Premises only to hold, process, manufacture, sell, use, store, liquidate, realize upon or otherwise dispose of goods that are Collateral and for other purposes that the Lender may in good faith deem to be related or incidental purposes. (c) The Lender's right to hold the Premises shall cease and terminate upon the earlier of (i) payment in full and discharge of all Obligations and termination of the Commitment, and (ii) final sale or disposition of all goods constituting Collateral and delivery of all such goods to purchasers. (d) The Lender shall not be obligated to pay or account for any rent or other compensation for the possession, occupancy or use of any of the Premises; provided, however, that if the Lender does pay or account for any rent or other compensation for the possession, occupancy or use of any of the Premises, the Borrower shall reimburse the Lender promptly for the full amount thereof. In addition, the Borrower will pay, or reimburse the Lender for, all taxes, fees, duties, imposts, charges and expenses at any time incurred by or imposed upon the Lender by reason of the execution, delivery, existence, recordation, performance or enforcement of this Agreement or the provisions of this Section 3.4. Section 3.5 License. The Borrower hereby grants to the Lender a non-exclusive, worldwide and royalty-free license to use or otherwise exploit all trademarks, franchises, trade names, copyrights and patents of the Borrower for the purpose of selling, leasing or otherwise disposing of any or all Collateral during any Default Period. Notwithstanding the foregoing, such grant shall not constitute an assignment of any Intellectual Property License to the extent granting such a license is prohibited by or would constitute a default under any such Intellectual Property License (but only to the extent such prohibition is enforceable under applicable law). Section 3.6 Financing Statement. A carbon, photographic or other reproduction of this Agreement or of any financing statements signed by the Borrower is sufficient as a financing statement and may be filed as a financing statement in any state to - 26 27 perfect the security interests granted hereby. For this purpose, the following information is set forth: Name and address of Debtors: Heska Corporation 1613 Prospect Parkway Fort Collins, Colorado 80525 Federal Tax Identification No. 77-0192527 Diamond Animal Health, Inc. 2538 43rd Street SE Des Moines, Iowa 50317 Federal Tax Identification No. 42-1410342 Center Laboratories, Inc. 35 Channel Drive Post Washington, New York 11050 Federal Tax Identification No. 11-3388167 Name and address of Secured Party: Wells Fargo Business Credit, Inc. MAC C7300-300 1740 Broadway Denver, Colorado 80274 Federal Tax Identification No. 41-1237652 Section 3.7 Setoff. The Borrower agrees that the Lender may at any time or from time to time during any Default Period, at its sole discretion and without demand and without notice to anyone, setoff any liability owed to the Borrower by the Lender, whether or not due, against any Obligation, whether or not due. In addition, whether or not a Default Period exists, each other Person holding a participating interest in any Obligations shall have the right to appropriate or setoff any deposit or other liability then owed by such Person to the Borrower, whether or not due, and apply the same to the payment of said participating interest, as fully as if such Person had lent directly to the Borrower the amount of such participating interest. Section 3.8 Security Interest in Special Account. The Borrower hereby pledges, and grants to the Lender a security interest in, all funds held in the Special Account from time to time and all proceeds thereof, as security for the payment of all Obligations. - 27 28 ARTICLE IV CONDITIONS OF LENDING Section 4.1 Conditions Precedent to the Initial Revolving and Term Advances. The Lender's obligation to make the initial Advance hereunder shall be subject to the condition precedent that the Lender shall have received all of the following, each in form and substance satisfactory to the Lender: (a) This Agreement, properly executed by each Borrower. (b) The Notes, properly executed by the appropriate Borrowers. (c) A true and correct copy of any and all leases pursuant to which any Borrower is leasing the Premises, together with a landlord's disclaimer and consent with respect to each such lease. (d) A Patent and Trademark Security Agreement with respect to its registered trademarks, executed by Center. (e) Separate Lockbox Agreements, executed by Center, Heska, Regulus and Wells Fargo Bank, NA. (f) Amendments to the Farm Mortgage and the Factory Mortgage, executed by the Borrower. (g) With respect to each of the Mortgages, an endorsement to bring down and make current the title insurance policy previously issued for the benefit of the Lender and any documents required by the title insurance company in connection therewith. (h) Current searches of appropriate filing offices showing that (i) no state or federal tax liens have been filed and remain in effect against any Borrower, (ii) no financing statements have been filed and remain in effect against any Borrower except those financing statements relating to Permitted Liens or to liens held by Persons who have agreed in writing that upon receipt of proceeds of the Advances, they will deliver UCC releases and/or terminations satisfactory to the Lender, and (iii) the Lender has duly filed all financing statements necessary to perfect the Security Interest, to the extent the Security Interest is capable of being perfected by filing. (i) A certificate of each Borrower's secretary or assistant secretary certifying as to (i) the resolutions of such Borrower's directors and if required, - 28 29 shareholders, authorizing the execution, delivery and performance of the Loan Documents, (ii) such Borrower's articles of incorporation and bylaws, and (iii) the signatures of such Borrower's officers or agents authorized to execute and deliver the Loan Documents and other instruments, agreements and certificates, including Advance requests, on such Borrower's behalf. (j) A current certificate issued by the Secretary of State of the state of incorporation of each Borrower, certifying that such Borrower is in compliance with all applicable organizational requirements of such state. (k) Evidence that each Borrower is duly licensed or qualified to transact business in all jurisdictions where the character of the property owned or leased or the nature of the business transacted by it makes such licensing or qualification necessary. (l) A certificate of one of the Borrowers' officers confirming the representations and warranties set forth in Article V. (m) An opinion of counsel to the Borrowers, addressed to the Lender. (n) Separate guaranties, executed by each of Diamond and Center. (o) Certificates of the insurance required hereunder and under the Mortgages, with all hazard insurance containing a lender's loss payable endorsement in the Lender's favor and with all liability insurance naming the Lender as an additional insured. (p) An amendment to the Amended and Restated Security Interest - Subordination Agreement dated as of August __, 1998, increasing the principal amount allowed under the "Obligations" defined therein to at least $13,102,500.13, executed by the City of Des Moines, Iowa, for the benefit of Lender. (q) Payment of the fees and commissions due through the date of the initial Advance under Section 2.9 and expenses incurred by the Lender through such date and required to be paid by the Borrower under Section 9.8, including all legal expenses incurred through the date of this Agreement. (r) Such other documents as the Lender in its sole discretion may require. Section 4.2 Conditions Precedent to All Advances and Causing All Letters of Credit to be Issued. The Lender will not consider a request for any Advance or the issuance of any Letter of Credit unless on the date thereof: - 29 30 (a) the representations and warranties contained in Article V hereof are correct on and as of such date of such Advance as though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date; and (b) no event has occurred and is continuing, or would result from such Advance or the issuance of such Letter of Credit, as the case may be, which constitutes a Default or an Event of Default. ARTICLE V REPRESENTATIONS AND WARRANTIES Each Borrower represents and warrants to the Lender as follows: Section 5.1 Corporate Existence and Power; Name; Chief Executive Office; Inventory and Equipment Locations; Tax Identification Number. Diamond is a corporation, duly organized, validly existing and in good standing under the laws of the State of Iowa, Each of Heska and Center is a corporation, duly organized, validly existing and in good standing under the laws of the State of Delaware. Each Borrower is duly licensed or qualified to transact business in all jurisdictions where the character of the property owned or leased or the nature of the business transacted by it makes such licensing or qualification necessary. No dissolution or termination of any Borrower has occurred, and no notice of dissolution or articles of termination have been filed with respect to any Borrower. Each Borrower has all requisite corporate power and authority, to conduct its business, to own its properties and to execute and deliver, and to perform all of its obligations under the Loan Documents. Since 1994, each Borrower has done business solely under the names set forth in Schedule 5.1 hereto. Each Borrower's chief executive office and principal place of business is located at the address set forth under the name of such Borrower in Schedule 5.1 hereto, and all of such Borrower's records relating to its business or the Collateral are kept at that location. All Inventory and Equipment is located at that location or at one of the other locations set forth in Schedule 5.1 hereto. Each Borrower's tax identification number is correctly set forth in Section 3.6 hereto. Section 5.2 Authorization of Borrowing; No Conflict as to Law or Agreements. The execution, delivery and performance by each Borrower of the Loan Documents and the borrowings from time to time hereunder have been duly authorized by all necessary corporate action and do not and will not (i) require any consent or approval of such Borrower's shareholders; (ii) require any authorization, consent or approval by, or registration, declaration or filing with, or notice to, any governmental department, - 30 31 commission, board, bureau, agency or instrumentality, domestic or foreign, or any third party, except such authorization, consent, approval, registration, declaration, filing or notice as has been obtained, accomplished or given prior to the date hereof; (iii) violate any provision of any law, rule or regulation (including, without limitation, Regulation X of the Board of Governors of the Federal Reserve System) or of any order, writ, injunction or decree presently in effect having applicability to such Borrower or of such Borrower's articles of incorporation and bylaws; (iv) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other material agreement, lease or instrument to which such Borrower is a party or by which it or its properties may be bound or affected; or (v) result in, or require, the creation or imposition of any mortgage, deed of trust, pledge, lien, security interest or other charge or encumbrance of any nature (other than the Security Interest) upon or with respect to any of the properties now owned or hereafter acquired by such Borrower. Section 5.3 Legal Agreements. (a) Immediately prior to execution of this Agreement, the Old Credit Documents constituted the legal, valid and binding obligations of Diamond, enforceable against Diamond in accordance with their respective terms, subject to general principles of equity and the effects of bankruptcy and insolvency laws applicable to creditors generally. Diamond has no claim, defense or offset to enforcement of the Old Credit Documents. (b) This Agreement constitutes and, upon due execution by each Borrower, the other Loan Documents will constitute the legal, valid and binding obligations of such Borrower, enforceable against such Borrower in accordance with their respective terms, subject to general principles of equity and the effects of bankruptcy and insolvency laws applicable to creditors generally. Section 5.4 Subsidiaries. No Borrower has any Subsidiaries except as set forth in Schedule 5.4. Section 5.5 Financial Condition; No Adverse Change. Heska has heretofore furnished to the Lender its consolidated and consolidating financial statements and those statements fairly present the Borrowers' financial condition on the dates thereof and the results of its operations and cash flows for the periods then ended and were prepared in accordance with generally accepted accounting principles (except for the absence of footnotes and subject to normal year-end adjustments with respect to unaudited financial statements). Since the date of the most recent financial statements, to the date hereof, there has been no material adverse change in any Borrower's business, properties or condition (financial or otherwise). - 31 32 Section 5.6 Litigation. Except as set forth in Schedule 5.6 hereto, there are no actions, suits or proceedings pending or, to any Borrower's knowledge, threatened against or affecting any Borrower or the properties of any Borrower before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, which, if determined adversely to such Borrower, would have a material adverse effect on the financial condition, properties or operations of such Borrower. Section 5.7 Regulation U. No Borrower is engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System), and no part of the proceeds of any Advance will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock. Section 5.8 Taxes. Each Borrower and its Affiliates have paid or caused to be paid to the proper authorities when due all federal, state and local taxes required to be withheld by each of them (other than (a) any such tax whose amount, applicability or validity is being contested in good faith by appropriate proceedings and for which proper reserves have been made, or (b) any such taxes in an aggregate amount among all Borrowers less than $25,000 at any given time). Each Borrower and its Affiliates have filed all federal, state and local tax returns which to the knowledge of the officers of such Borrower or any Affiliate, as the case may be, are required to be filed, and each Borrower and its Affiliates have paid or caused to be paid to the respective taxing authorities all taxes as shown on said returns or on any assessment received by any of them to the extent such taxes have become due (other than (a) any such tax whose amount, applicability or validity is being contested in good faith by appropriate proceedings and for which proper reserves have been made, or (b) any such taxes in an aggregate amount among all Borrowers less than $25,000 at any given time). Section 5.9 Titles and Liens. Each Borrower has good and absolute title to all Collateral described in the collateral reports provided to the Lender and all other Collateral, properties and assets (other than assets identified as being subject to capital leases) reflected in the latest financial statements referred to in Section 5.5 and all proceeds thereof, free and clear of all mortgages, security interests, liens, adverse claims and encumbrances, except for Permitted Liens. No financing statement naming any Borrower as debtor is on file in any office except to perfect only Permitted Liens. Section 5.10 Plans. Except as disclosed to the Lender in writing prior to the date hereof, no Borrower nor any Affiliates of any Borrower maintains or has maintained any Plan. To the best of its knowledge, no Borrower nor any Affiliate of any Borrower has received any notice or has any knowledge to the effect that it is not in full compliance with any of the requirements of ERISA, except as set forth on Schedule 5.10. No Reportable Event or other fact or circumstance which may have an adverse effect on the Plan's tax - 32 33 qualified status exists in connection with any Plan. No Borrower nor any Affiliate of any Borrower has: (a) Any accumulated funding deficiency within the meaning of ERISA; or (b) Any liability or knows of any fact or circumstances which could result in any liability to the Pension Benefit Guaranty Corporation, the Internal Revenue Service, the Department of Labor or any participant in connection with any Plan (other than accrued benefits which or which may become payable to participants or beneficiaries of any such Plan). Section 5.11 Default. Each Borrower is in compliance with all provisions of all agreements, instruments, decrees and orders to which it is a party or by which it or its property is bound or affected, the breach or default of which could have a material adverse effect on any Borrower's financial condition, properties or operations. Section 5.12 Environmental Matters. (a) Definitions. As used in this Agreement, the following terms shall have the following meanings: (i) "Environmental Law" means any federal, state, local or other governmental statute, regulation, law or ordinance dealing with the protection of human health and the environment. (ii) "Hazardous Substances" means pollutants, contaminants, hazardous substances, hazardous wastes, petroleum and fractions thereof, and all other chemicals, wastes, substances and materials listed in, regulated by or identified in any Environmental Law. (b) To each Borrower's best knowledge, except as previously disclosed to Lender, there are not present in, on or under the Premises any Hazardous Substances in such form or quantity as to create any liability or obligation for any Borrower or for the Lender under common law of any jurisdiction or under any Environmental Law, and no Hazardous Substances have ever been stored, buried, spilled, leaked, discharged, emitted or released in, on or under the Premises in such a way as to create any such liability. (c) Except as set forth in Schedule 5.12, to each Borrower's best knowledge, no Borrower has disposed of Hazardous Substances in such a manner as to create any liability under any Environmental Law. (d) Except as previously disclosed to Lender, there are not and there never have been any requests, claims, notices, investigations, demands, administrative - 33 34 proceedings, hearings or litigation, relating in any way to the Premises or any Borrower, alleging liability under, violation of, or noncompliance with any Environmental Law or any license, permit or other authorization issued pursuant thereto, which could create liability to any Borrower in excess of $25,000. To each Borrower's best knowledge, no such matter is threatened or impending. (e) To each Borrower's best knowledge, except as previously disclosed to Lender, each Borrower's businesses are and have in the past always been conducted in accordance with all Environmental Laws and all licenses, permits and other authorizations required pursuant to any Environmental Law and necessary for the lawful and efficient operation of such businesses are in the Borrowers' possession and are in full force and effect. Except as set forth in Schedule 5.12, to each Borrower's best knowledge, there is no threat that any permit required under any Environmental Law will be withdrawn, terminated, limited or materially changed. (f) To each Borrower's best knowledge, except as previously disclosed to Lender, the Premises are not and never have been listed on the National Priorities List, the Comprehensive Environmental Response, Compensation and Liability Information System or any similar federal, state or local list, schedule, log, inventory or database. (g) Except as set forth in Schedule 5.12, each Borrower has delivered to Lender all environmental assessments, audits, reports, permits, licenses and other documents describing or relating in any way to the Premises or such Borrower's businesses to the extent in such Borrower's possession or control. Section 5.13 Submissions to Lender. All financial and other information provided to the Lender by or on behalf of each Borrower in connection with such Borrower's request for the credit facilities contemplated hereby were true and correct in all material respects as of the date given and, as to projections, valuations or proforma financial statements, presented, at the time given, a good faith opinion as to such projections, valuations and proforma condition and results. It is recognized by the Lender that projections and forecasts provided by or on behalf of the Borrowers, although reflecting the Borrowers' good faith projections or forecasts based on methods and data which the Borrowers believe to be reasonable and accurate, are not to be viewed as facts and that actual results during the periods covered by any such projections and forecasts may (and are likely to) differ from the projected or forecasted results. Notwithstanding the foregoing, it is recognized by the Borrowers that the Lender will rely on, among other things, the Borrowers' projections in setting financial covenants set forth in Articles VI and VII hereof, and nothing in this Section 5.13 shall be construed as a waiver of the Lender's right to rely on such covenants or to exercise its remedies in case of a breach of such covenants. - 34 35 Section 5.14 Financing Statements. Each Borrower has provided to the Lender signed financing statements sufficient when filed to perfect the Security Interest and the other security interests created by the Security Documents. When such financing statements are filed in the offices noted therein, the Lender will have a valid and perfected security interest in all Collateral and all other collateral described in the Security Documents which is capable of being perfected by filing financing statements. None of the Collateral or other collateral covered by the Security Documents is or will become a fixture on real estate, unless a sufficient fixture filing is in effect with respect thereto. Section 5.15 Rights to Payment. To the best of each Borrower's knowledge, except as disclosed to Lender, each right to payment and each instrument, document, chattel paper and other agreement constituting or evidencing Collateral or other collateral covered by the Security Documents is (or, in the case of all future Collateral or such other collateral, will be when arising or issued) the valid, genuine and legally enforceable obligation, subject to no defense, setoff or counterclaim, of the account debtor or other obligor named therein or in such Borrower's records pertaining thereto as being obligated to pay such obligation. Section 5.16 Financial Solvency. Both before and after giving effect to all of the transactions contemplated in the Loan Documents, no Borrower, and no Affiliate of any Borrower: (a) was or will be insolvent, as that term is used and defined in Section 101(32) of the United States Bankruptcy Code and Section 2 of the Uniform Fraudulent Transfer Act; (b) has unreasonably small capital or is engaged or about to engage in a business or a transaction for which any remaining assets of such Borrower or such Affiliate are unreasonably small; (c) by executing, delivering or performing its obligations under the Loan Documents or other documents to which it is a party or by taking any action with respect thereto, intends to, nor believes that it will, incur debts beyond its ability to pay them as they mature; (d) by executing, delivering or performing its obligations under the Loan Documents or other documents to which it is a party or by taking any action with respect thereto, intends to hinder, delay or defraud either its present or future creditors; and (e) at this time contemplates filing a petition in bankruptcy or for an arrangement or reorganization or similar proceeding under any law of any jurisdiction, or, to the best knowledge of any Borrower, is the subject of any actual, pending or threatened bankruptcy, insolvency or similar proceedings under any law of any jurisdiction. - 35 36 ARTICLE VI BORROWER'S AFFIRMATIVE COVENANTS So long as the Obligations shall remain unpaid, or the Credit Facility shall remain outstanding, each Borrower will comply with the following requirements, unless the Lender shall otherwise consent in writing: Section 6.1 Reporting Requirements. Heska will deliver, or cause to be delivered, to the Lender each of the following, which shall be in form and detail acceptable to the Lender: (a) as soon as available, and in any event within 90 days after the end of each fiscal year of Heska, Heska's audited financial statements with the unqualified opinion of independent certified public accountants selected by Heska and acceptable to the Lender, which annual financial statements shall include Heska's balance sheet as at the end of such fiscal year and the related statements of Heska's income, retained earnings and cash flows for the fiscal year then ended, prepared on a consolidating and consolidated basis to include any Affiliates, all in reasonable detail and prepared in accordance with GAAP, together with (i) copies of all management letters prepared by such accountants and (ii) a certificate of Heska's chief financial officer stating that to the best of his knowledge such financial statements have been prepared in accordance with GAAP and whether or not such officer has knowledge of the occurrence of any Default or Event of Default hereunder and, if so, stating in reasonable detail the facts with respect thereto; (b) within 5 business days of filing with the United States Securities and Exchange Commission, a copy of each of Heska's annual or quarterly reports on forms 10K or 10Q; (c) as soon as available and in any event within 20 days after the end of each month (or, in the case of months that coincide with the end of the Borrowers' fiscal quarter, within 30 days after the end of such month), an unaudited/internal balance sheet and statement of income and retained earnings of Heska as at the end of and for such month and for the year to date period then ended, prepared on a consolidated and consolidating basis in accordance with GAAP, subject to year-end audit adjustments; and accompanied by a certificate of Heska's chief financial officer, substantially in the form of Exhibit G hereto, stating (i) that to the best of his knowledge such financial statements have been prepared in accordance with GAAP and fairly represent each Borrower's financial condition and the results of its operations, subject to year-end audit adjustments, (ii) whether or not such officer has knowledge of the occurrence of any Default or Event of Default hereunder not - 36 37 theretofore reported and remedied and, if so, stating in reasonable detail the facts with respect thereto, and (iii) all relevant facts in reasonable detail to evidence, and the computations as to, whether or not the Borrower is in compliance with the requirements set forth in Sections 6.12, 6.13, 6.14, 6.15, and 7.10; (d) weekly, or more frequently if the Lender so requires, sales journals, collection reports, and credit memos of each Borrower; (e) Except during the Inactive Period, monthly within 20 days after the end of each month, agings of each Borrower's accounts receivable and its accounts payable, an inventory certification report, and a calculation of each Borrower's Accounts, Eligible Accounts, Inventory and Eligible Inventory as at the end of such month or shorter time period; (f) at least 30 days before the beginning of each fiscal year of Heska, the projected balance sheets and income statements for each month of such year, each in reasonable detail, representing each Borrower's good faith projections and certified by such Borrower's chief financial officer as being the most accurate projections available and identical to the projections used by such Borrower for internal planning purposes, together with such supporting schedules and information as the Lender may in its discretion require; (g) immediately after the commencement thereof, notice in writing of all litigation and of all proceedings before any governmental or regulatory agency affecting any Borrower of the type described in Section 5.12 or which seek a monetary recovery against any Borrower in excess of $50,000; (h) as promptly as practicable (but in any event not later than five business days) after an officer of any Borrower obtains knowledge of the occurrence of any breach, default or event of default under any Security Document or any event which constitutes a Default or Event of Default hereunder, notice of such occurrence, together with a detailed statement by a responsible officer of such Borrower of the steps being taken by such Borrower to cure the effect of such breach, default or event; (i) as soon as possible and in any event within 30 days after any Borrower knows or has reason to know that any Reportable Event with respect to any Plan has occurred, the statement of such Borrower's chief financial officer setting forth details as to such Reportable Event and the action which such Borrower proposes to take with respect thereto, together with a copy of the notice of such Reportable Event to the Pension Benefit Guaranty Corporation; - 37 38 (j) as soon as possible, and in any event within 10 days after any Borrower fails to make any quarterly contribution required with respect to any Plan under Section 412(m) of the Internal Revenue Code of 1986, as amended, the statement of such Borrower's chief financial officer setting forth details as to such failure and the action which such Borrower proposes to take with respect thereto, together with a copy of any notice of such failure required to be provided to the Pension Benefit Guaranty Corporation; (k) promptly upon knowledge thereof, notice of any loss of or material damage to any Collateral or other collateral covered by the Security Documents or of any substantial adverse change in the Collateral or such other collateral or the prospect of payment thereof, in each case involving a loss, damage or change of $50,000 of more; (l) promptly upon their distribution, copies of all financial statements, reports and proxy statements which the Borrower shall have sent to its stockholders; (m) promptly after the sending or filing thereof, copies of all regular and periodic reports which any Borrower shall file with the Securities and Exchange Commission or any national securities exchange; (n) promptly upon filing, copies of the state and federal tax returns and all schedules thereto of each Borrower; (o) promptly upon knowledge thereof, notice of any Borrower's violation of any law, rule or regulation, the non-compliance with which could materially and adversely affect any Borrower's business or its financial condition; and (p) from time to time, with reasonable promptness, any and all receivables schedules, collection reports, deposit records, equipment schedules, copies of invoices to account debtors, shipment documents and delivery receipts for goods sold, and such other material, reports, records or information as the Lender may request. Section 6.2 Books and Records; Inspection and Examination. Each Borrower will keep accurate books of record and account for itself pertaining to the Collateral and pertaining to such Borrower's business and financial condition and such other matters as the Lender may from time to time request in which true and complete entries will be made in accordance with GAAP and, upon the Lender's request, will permit any officer, employee, attorney or accountant for the Lender to audit, review, make extracts from or copy any and all corporate and financial books and records of such Borrower at all times during ordinary business hours, to send and discuss with account debtors and other obligors requests for verification of amounts owed to such Borrower, and to discuss such Borrower's affairs with - 38 39 any of its directors, officers, employees or agents. Each Borrower will permit the Lender, or its employees, accountants, attorneys or agents, to examine and inspect any Collateral, other collateral covered by the Security Documents or any other property of such Borrower at any time during ordinary business hours. Section 6.3 Account Verification. The Lender may at any time and from time to time send or require any Borrower to send requests for verification of accounts or notices of assignment to account debtors and other obligors. The Lender may also at any time and from time to time telephone account debtors and other obligors to verify accounts. Section 6.4 Compliance with Laws. (a) Each Borrower will (i) comply with the requirements of applicable laws and regulations, the non-compliance with which would materially and adversely affect its business or its financial condition and (ii) use and keep the Collateral, and require that others use and keep the Collateral, only for lawful purposes, without violation of any federal, state or local law, statute or ordinance. (b) Without limiting the foregoing undertakings, each Borrower specifically agrees that it will comply in all material respects with all applicable Environmental Laws and obtain and comply with all permits, licenses and similar approvals required by any Environmental Laws, and will not generate, use, transport, treat, store or dispose of any Hazardous Substances in such a manner as to create any material liability or obligation under the common law of any jurisdiction or any Environmental Law. Section 6.5 Payment of Taxes and Other Claims; Payment of Past-Due Accounts. Each Borrower will pay or discharge, when due, (a) all taxes, assessments and governmental charges levied or imposed upon it or upon its income or profits, upon any properties belonging to it (including, without limitation, the Collateral) or upon or against the creation, perfection or continuance of the Security Interest, prior to the date on which penalties attach thereto, (b) all federal, state and local taxes required to be withheld by it, and (c) all lawful claims for labor, materials and supplies which, if unpaid, might by law become a lien or charge upon any properties of such Borrower; provided, that no Borrower shall be required to pay any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings and for which proper reserves have been made. Each Borrower will, at all times (except for the period of time beginning on the date of this Agreement and ending 60 days prior to the end of the Inactive Period) immediately pay all of its accounts payable that are 60 days or more past due. Each Borrower will at all times maintain its accounts payable in accordance with the previous sentence. - 39 40 Section 6.6 Maintenance of Properties. (a) Each Borrower will keep and maintain the Collateral, the other collateral covered by the Security Documents and all of its other properties necessary or useful in its business in good condition, repair and working order (normal wear and tear excepted) and will from time to time replace or repair any worn, defective or broken parts; provided, however, that nothing in this Section 6.6 shall prevent any Borrower from discontinuing the operation and maintenance of any of its properties if such discontinuance is, in such Borrower's judgment, desirable in the conduct of the Borrower's business and not disadvantageous in any material respect to the Lender. (b) Each Borrower will defend the Collateral against all claims or demands of all persons (other than the Lender) claiming the Collateral or any interest therein. (c) Each Borrower will keep all Collateral and other collateral covered by the Security Documents free and clear of all security interests, liens and encumbrances except Permitted Liens. Section 6.7 Insurance. Each Borrower will obtain and at all times maintain insurance with insurers believed by such Borrower to be responsible and reputable, in such amounts and against such risks as may from time to time be reasonably required by the Lender, but in all events in such amounts and against such risks as is usually carried by companies engaged in similar business and owning similar properties in the same general areas in which such Borrower operates. Without limiting the generality of the foregoing, each Borrower will at all times keep all tangible Collateral insured against risks of fire (including so-called extended coverage), theft, collision (for Collateral consisting of motor vehicles) and such other risks and in such amounts as the Lender may reasonably request, with any loss payable to the Lender to the extent of its interest, and all policies of such insurance shall contain a lender's loss payable endorsement for the Lender's benefit acceptable to the Lender. All policies of liability insurance required hereunder shall name the Lender as an additional insured. Section 6.8 Preservation of Existence. Each Borrower will preserve and maintain its existence and all of its rights, privileges and franchises necessary or desirable in the normal conduct of its business and shall conduct its business in an orderly, efficient and regular manner. Section 6.9 Delivery of Instruments, etc. Upon request by the Lender, each Borrower will promptly deliver to the Lender in pledge all instruments, documents and chattel papers constituting Collateral, duly endorsed or assigned by such Borrower. - 40 41 Section 6.10 Collateral Account. (a) If, notwithstanding the instructions to debtors to make payments to the Lockbox, any Borrower receives any payments on Receivables, such Borrower shall deposit such payments into such Borrower's Collateral Account. Until so deposited, such Borrower shall hold all such payments in trust for and as the property of the Lender and shall not commingle such payments with any of its other funds or property; provided, however, that the foregoing shall not be construed to allow the Lender to withhold any such payments after full payment and discharge of all Obligations. (b) Amounts deposited in any Collateral Account shall not bear interest and shall not be subject to withdrawal by any Borrower, except after full payment and discharge of all Obligations; provided, however, that if the Borrowers' only outstanding Obligations are principal owing under the Term Loan A Note and the Term Loan B Note, and if no such principal amount is due, the Lender agrees to remit such amounts to such Borrower's demand deposit account maintained with Wells Fargo Bank. (c) All deposits in any Collateral Account shall constitute proceeds of Collateral and shall not constitute payment of the Obligations. The Lender shall from time to time within one Banking Day, apply deposited funds in each Collateral Account to the payment of the Obligations, in any order or manner of application satisfactory to the Lender, by transferring such funds to the Lender's general account. (d) All items deposited in any Collateral Account shall be subject to final payment. If any such item is returned uncollected, the Borrowers will immediately pay the Lender, or, for items deposited in a Collateral Account, the bank maintaining such account, the amount of that item, or such bank at its discretion may charge any uncollected item to any commercial account or other account belonging to the Borrower to whom the item was payable. Section 6.11 Performance by the Lender. If any Borrower at any time fails to perform or observe any of the foregoing covenants contained in this Article VI or elsewhere herein, and if such failure shall continue for a period of ten calendar days after the Lender gives such Borrower written notice thereof (or in the case of the agreements contained in Sections 6.5, 6.7 and 6.10, immediately upon the occurrence of such failure, without notice or lapse of time), the Lender may, but need not, perform or observe such covenant on behalf and in the name, place and stead of such Borrower (or, at the Lender's option, in the Lender's name) and may, but need not, take any and all other actions which the Lender may reasonably deem necessary to cure or correct such failure (including, without limitation, the payment of taxes, the satisfaction of security interests, liens or encumbrances, the performance of obligations owed to account debtors or other obligors, the procurement and maintenance of insurance, the execution of assignments, security agreements and financing - 41 42 statements, and the endorsement of instruments); and such Borrower shall thereupon pay to the Lender on demand the amount of all monies expended and all costs and expenses (including reasonable attorneys' fees and legal expenses) incurred by the Lender in connection with or as a result of the performance or observance of such agreements or the taking of such action by the Lender, together with interest thereon from the date expended or incurred at the Revolving Floating Rate. To facilitate the Lender's performance or observance of such covenants of the Borrowers, each Borrower hereby irrevocably appoints the Lender, or the Lender's delegate, acting alone, as such Borrower's attorney in fact (which appointment is coupled with an interest) with the right (but not the duty) from time to time to create, prepare, complete, execute, deliver, endorse or file in the name and on behalf of such Borrower any and all instruments, documents, assignments, security agreements, financing statements, applications for insurance and other agreements and writings required to be obtained, executed, delivered or endorsed by such Borrower under this Section 6.11. Section 6.12 Minimum Book Net Worth. Heska will maintain, on a consolidated basis, as of each date listed below, its Book Net Worth at an amount not less than the amount set forth opposite such date:
Period Minimum Book Net Worth ------ ---------------------- March 31, 2000 $34,609,000 April 30, 2000 $33,011,000 May 31, 2000 $31,399,000 June 30, 2000 $29,844,000 July 31, 2000 $27,828,000 August 31, 2000 $26,095,000 September 30, 2000 $24,915,000 October 31, 2000 $23,302,000 November 30, 2000 $22,110,000 December 31, 2000 and the last day of each month thereafter $21,666,000
Section 6.13 Minimum Net Income. Heska will achieve, on a consolidated basis, during each period described below, Net Income in an amount not less than the amount set forth opposite such period (amounts in parentheses denote negative numbers): - 42 43
Period Minimum Net Income ------ ------------------ Three months ending March 31, 2000 ($10,830,000) Six months ending June 30, 2000 ($15,595,000) Nine months ending September 30, 2000 ($20,524,000) Twelve months ending December 31, 2000 ($23,773,000)
Section 6.14 Minimum Cash Balance. During the Inactive Period, Heska shall maintain at all times, on a consolidated basis, Cash of not less than $3,000,000. At all times thereafter, Heska shall maintain, on a consolidated basis, its Liquidity at not less than $6,000,000. Section 6.15 Minimum Individual Book Net Worth. Each Borrower shall at all times maintain its Book Net Worth, calculated without regard to any Subsidiary or other Affiliate, at an amount greater than zero. Section 6.16 New Covenants. On or before December 31, 2000, the Borrower and the Lender shall agree on new covenant levels for Sections 6.12, 6.13, 7.4(a)(v), and 7.10 for periods after such date. The new covenant levels will be based on the Borrower's projections for such periods and shall be no less stringent than the present levels. An Event of Default shall occur if the new covenants are not agreed to by the above date. ARTICLE VII NEGATIVE COVENANTS So long as the Obligations shall remain unpaid, or the Credit Facility shall remain outstanding, each Borrower agrees that, without the Lender's prior written consent: Section 7.1 Liens. Such Borrower will not create, incur or suffer to exist any mortgage, deed of trust, pledge, lien, security interest, adverse claim, assignment or transfer (collectively, "Liens") upon or of any of its assets, now owned or hereafter acquired, to secure any indebtedness; excluding, however, from the operation of the foregoing, the following (collectively, "Permitted Liens"): (a) in the case of any of such Borrower's property which is not Collateral or other collateral described in the Security Documents, mortgages, deeds of trust, covenants, restrictions, rights, easements and minor irregularities in title which do not materially interfere with such Borrower's business or operations as presently conducted; - 43 44 (b) Liens in existence on the date hereof and listed in Schedule 7.1 hereto; (c) the Security Interest and Liens and security interests created by the Security Documents; (d) purchase money Liens given, simultaneously with or within one hundred twenty (120) days after the acquisition or construction of real property or tangible personal property (including vendor's rights under purchase contracts under an agreement whereby title is retained for the purpose of securing the purchase price thereof and lessors' liens under capitalized lease obligations) or any Lien given to a financial institution financing the acquisition or construction of the real property or tangible personal property, on real property or tangible personal property hereafter acquired or constructed and not heretofore owned by any Borrower; provided, however, that in each such case such Lien (i) does not exceed the amount paid for such acquisition or construction, and (ii) is limited to such acquired or constructed real or tangible personal property; (e) carriers', mechanics', materialmen's, suppliers', and other like Liens and charges arising in the ordinary course of business securing obligations that are not incurred in connection with the obtaining of any advance or credit and which are not overdue, or are being contested in good faith by appropriate proceedings; (f) Liens arising in connection with worker's compensation, unemployment insurance and progress payments under government contracts and liens securing the performance of bids, tenders, leases, contracts (other than for the repayment of borrowed money), statutory obligations, surety customs and appeal bonds and other obligations of like nature, incurred, in each case, in the ordinary course of business; (g) judgment liens in existence in an amount not more than $100,000; (h) zoning restrictions, easements, licenses, encumbrances, reservations, provisions, covenants, conditions, waivers, restrictions on the use of property or minor irregularities of title (and with respect to leasehold interests, mortgages, obligations, liens and other encumbrances incurred, created, assumed or permitted to exist and arising by, through or under a landlord or owner of the leased property, with or without consent of the lessee) as normally exist with respect to similar properties which do not in the aggregate materially impair the use thereof in the operation of any Borrower's business; (i) any preexisting Lien (whether or not assumed) on any real property or tangible personal property hereafter acquired by any Borrower; provided, however, - 44 45 that in each such case such Lien is limited to such acquired real or tangible personal property; provided, further, that proceeds from a Term Advance are not used to acquire such real property or tangible personal property; (j) extensions, renewals and replacements of the Liens referred to in clause (b), (d) or (i) above; provided, any such extension, renewal or replacement liens shall be limited to the property or assets covered by the Lien extended, renewed or replaced; (k) leases, subleases, licenses and sublicenses to third parties of patents, patent applications, trademarks and copyrights, in each case in the ordinary course of its business as currently conducted; and (l) Liens of brokers under brokerage agreements entered into in the ordinary course of business as presently conducted. Section 7.2 Indebtedness. Such Borrower will not incur, create, assume or permit to exist any indebtedness or liability on account of deposits or advances or any indebtedness for borrowed money or letters of credit issued on such Borrower's behalf, or any other indebtedness or liability evidenced by notes, bonds, debentures or similar obligations, except: (a) indebtedness arising hereunder; (b) indebtedness of such Borrower in existence on the date hereof and listed in Schedule 7.2 hereto; (c) indebtedness of such Borrower (i) relating to liens of such Borrower permitted in accordance with Section 7.1, (ii) arising out of guaranties of such Borrower permitted under Section 7.3, or (iii) arising for such Borrower as a result of an investment in or loan to such Borrower by another Borrower in accordance with Section 7.4. (d) unsecured trade debt incurred, and cash advances received from customers, in each case in the ordinary course of business; (e) indebtedness of any Person existing at the time such Person is merged with or into such Borrower, to the extent the Lender consents to such merger in accordance with Section 7.7, and provided that such Debt is not incurred in connection with or in contemplation of such merger; (f) extensions, renewals and replacements of the debt referred to in clause (b) or (c) above; provided that any such extension, renewal or replacement - 45 46 shall be in an amount not greater than, and on terms no less favorable to such Borrower (other than interest rate increases) than, the amount extended, renewed or replaced; (g) other Debt in an amount not to exceed $100,000; and (h) capital leases to the extent the entry into such leases does not cause a Default or Event of Default hereunder. Section 7.3 Guaranties. Such Borrower will not assume, guarantee, endorse or otherwise become directly or contingently liable in connection with any obligations of any other Person, except: (a) the endorsement of negotiable instruments by such Borrower for deposit or collection or similar transactions in the ordinary course of business; (b) guaranties, endorsements and other direct or contingent liabilities in connection with the obligations of other Persons, in existence on the date hereof and listed in Schedule 7.3 hereto; and (c) guaranties of the obligations of one Borrower given by another Borrower. Section 7.4 Investments and Subsidiaries. (a) Such Borrower will not purchase or hold beneficially any stock or other securities or evidences of indebtedness of, make or permit to exist any loans or advances to, or make any investment or acquire any interest whatsoever in, any other Person, including specifically but without limitation any partnership or joint venture, except: (i) investments in direct obligations of the United States of America or any agency or instrumentality thereof whose obligations constitute full faith and credit obligations of the United States of America having a maturity of one year or less, commercial paper issued by U.S. corporations rated "A-1" or "A-2" by Standard & Poors Corporation or "P-1" or "P-2" by Moody's Investors Service or certificates of deposit or bankers' acceptances having a maturity of one year or less issued by members of the Federal Reserve System having deposits in excess of $100,000,000 (which certificates of deposit or bankers' acceptances are fully insured by the Federal Deposit Insurance Corporation); (ii) advances or loans to such Borrower's officers and employees not exceeding at any one time an aggregate of $200,000; - 46 47 (iii) advances in the form of progress payments, prepaid rent not exceeding two months or security deposits; (iv) unless a Default Period exists or would exist immediately after or as a result of any such loan, advance or capital contribution, loans, advances or capital contributions by Heska to any Subsidiary that is also a Borrower; provided, however, that both before and after such advance or contribution both Heska's Tangible Net Worth and such Subsidiary's Tangible Net Worth must equal or exceed $100,000; (v) unless a Default Period exists or would exist immediately after or as a result of any such advance or contribution, advances or contributions by Heska to any Subsidiary that is not a Borrower; provided, however, that (A) both before and after such advance or contribution Heska's Tangible Net Worth must equal or exceed $100,000 and (B) all contributions and advances made in reliance on this subsection (v) shall not exceed $700,000 in the aggregate during the 2000 fiscal year; (vi) investments, including investments in Subsidiaries, existing on the date hereof and listed in Schedule 7.4; (vii) investments in the following items arising in the ordinary course of business: (A) prepaid expenses and negotiable instruments held for collection; (B) Accounts (and Investments obtained in exchange or settlement of Accounts for which the Borrower has determined that collection is not likely); and (C) lease, utility and worker's compensation, performance and other similar deposits; (viii) unless a Default Period exists or would exist immediately after or as a result of any such loan or advance, loans or advances by any Subsidiary that is also a Borrower to Heska; provided, however, that both before and after such loan or advance both Heska's Tangible Net Worth and such Subsidiary's Tangible Net Worth must equal or exceed $100,000. (b) Such Borrower will not create or permit to exist any Subsidiary; provided, however, that so long as no Default Period exists, upon written request by such Borrower, the Lender shall not withhold its consent to the creation of (i) any domestic subsidiary provided such Borrower causes such subsidiary to deliver to the Lender a guaranty, a security agreement, and UCC financing statements and other documents requested by the Lender to create a first priority security interest on behalf of the Lender, or to perfect such security interest, in all assets of such subsidiary, or (ii) any foreign subsidiary. - 47 48 Section 7.5 Dividends. Such Borrower will not declare or pay any dividends (other than dividends payable solely in stock of such Borrower) on any class of its stock or make any payment on account of the purchase, redemption or other retirement of any shares of such stock or make any distribution in respect thereof, either directly or indirectly; provided, however, that (A) any Subsidiary may pay dividends to Heska; provided, however, that if such Subsidiary is also a Borrower such Subsidiary's Tangible Net Worth both before and after such dividend must equal or exceed $100,000; and (B) if no Default Period then exists or would occur immediately following or as a result of such repurchase, Heska may repurchase capital stock of Heska held by any employee provided Heska is required to do so pursuant to any employee equity subscription agreement, stock ownership plan or stock option agreement in effect from time to time; and provided further that the aggregate price paid for all such repurchased, redeemed, acquired or retired capital shall not exceed $100,000 during any fiscal year. Notwithstanding the foregoing, the exercise of stock options for the purchase of Heska's capital stock shall not, by means of any deemed repurchase of shares as a result of a cashless exercise or otherwise, cause a breach of this Section 7.5. Section 7.6 Sale or Transfer of Assets; Suspension of Business Operations. Such Borrower will not sell, lease, assign, transfer or otherwise dispose of (i) the stock of any Subsidiary, (ii) all or a substantial part of its assets, or (iii) any Collateral or any interest therein (whether in one transaction or in a series of transactions) to any other Person other than (A) sale of Inventory in the ordinary course of business; (B) licenses and sublicenses to third parties of patents, patent applications, trademarks and copyrights, in each case in the ordinary course of its business as currently conducted; (C) the sale of used equipment, provided that the aggregate amount of any such sales of equipment shall not exceed $100,000 during any year, unless the proceeds of such sales are delivered to the Lender for application against the Obligations; (D) sales or other dispositions of Investments permitted by Section 7.4; (E) sales of defaulted receivables to a collection agency in the ordinary course of business; (F) other sales of assets with book value of not more than $100,000 during any fiscal year, for fair and reasonable consideration, to the extent such sale could not reasonably be expected to have a material adverse effect; and (G) so long as the outstanding balance under the Center Revolving Note is zero and no Advances have been made to any Borrower in reliance on the assets of Center, a sale of substantially all the assets of Center. Such Borrower will not in any manner transfer any property without prior or present receipt of full and adequate consideration. Section 7.7 Consolidation and Merger; Asset Acquisitions. Such Borrower will not consolidate with or merge into any Person, or permit any other Person to merge into it, or acquire (in a transaction analogous in purpose or effect to a consolidation or merger) all or substantially all the assets of any other Person; provided, however, that the Lender will not unreasonably withhold its consent to any merger or acquisition. - 48 49 Section 7.8 Restrictions on Nature of Business. Such Borrower will not engage in any line of business materially different from that presently engaged in by such Borrower and/or lines of business reasonably related or supplementing thereto and will not purchase, lease or otherwise acquire assets not related to its business. Section 7.9 Accounting. Such Borrower will not adopt any material change in accounting principles other than as required by GAAP, the SEC, or NASDAQ. Such Borrower will not adopt, permit or consent to any change in its fiscal year. Section 7.10 Capital Expenditures. The Borrowers, together with any Affiliates, will not incur or contract to incur, in the aggregate, Capital Expenditures of more than $2,800,000 in the aggregate during the period from January 1, 2000 through December 31, 2000. Section 7.11 Discounts, etc. Such Borrower will not, following and during the continuance of an Event of Default, if requested by the Lender, grant any discount, credit or allowance to any customer of such Borrower or accept any return of goods sold, or modify, amend, subordinate, cancel or terminate the obligation of any account debtor or other obligor of such Borrower. Section 7.12 Defined Benefit Pension Plans. Such Borrower will not adopt, create, assume or become a party to any defined benefit pension plan, unless disclosed to the Lender pursuant to Section 5.10. Section 7.13 Other Defaults. Such Borrower will not permit any breach, default or event of default to occur under any note, loan agreement, indenture, lease, mortgage, contract for deed, security agreement or other contractual obligation binding upon such Borrower if the effect of such breach, default or event of default is to permit the lender thereof to accelerate the payment of $100,000 or more; provided, however, that such Borrower shall not be in breach hereunder so long as such breach, default or event of default is being contested in good faith by appropriate proceedings, for which proper reserves have been made, and the Lender has been given written notice of such content. Section 7.14 Place of Business; Name. Such Borrower will not transfer its chief executive office or principal place of business, or move, relocate, close or sell any business location. Such Borrower will not permit any tangible Collateral or any records pertaining to the Collateral to be located in any state or area in which, in the event of such location, a financing statement covering such Collateral would be required to be, but has not in fact been, filed in order to perfect the Security Interest. Such Borrower will not change its name. Upon written request by any Borrower, after delivery by such Borrower of (a) financing statements, financing statement amendments, and other documents requested by the Lender for the purpose of perfecting or maintaining priority or perfection of the Security - 49 50 Interest and the other security interests evidenced by the Security Documents, and (b) searches and other proof requested by the Lender to evidence such priority and perfection, the Lender shall grant its consent to (x) a relocation of business locations or Collateral within the United States or (y) a change of any Borrower's name. Section 7.15 Organizational Documents. Such Borrower will not become an S Corporation within the meaning of the Internal Revenue Code of 1986, as amended. ARTICLE VIII EVENTS OF DEFAULT, RIGHTS AND REMEDIES Section 8.1 Events of Default. "Event of Default", wherever used herein, means any one of the following events: (a) default in the payment of the Obligations (other than the Obligations specified in Section 8.1(b)) when they become due and payable; (b) default in the payment of any fees, commissions, costs or expenses required to be paid by any Borrower under this Agreement or any other Loan Document within 5 Business Days of the date they become due and payable; (c) default in the performance, or breach, of the covenants contained in Section 6.4(a) or Section 6.6(a) of this Agreement if such default remains unremedied 15 Business Days after its occurrence; or default in the performance, or breach, of any other covenant or agreement of any Borrower contained in this Agreement or any other Loan Document; (d) Any Borrower or any Guarantor shall be or become insolvent, or admit in writing its or his inability to pay its or his debts as they mature, or make an assignment for the benefit of creditors; or any Borrower or any Guarantor shall apply for or consent to the appointment of any receiver, trustee, or similar officer for it or him or for all or any substantial part of its or his property; or such receiver, trustee or similar officer shall be appointed without the application or consent of such Borrower or such Guarantor, as the case may be; or any Borrower or any Guarantor shall institute (by petition, application, answer, consent or otherwise) any bankruptcy, insolvency, reorganization, arrangement, readjustment of debt, dissolution, liquidation or similar proceeding relating to it or him under the laws of any jurisdiction; or any such proceeding shall be instituted (by petition, application or otherwise) against any Borrower or any such Guarantor; or any judgment, writ, warrant of attachment or execution or similar process shall be issued or levied against a substantial part of the property of any Borrower or any Guarantor; - 50 51 (e) A petition shall be filed by or against any Borrower or any Guarantor under the United States Bankruptcy Code naming such Borrower or such Guarantor as debtor; (f) Any representation or warranty made by any Borrower in this Agreement, by any Guarantor in any guaranty delivered to the Lender, or by any Borrower (or any of its officers) or any Guarantor in any agreement, certificate, instrument or financial statement or other statement contemplated by or made or delivered pursuant to or in connection with this Agreement or any such guaranty shall prove to have been incorrect in any material respect when deemed to be effective; (g) The rendering against any Borrower of a final judgment, decree or order for the payment of money in excess of $100,000 and the continuance of such judgment, decree or order unsatisfied and in effect for any period of 30 consecutive days without a stay of execution; (h) A default under any bond, debenture, note or other evidence of indebtedness of any Borrower owed to any Person other than the Lender, or under any indenture or other instrument under which any such evidence of indebtedness has been issued or by which it is governed, or under any lease of any of the Premises, and the expiration of the applicable period of grace, if any, specified in such evidence of indebtedness, indenture, other instrument or lease, if the effect of such default is to permit the lender thereof to accelerate the payment of indebtedness $100,000 or more; (i) Any Reportable Event, which the Lender determines in good faith might constitute grounds for the termination of any Plan or for the appointment by the appropriate United States District Court of a trustee to administer any Plan, shall have occurred and be continuing 30 days after written notice to such effect shall have been given to such Borrower by the Lender; or a trustee shall have been appointed by an appropriate United States District Court to administer any Plan; or the Pension Benefit Guaranty Corporation shall have instituted proceedings to terminate any Plan or to appoint a trustee to administer any Plan; or any Borrower shall have filed for a distress termination of any Plan under Title IV of ERISA; or any Borrower shall have failed to make any quarterly contribution required with respect to any Plan under Section 412(m) of the Internal Revenue Code of 1986, as amended, which the Lender determines in good faith may by itself, or in combination with any such failures that the Lender may determine are likely to occur in the future, result in the imposition of a lien on such Borrower's assets in favor of the Plan; - 51 52 (j) An event of default shall occur under any Security Document or under any other security agreement, mortgage, deed of trust, assignment or other instrument or agreement securing any obligations of any Borrower hereunder or under any note; (k) Except as permitted by Section 7.6 of this Agreement, any Borrower shall liquidate, dissolve, terminate or suspend its business operations or otherwise fail to operate its business in the ordinary course, or sell all or substantially all of its assets, without the Lender's prior written consent; (l) Any Borrower shall fail to pay, withhold, collect or remit any tax or tax deficiency when assessed or due (other than any tax deficiency which is being contested in good faith and by proper proceedings and for which it shall have set aside on its books adequate reserves therefor) or notice of any state or federal tax liens shall be filed or issued (unless such lien is being contested in good faith and by proper proceedings and for which it shall have set aside on its books adequate reserves therefor); (m) Default in the payment of any amount owed by any Borrower to the Lender, other than any indebtedness arising hereunder; (n) Any Guarantor shall repudiate, purport to revoke or fail to perform any such Guarantor's obligations under such Guarantor's guaranty in favor of the Lender, or any Guarantor shall cease to exist; (o) Any event or circumstance with respect to any Borrower shall occur such that the Lender shall believe in good faith that the prospect of payment of all or any part of the Obligations or the performance by any Borrower under the Loan Documents is impaired or any material adverse change in the business or financial condition of any Borrower shall occur; (p) Any Borrower shall take or participate in any action which would be prohibited under the provisions of any Subordination Agreement or make any payment on Subordinated Indebtedness (as defined in any Subordination Agreement) that any Person was not entitled to receive under the provisions of such Subordination Agreement; or Section 8.2 Rights and Remedies. During any Default Period, the Lender may exercise any or all of the following rights and remedies: (a) the Lender may, by notice to Heska, declare the Commitment to be terminated, whereupon the same shall forthwith terminate; - 52 53 (b) the Lender may, by notice to Heska, declare the Obligations to be forthwith due and payable, whereupon all Obligations shall become and be forthwith due and payable, without presentment, notice of dishonor, protest or further notice of any kind, all of which each Borrower hereby expressly waives; (c) the Lender may refuse to fund any requested Advance made by any Borrower; (d) the Lender may, without notice to any Borrower and without further action, apply any and all money owing by the Lender to any Borrower to the payment of the Obligations; (e) the Lender may exercise and enforce any and all rights and remedies available upon default to a secured party under the UCC, including, without limitation, the right to take possession of Collateral, or any evidence thereof, proceeding without judicial process or by judicial process (without a prior hearing or notice thereof, which each Borrower hereby expressly waives) and the right to sell, lease or otherwise dispose of any or all of the Collateral, and, in connection therewith, each Borrower will on demand assemble the Collateral and make it available to the Lender at a place to be designated by the Lender which is reasonably convenient to both parties; (f) the Lender may exercise and enforce its rights and remedies under the Loan Documents; and (g) the Lender may exercise any other rights and remedies available to it by law or agreement. Notwithstanding the foregoing, upon the occurrence of an Event of Default described in subsections (d) or (e) of Section 8.1, the Obligations shall be immediately due and payable automatically without presentment, demand, protest or notice of any kind. Section 8.3 Certain Notices. If notice to any Borrower of any intended disposition of Collateral or any other intended action is required by law in a particular instance, such notice shall be deemed commercially reasonable if given (in the manner specified in Section 9.5) at least ten calendar days before the date of intended disposition or other action. - 53 54 ARTICLE IX MISCELLANEOUS Section 9.1 Restatement of Old Credit Documents. This Agreement is executed for the purpose of amending and restating the Old Credit Documents. Section 9.2 Release. Each Borrower hereby absolutely and unconditionally releases and forever discharges the Lender, the Participants and any and all parent corporations, subsidiary corporations, affiliated corporations, insurers, indemnitors, successors and assigns thereof, together with all of the present and former directors, officers, agents and employees of any of the foregoing, from any and all claims, demands or causes of action of any kind, nature or description relating to the transactions contemplated by this Agreement, whether arising in law or equity or upon contract or tort or under any state or federal law or otherwise, which such Borrower has had or has made claim to have against any such person for or by reason of any act, omission, matter, cause or thing whatsoever arising from the beginning of time to and including the date of this Agreement, whether such claims, demands and causes of action are matured or unmatured or known or unknown. For greater certainty, nothing herein shall constitute a release by any Borrower of any Person for any such claim, demand or cause of action arising after the date of this Agreement. Section 9.3 No Waiver; Cumulative Remedies. No failure or delay by the Lender in exercising any right, power or remedy under the Loan Documents shall operate as a waiver thereof; nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy under the Loan Documents. The remedies provided in the Loan Documents are cumulative and not exclusive of any remedies provided by law. Section 9.4 Amendments, Etc. No amendment, modification, termination or waiver of any provision of any Loan Document or consent to any departure by any Borrower therefrom or any release of a Security Interest shall be effective unless the same shall be in writing and signed by the Lender, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. No notice to or demand on any Borrower in any case shall entitle such Borrower to any other or further notice or demand in similar or other circumstances. Section 9.5 Addresses for Notices, Etc. Except as otherwise expressly provided herein, all notices, requests, demands and other communications provided for under the Loan Documents shall be in writing and shall be (a) personally delivered, (b) sent by first class United States mail, (c) sent by overnight courier of national reputation, or (d) transmitted by telecopy, in each case addressed or telecopied to the party to whom notice is being given at its address or telecopier number as set forth below: - 54 55 If to the Borrowers: Heska Corporation 1613 Prospect Parkway Fort Collins, Colorado 80525 Telecopier: (970) 484-9505 Attention: Chief Financial Officer If to the Lender: Wells Fargo Business Credit, Inc. MAC C7300-300 1740 Broadway Denver, Colorado 80274 Telecopier: 303-863-4904 Attention: Colette Taylor or, as to each party, at such other address or telecopier number as may hereafter be designated by such party in a written notice to the other party complying as to delivery with the terms of this Section. All such notices, requests, demands and other communications shall be deemed to have been given on (a) the date received if personally delivered, (b) when deposited in the mail if delivered by mail, (c) the date sent if sent by overnight courier, or (d) the date of transmission if delivered by telecopy, except that notices or requests to the Lender pursuant to any of the provisions of Article II shall not be effective until received by the Lender. Section 9.6 Further Documents. Each Borrower will from time to time execute and deliver or endorse any and all instruments, documents, conveyances, assignments, security agreements, financing statements and other agreements and writings that the Lender may reasonably request in order to secure, protect, perfect or enforce the Security Interest or the Lender's rights under the Loan Documents (but any failure to request or assure that any Borrower executes, delivers or endorses any such item shall not affect or impair the validity, sufficiency or enforceability of the Loan Documents and the Security Interest, regardless of whether any such item was or was not executed, delivered or endorsed in a similar context or on a prior occasion). Section 9.7 Collateral. This Agreement does not contemplate a sale of accounts, contract rights or chattel paper, and, as provided by law, each Borrower is entitled to any surplus and shall remain liable for any deficiency. The Lender's duty of care with respect to Collateral in its possession (as imposed by law) shall be deemed fulfilled if it exercises reasonable care in physically keeping such Collateral, or in the case of Collateral in - 55 56 the custody or possession of a bailee or other third person, exercises reasonable care in the selection of the bailee or other third person, and the Lender need not otherwise preserve, protect, insure or care for any Collateral. The Lender shall not be obligated to preserve any rights any Borrower may have against prior parties, to realize on the Collateral at all or in any particular manner or order or to apply any cash proceeds of the Collateral in any particular order of application. Section 9.8 Costs and Expenses. Each Borrower, jointly and severally, agrees to pay on demand all costs and expenses, including (without limitation) reasonable attorneys' fees, incurred by the Lender in connection with the Obligations, this Agreement, the Loan Documents, and any other document or agreement related hereto or thereto, and the transactions contemplated hereby, including without limitation all such costs, expenses and fees incurred in connection with the negotiation, preparation, execution, amendment, administration, performance, collection and enforcement of the Obligations and all such documents and agreements and the creation, perfection, protection, satisfaction, foreclosure or enforcement of the Security Interest. Section 9.9 Indemnity. In addition to the payment of expenses pursuant to Section 9.8, each Borrower, jointly and severally, agrees to indemnify, defend and hold harmless the Lender, and any of its participants, parent corporations, subsidiary corporations, affiliated corporations, successor corporations, and all present and future officers, directors, employees, attorneys and agents of the foregoing (the "Indemnitees") from and against any of the following (collectively, "Indemnified Liabilities"): (i) any and all transfer taxes, documentary taxes, assessments or charges made by any governmental authority by reason of the execution and delivery of the Loan Documents or the making of the Advances; (ii) any claims, loss or damage to which any Indemnitee may be subjected if any representation or warranty contained in Section 5.12 proves to be incorrect in any respect or as a result of any violation of the covenant contained in Section 6.4(b); and (iii) any and all other liabilities, losses, damages, penalties, judgments, suits, claims, costs and expenses of any kind or nature whatsoever (including, without limitation, the reasonable fees and disbursements of counsel) in connection with the foregoing and any other investigative, administrative or judicial proceedings, whether or not such Indemnitee shall be designated a party thereto, which may be imposed on, incurred by or asserted against any such Indemnitee, in any manner related to or arising out of or in connection with the making of the Advances and the Loan Documents or the use or intended use of the proceeds of the Advances; - 56 57 provided that no Borrower shall have any such obligation for any Indemnified Liabilities arising from any act or omission by an Indemnitee which constitutes gross negligence or willful misconduct. If any investigative, judicial or administrative proceeding arising from any of the foregoing is brought against any Indemnitee, upon such Indemnitee's request, each Borrower, or counsel designated by any such Borrower and satisfactory to the Indemnitee, will resist and defend such action, suit or proceeding to the extent and in the manner directed by the Indemnitee, at such Borrower's sole costs and expense. Each Indemnitee will use its best efforts to cooperate in the defense of any such action, suit or proceeding. If the foregoing undertaking to indemnify, defend and hold harmless may be held to be unenforceable because it violates any law or public policy, each Borrower shall nevertheless make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. Each Borrower's obligation under this Section 9.9 shall survive the termination of this Agreement and the discharge of such Borrower's other obligations hereunder. Section 9.10 Participants. The Lender and its participants, if any, are not partners or joint venturers, and the Lender shall not have any liability or responsibility for any obligation, act or omission of any of its participants. All rights and powers specifically conferred upon the Lender may be transferred or delegated to any of the Lender's participants, successors or assigns. Section 9.11 Execution in Counterparts. This Agreement and other Loan Documents may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which counterparts, taken together, shall constitute but one and the same instrument. Section 9.12 Binding Effect; Assignment; Complete Agreement; Exchanging Information. The Loan Documents shall be binding upon and inure to the benefit of the Borrowers and the Lender and their respective successors and assigns, except that no Borrower shall have the right to assign its rights thereunder or any interest therein without the Lender's prior written consent. This Agreement, together with the Loan Documents, comprises the complete and integrated agreement of the parties on the subject matter hereof and supersedes all prior agreements, written or oral, on the subject matter hereof. Without limiting the Lender's right to share information regarding any Borrower and its Affiliates with the Lender's participants (except that the Lender shall not share any information with a participant that is a competitor, or an affiliate of a competitor, of any such Borrower, in the area of researching, developing and manufacturing animal health products), accountants, lawyers and other advisors, the Lender, WFC Holdings Corporation, and all direct and indirect subsidiaries of WFC Holdings Corporation, may exchange any and all information they may have in their possession regarding any Borrower and its Affiliates, and each Borrower waives any right of confidentiality it may have with respect to such exchange of such information. - 57 58 Section 9.13 Severability of Provisions. Any provision of this Agreement which is prohibited or unenforceable shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. Section 9.14 Headings. Article and Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. - 58 59 Section 9.15 Governing Law; Jurisdiction, Venue; Waiver of Jury Trial. The Loan Documents shall be governed by and construed in accordance with the substantive laws (other than conflict laws) of the State of Colorado. The parties hereto hereby (i) consent to the personal jurisdiction of the state and federal courts located in the State of Colorado in connection with any controversy related to this Agreement; (ii) waive any argument that venue in any such forum is not convenient, (iii) agree that any litigation initiated by the Lender or any Borrower in connection with this Agreement or the other Loan Documents shall be venued in either the District Court for the City and County of Denver, Colorado, or the United States District Court, District of Colorado; and (iv) agree that a final judgment in any such suit, action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. THE PARTIES WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED ON OR PERTAINING TO THIS AGREEMENT. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the date first above written. WELLS FARGO HESKA CORPORATION BUSINESS CREDIT, INC. By /s/Collette Taylor By /s/Ronald L. Hendrick ------------------------------ ---------------------- Colette Taylor, Assistant Ronald L. Hendrick, Chief Vice President Financial Officer DIAMOND ANIMAL HEALTH, INC. By /s/Ronald L. Hendrick ---------------------- Ronald L. Hendrick, Secretary and Treasurer CENTER LABORATORIES, INC. By /s/Ronald L. Hendrick ---------------------- Ronald L. Hendrick, Secretary - 59 60 Table of Exhibits and Schedules Exhibit A Form of Heska Revolving Note Exhibit B Form of Diamond Revolving Note Exhibit C Form of Center Revolving Note Exhibit D Form of Term Loan A Note Exhibit E Form of Term Loan B Note Exhibit F Premises Exhibit G Compliance Certificate ------------------- Schedule 5.1 Trade Names, Chief Executive Office, Principal Place of Business, and Locations of Collateral Schedule 5.4 List of Subsidiaries Schedule 5.6 Litigation Schedule 5.10 Plans Schedule 5.12 Environmental Matters Schedule 7.1 Permitted Liens Schedule 7.2 Permitted Indebtedness and Guaranties Schedule 7.3 Guarantees Schedule 7.4 Investments
61 Exhibit A to Amended and Restated Credit and Security Agreement REVOLVING NOTE $10,000,000 Denver, Colorado June ___, 2000 For value received, the undersigned, HESKA CORPORATION, a Delaware corporation (the "Borrower"), hereby promises to pay on the Termination Date under the Credit Agreement (defined below), to the order of WELLS FARGO BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender"), at its main office in Denver, Colorado, or at any other place designated at any time by the holder hereof, in lawful money of the United States of America and in immediately available funds, the principal sum of Ten Million Dollars ($10,000,000) or, if less, the aggregate unpaid principal amount of all Revolving Advances made by the Lender to the Borrower under the Credit Agreement (defined below) together with interest on the principal amount hereunder remaining unpaid from time to time, computed on the basis of the actual number of days elapsed and a 360-day year, from the date hereof until this Note is fully paid at the rate from time to time in effect under the Second Amended and Restated Credit and Security Agreement of even date herewith (as the same may hereafter be amended, supplemented or restated from time to time, the "Credit Agreement") by and among the Lender, the Borrower, Diamond Animal Health, Inc., and Center Laboratories, Inc. The principal hereof and interest accruing thereon shall be due and payable as provided in the Credit Agreement. This Note may be prepaid only in accordance with the Credit Agreement. This Note is issued pursuant, and is subject, to the Credit Agreement, which provides, among other things, for acceleration hereof. This Note is the Heska Revolving Note referred to in the Credit Agreement. This Note is secured, among other things, pursuant to the Credit Agreement and the Security Documents as therein defined, and may now or hereafter be secured by one or more other security agreements, mortgages, deeds of trust, assignments or other instruments or agreements. The Borrower hereby agrees to pay all costs of collection, including attorneys' fees and legal expenses in the event this Note is not paid when due, whether or not legal proceedings are commenced. 62 Presentment or other demand for payment, notice of dishonor and protest are expressly waived. HESKA CORPORATION By -------------------------------------- Ronald L. Hendrick, Chief Financial Officer -2- 63 Exhibit B to Amended and Restated Credit and Security Agreement REVOLVING NOTE $10,000,000 Denver, Colorado June ___, 2000 For value received, the undersigned, DIAMOND ANIMAL HEALTH, INC., an Iowa corporation ("Diamond") and HESKA CORPORATION, a Delaware corporation (collectively, the "Borrowers"), hereby promise to pay on the Termination Date under the Credit Agreement (defined below), to the order of WELLS FARGO BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender"), at its main office in Denver, Colorado, or at any other place designated at any time by the holder hereof, in lawful money of the United States of America and in immediately available funds, the principal sum of Ten Million Dollars ($10,000,000) or, if less, the aggregate unpaid principal amount of all Revolving Advances made by the Lender to Diamond under the Credit Agreement (defined below) together with interest on the principal amount hereunder remaining unpaid from time to time, computed on the basis of the actual number of days elapsed and a 360-day year, from the date hereof until this Note is fully paid at the rate from time to time in effect under the Second Amended and Restated Credit and Security Agreement of even date herewith (as the same may hereafter be amended, supplemented or restated from time to time, the "Credit Agreement") by and among the Lender, the Borrowers, and Center Laboratories, Inc. The principal hereof and interest accruing thereon shall be due and payable as provided in the Credit Agreement. This Note may be prepaid only in accordance with the Credit Agreement. This Note is issued pursuant, and is subject, to the Credit Agreement, which provides, among other things, for acceleration hereof. To the extent this Note evidences the Borrower's Obligation to pay Existing Revolving Advances, this Note is issued in substitution for and replacement of, but not in payment of, Diamond's promissory note dated as of September 8, 1998, payable to the order of the Lender in the original principal amount of $2,500,000. This Note is the Diamond Revolving Note referred to in the Credit Agreement. This Note is secured, among other things, pursuant to the Credit Agreement and the Security Documents as therein defined, and may now or hereafter be secured by one or more other security agreements, mortgages, deeds of trust, assignments or other instruments or agreements. 64 The Borrower hereby agrees to pay all costs of collection, including attorneys' fees and legal expenses in the event this Note is not paid when due, whether or not legal proceedings are commenced. Presentment or other demand for payment, notice of dishonor and protest are expressly waived. DIAMOND ANIMAL HEALTH, INC. HESKA CORPORATION By By ------------------------------- --------------------------------------- Ronald L. Hendrick, Ronald L. Hendrick, Secretary and Treasurer Chief Financial Officer -2- 65 Exhibit C to Amended and Restated Credit and Security Agreement REVOLVING NOTE $10,000,000 Denver, Colorado June ___, 2000 For value received, the undersigned, CENTER LABORATORIES, INC., a Delaware corporation ("Center") and HESKA CORPORATION, a Delaware corporation (collectively, the "Borrowers"), hereby promise to pay on the Termination Date under the Credit Agreement (defined below), to the order of WELLS FARGO BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender"), at its main office in Denver, Colorado, or at any other place designated at any time by the holder hereof, in lawful money of the United States of America and in immediately available funds, the principal sum of Ten Million Dollars ($10,000,000) or, if less, the aggregate unpaid principal amount of all Revolving Advances made by the Lender to Center under the Credit Agreement (defined below) together with interest on the principal amount hereunder remaining unpaid from time to time, computed on the basis of the actual number of days elapsed and a 360-day year, from the date hereof until this Note is fully paid at the rate from time to time in effect under the Second Amended and Restated Credit and Security Agreement of even date herewith (as the same may hereafter be amended, supplemented or restated from time to time, the "Credit Agreement") by and between the Lender, the Borrowers, and Diamond Animal Health, Inc. The principal hereof and interest accruing thereon shall be due and payable as provided in the Credit Agreement. This Note may be prepaid only in accordance with the Credit Agreement. This Note is issued pursuant, and is subject, to the Credit Agreement, which provides, among other things, for acceleration hereof. This Note is the Center Revolving Note referred to in the Credit Agreement. This Note is secured, among other things, pursuant to the Credit Agreement and the Security Documents as therein defined, and may now or hereafter be secured by one or more other security agreements, mortgages, deeds of trust, assignments or other instruments or agreements. The Borrowers hereby agree to pay all costs of collection, including attorneys' fees and legal expenses in the event this Note is not paid when due, whether or not legal proceedings are commenced. 66 Presentment or other demand for payment, notice of dishonor and protest are expressly waived. CENTER LABORATORIES, INC. HESKA CORPORATION By By -------------------------------- --------------------------------------- Ronald L. Hendrick, Secretary Ronald L. Hendrick, Chief Financial Officer -2- 67 Exhibit D to Amended and Restated Credit and Security Agreement TERM LOAN A NOTE $1,040,000.13 Denver, Colorado June 14, 2000 For value received, the undersigned, DIAMOND ANIMAL HEALTH, INC., an Iowa corporation ("Diamond") and HESKA CORPORATION, a Delaware corporation (collectively, the "Borrowers"), hereby promise to pay on the Termination Date under the Credit Agreement (defined below), to the order of WELLS FARGO BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender"), at its main office in Denver, Colorado, or at any other place designated at any time by the holder hereof, in lawful money of the United States of America and in immediately available funds, the principal sum of One Million Forty Thousand and 13/100 Dollars ($1,040,000.13) or, if less, the aggregate unpaid principal amount of all Term Loan A Advances made by the Lender to Diamond under the Credit Agreement (defined below) together with interest on the principal amount hereunder remaining unpaid from time to time, computed on the basis of the actual number of days elapsed and a 360-day year, from the date hereof until this Note is fully paid at the rate from time to time in effect under the Second Amended and Restated Credit and Security Agreement of even date herewith (as the same may hereafter be amended, supplemented or restated from time to time, the "Credit Agreement") by and among the Lender, the Borrowers, and Center Laboratories, Inc. The principal hereof and interest accruing thereon shall be due and payable as provided in the Credit Agreement. This Note may be prepaid only in accordance with the Credit Agreement. This Note is issued pursuant, and is subject, to the Credit Agreement, which provides, among other things, for acceleration hereof. This Note is issued in substitution for and replacement of, but not in payment of, Diamond's Term Loan A Note dated as of September 8, 1998, payable to the order of the Lender in the original principal amount of $1,600,000. This Note is the Term Loan A Note referred to in the Credit Agreement. This Note is secured, among other things, pursuant to the Credit Agreement and the Security Documents as therein defined, and may now or hereafter be secured by one or more other security agreements, mortgages, deeds of trust, assignments or other instruments or agreements. 68 The Borrower hereby agrees to pay all costs of collection, including attorneys' fees and legal expenses in the event this Note is not paid when due, whether or not legal proceedings are commenced. Presentment or other demand for payment, notice of dishonor and protest are expressly waived. DIAMOND ANIMAL HEALTH, INC. HESKA CORPORATION By By -------------------------------- --------------------------------------- Ronald L. Hendrick, Ronald L. Hendrick, Secretary and Treasurer Chief Financial Officer -2- 69 Exhibit E to Amended and Restated Credit and Security Agreement TERM LOAN B NOTE $2,062,500 Denver, Colorado June ___, 2000 For value received, the undersigned, DIAMOND ANIMAL HEALTH, INC., an Iowa corporation ("Diamond") and HESKA CORPORATION, a Delaware corporation (collectively, the "Borrowers"), hereby promise to pay on the Termination Date under the Credit Agreement (defined below), to the order of WELLS FARGO BUSINESS CREDIT, INC., a Minnesota corporation (the "Lender"), at its main office in Denver, Colorado, or at any other place designated at any time by the holder hereof, in lawful money of the United States of America and in immediately available funds, the principal sum of Two Million Sixty-Two Thousand Five Hundred Dollars ($2,062,500) or, if less, the aggregate unpaid principal amount of all Term Loan B Advances made by the Lender to Diamond under the Credit Agreement (defined below) together with interest on the principal amount hereunder remaining unpaid from time to time, computed on the basis of the actual number of days elapsed and a 360-day year, from the date hereof until this Note is fully paid at the rate from time to time in effect under the Second Amended and Restated Credit and Security Agreement of even date herewith (as the same may hereafter be amended, supplemented or restated from time to time, the "Credit Agreement") by and among the Lender, the Borrowers, and Center Laboratories, Inc. The principal hereof and interest accruing thereon shall be due and payable as provided in the Credit Agreement. This Note may be prepaid only in accordance with the Credit Agreement. This Note is issued pursuant, and is subject, to the Credit Agreement, which provides, among other things, for acceleration hereof. This Note is issued in substitution for and replacement of, but not in payment of, Diamond's Term Loan B Note dated as of September 8, 1998, payable to the order of the Lender in the original principal amount of $2,250,000. This Note is the Term Loan B Note referred to in the Credit Agreement. This Note is secured, among other things, pursuant to the Credit Agreement and the Security Documents as therein defined, and may now or hereafter be secured by one or more other security agreements, mortgages, deeds of trust, assignments or other instruments or agreements. 70 The Borrower hereby agrees to pay all costs of collection, including attorneys' fees and legal expenses in the event this Note is not paid when due, whether or not legal proceedings are commenced. Presentment or other demand for payment, notice of dishonor and protest are expressly waived. DIAMOND ANIMAL HEALTH, INC. HESKA CORPORATION By By -------------------------------- --------------------------------------- Ronald L. Hendrick, Ronald L. Hendrick, Secretary and Treasurer Chief Financial Officer -2- 71 Exhibit F to Amended and Restated Credit and Security Agreement PREMISES The Premises referred to in the Amended and Restated Credit and Security Agreement are legally described as follows: All of the Northeast 1/4 of the Southwest 1/4 of Section 17, Township 78 North, Range 23 West of the Fifth Principal Meridian lying North and East of the Chicago, Burlington & Quincy Railroad (formerly known as Des Moines & Knoxville Railway and sometimes erroneously described as the Des Moines & Kansas City Railway) now included in and forming a part of the City of Des Moines, Polk County, Iowa, except the following: The South 208 3/4 feet of the East 434 feet of said Northeast 1/4 of the Southwest 1/4 of Section 17, Township 78 North, Range 23, West of the Fifth Principal Meridian, Polk County, Iowa; A strip of ground 30 feet in width lying Northerly from and adjacent to the Northerly line of the 100 foot right-of-way of the Chicago, Burlington & Quincy Railroad Company in the South 17 acres (except street) of the Northeast 1/4 of the Southwest 1/4 of Section 17, Township 78 North, Range 23, West of the Fifth Principal Meridian, Polk County, Iowa; A rectangular piece in the Northeast 1/4 of the Southwest 1/4 of Section 17, Township 78 North, Range 23 West of the Fifth Principal Meridian, Polk County, Iowa, lying within the following described lines: Beginning at a point on the West line of said Northeast 1/4 of said Southwest 1/4 of said Section 17 which is 120 feet North of the Northerly line of the 100 foot right-of-way; of the Chicago, Burlington & Quincy Railroad Company; thence South along said West line of said Northeast 1/4 of said Southwest 1/4 of said Section 17, a distance of 120 feet to the Northerly line of said railroad right-of-way; thence Easterly at right angles to said West line of said Northeast 1/4 of said Southwest 1/4 of said Section 17, a distance of 80 feet; thence North on a line 80 feet East of and parallel with the West line of said Northwest 1/4 of Southwest 1/4 of said Section 17, a distance of 120 feet; thence Westerly in a straight line a distance of 80 feet to the point of beginning; and The Southeast 1/4 of the Northeast 1/4 and the Northeast 1/4 of the Northeast 1/4 and the Northeast 1/4 of the Southeast 1/4 and the Southeast 1/4 of the Southeast 1/4 of Section 22, Township 77 North, Range 23 West of the 5th P.M. in Warren County, Iowa and the portion of the Northwest 1/4 of the Southwest 1/4 located north and west of the roadway in Section 23, Township 77 North, Range 23 West of the 5th P.M. in Warren County, Iowa. 72 Exhibit G to Amended and Restated Credit and Security Agreement COMPLIANCE CERTIFICATE To: Colette Taylor Wells Fargo Business Credit, Inc. Date: , 20 ------------------ --- Subject: Heska Corporation Financial Statements In accordance with our Second Amended and Restated Credit and Security Agreement dated as of June 14, 2000 (the "Credit Agreement"), attached are the financial statements of Heska Corporation ("Heska") as of and for ________________, 20___ (the "Reporting Date") and the year-to-date period then ended (the "Current Financials"). All terms used in this certificate have the meanings given in the Credit Agreement. I certify that, to the best of my knowledge, the Current Financials have been prepared in accordance with GAAP, subject to year-end audit adjustments, and fairly present the Borrower's financial condition and the results of its operations as of the date thereof. Events of Default. (Check one): [ ] The undersigned does not have knowledge of the occurrence of a Default or Event of Default under the Credit Agreement. [ ] The undersigned has knowledge of the occurrence of a Default or Event of Default under the Credit Agreement and attached hereto is a statement of the facts with respect to thereto. I hereby certify to the Lender as follows: [ ] The Reporting Date does not mark the end of one of the Borrower's fiscal quarters, hence I am completing all paragraphs below except paragraph 2. [ ] The Reporting Date marks the end of one of the Borrower's fiscal quarters, hence I am completing all paragraphs below. 73 Financial Covenants. I further hereby certify as follows: 1. Minimum Book Net Worth. Pursuant to Section 6.12 of the Credit Agreement, as of the Reporting Date, Heska's Book Net Worth was, on a consolidated basis, $_________________, which [ ] satisfies [ ] does not satisfy the requirement that such amount be not less than $_____________ on the Reporting Date. 2. Minimum Net Income. Pursuant to Section 6.13 of the Credit Agreement, as of the Reporting Date, Heska's Net Income was, on a consolidated basis, $_________________, which [ ] satisfies [ ] does not satisfy the requirement that such amount be no less than $______________ on the Reporting Date. 3. Minimum Cash Balance. Pursuant to Section 6.14 of the Credit Agreement, as of the Reporting Date, the Borrower's Cash was $_________________, which [ ] satisfies [ ] does not satisfy the requirement that such amount be no less than $______________ on the Reporting Date. 4. Minimum Individual Book Net Worth. Pursuant to Section 6.15 of the Credit Agreement, as of the Reporting Date, Heska's Book Net Worth was $_________________, Diamond's Book Net Worth was $_________________, and Center's Book Net Worth was $_________________, which [ ] satisfies [ ] does not satisfy the requirement that such amounts be no less than zero on the Reporting Date. 5. Capital Expenditures. Pursuant to Section 7.10 of the Credit Agreement, as of the Reporting Date, Heska's Capital Expenditures were, in the aggregate and on a consolidated basis, $_______________ which [ ] satisfies [ ] does not satisfy the requirement that such amount be not more than $______________ during its fiscal year ending December 31, _____________. Attached hereto are all relevant facts in reasonable detail to evidence, and the computations of the financial covenants referred to above. These computations were made in accordance with GAAP. HESKA CORPORATION By --------------------------------------- Ronald L. Hendrick Its Chief Financial Officer EX-10.40 5 ex10-40.txt EMPLOYMENT AGREEMENT - DAN T. STINCHCOMB 1 EXHIBIT 10.40 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into by and between Heska Corporation, a Delaware corporation with its principal office at 1613 Prospect Parkway, Fort Collins, Colorado 80525 ("Company") and DAN T. STINCHCOMB ("Employee"), effective as of MAY 1, 2000. W I T N E S S E T H: Whereas Company desires to employ Employee to act as its EXECUTIVE VICE PRESIDENT, RESEARCH AND DEVELOPMENT in an at-will capacity; and Whereas Employee wishes to act as Company's EXECUTIVE VICE PRESIDENT, RESEARCH AND DEVELOPMENT as an employee in an at-will capacity; NOW, THEREFORE, in consideration of the mutual covenants and warranties contained herein, the parties agree as follows: 1. Employment. Company hereby employs Employee as its EXECUTIVE VICE PRESIDENT, RESEARCH AND DEVELOPMENT, and Employee hereby accepts such employment. 2. Duties and Responsibilities. Employee shall serve as EXECUTIVE VICE PRESIDENT, RESEARCH AND DEVELOPMENT of Company, with such duties and responsibilities as may be assigned to HIM from time to time by HIS superior officers (the "Senior Management") and/or the Board of Directors of Company, and with such on-going daily duties and responsibilities as are typically entailed in such position. The Senior Management and/or the Board of Directors shall be entitled to change such title, duties and responsibilities from time to time, in their discretion. Employee shall devote HIS full time and energies to such duties. 3. Compensation. Company shall pay Employee, as compensation for services rendered under this Agreement, a "base salary" per year, the amount of which shall initially be $180,000, which may be increased from time-to-time by the Company in its discretion. If for any reason during any given year, Employee does not work an entire year, other than normal vacations as provided hereunder, the compensation will be prorated to compensate only for the actual time worked. 4. Expenses. Company shall reimburse Employee for HIS reasonable out-of-pocket expenses incurred in connection with the business of Company, including travel away from the Company's facilities, upon presentation of appropriate written receipts and reports and subject to the customary practices and limitations of Company. 5. Employee Benefits. During the term of HIS employment hereunder, Employee shall be entitled to receive the same benefits that the Board of Directors establishes generally for the officers and other employees of Company. These may include, from time to time, medical insurance, life insurance, paid vacation time and medical disability insurance. -1- 2 6. Termination. (a) At-Will. This is an at-will employment agreement and does not bind either of the parties to any specific term or duration. (i) Employee is free to terminate employment with Company at any time, for any reason, or for no reason, for cause or without cause, and without any prior notice. (ii) Company is free to terminate the employment of Employee at any time, for any reason or for no reason, for cause or without cause, and without any prior notice. (b) Termination "Without Cause" - Separation Benefits. (i) Upon "involuntary termination" of HIS employment with Heska Corporation for other than a "change of control", as defined in Paragraph 6(c)(iii) below, Employee will be entitled to severance pay as provided in Paragraph 6(b)(ii) below, unless HE is terminated for "cause", as defined in Paragraph 6(d)(ii) below. Employee's entitlement to any severance pay is dependent on HIS execution of a complete release of claims against Company and its affiliates. (ii) In the event that severance pay is due to Employee as a result of the "involuntary termination" of HIS employment "without cause", Employee will be paid six months' "base salary" at the rate in effect immediately prior to the termination in six equal monthly installments (subject to all applicable taxes and other deductions), with the first such installment due 15 days after the date of such termination and with the following five installments due no later than monthly thereafter on Company's then regular payroll dates. The Company will also pay the employer contribution and administrative cost of the health insurance premiums for the medical and dental insurance coverage previously maintained by the Company for Employee and HIS eligible dependents during this six month period or until Employee is provided or obtains medical and dental insurance coverage by another employer or entity, whichever first occurs. (c) Change of Control - Separation Benefits. (i) Upon "involuntary termination" of HIS employment due to a "change of control" of Heska Corporation, Employee will be entitled to severance pay as provided in Paragraph 6(c)(iv) below, unless HE is terminated for "cause", as defined in Paragraph 6(d)(ii) below. Employee's entitlement to any severance pay is dependent on HIS execution of a complete release of claims against Company and its affiliates. (ii) For the purposes of this Employment Agreement, "change of control" is defined as the merger, acquisition or sale of Company or all or substantially all of its assets with, into, or to a previously unaffiliated third party entity, other than a merger in which the shareholders of Company prior to the merger, by reason of such shareholdings, own more than 50% of the outstanding shares of the company after the merger. -2- 3 (iii) The parties agree that for the purposes of this Employment Agreement, an "involuntary termination" due to a "change of control" will be deemed to have occurred when Employee is no longer employed by the Company's successor following a "change of control" because the Employee's position is eliminated within nine (9) months of the "change of control" or when Employee's job responsibilities are materially and negatively changed within nine (9) months of the "change of control", and Employee elects to resign. (iv) In the event that severance pay is due to Employee as a result of the "involuntary termination" of HIS employment without "cause" due to a "change of control", Employee will be paid one (1) year's "base salary" at the rate in effect immediately prior to the termination in twelve equal monthly installments (subject to all applicable taxes and other deductions), with the first such installment due 15 days after the date of such termination and with the following eleven installments due no later than monthly thereafter on Company's then regular payroll dates. The Company will also pay the employer contribution and administrative cost of the health insurance premiums for the medical and dental insurance coverage previously maintained by the Company for Employee and HIS eligible dependents during this one year period or until Employee is provided or obtains medical and dental insurance coverage by another employer or entity, whichever first occurs. (d) Termination "For Cause"; Voluntary Resignation. (i) If Company or its successor terminates Employee for "cause" or if Employee's employment terminates for any reason other than a termination by the Company "without cause" (as set forth in paragraph 6(b)) or due to a "change of control" (as set forth in Paragraph 6(c)), Employee will not be entitled to any severance pay and shall only receive pay and benefits which Employee earned as of the date of termination. (ii) The parties agree that for the purposes of this Employment Agreement, a termination for "cause" will be deemed to have occurred when Company terminates Employee's employment because of the occurrence of any of the following events: (A) Employee shall refuse to accept a change or modification of HIS title, duties or responsibilities by senior management and/or the Board of Directors; (B) Employee shall refuse to accept a reasonable transfer not arising from a change in control to a position with comparable responsibility and salary with any affiliated company that does not involve commuting more than fifty (50) miles each way from the Company headquarters in the Fort Collins, Colorado area; -3- 4 (C) Employee shall die, be adjudicated to be mentally incompetent or become mentally or physically disabled to such an extent that Employee is unable to perform HIS duties under this Employment Agreement for a period of ninety (90) consecutive days; (D) Employee shall commit any breach of HIS obligations under this Agreement; (E) Employee shall commit any breach of any material fiduciary duty to Company; (F) Employee shall be convicted of, or enter a plea of nolo contendere to, any crime involving moral turpitude or dishonesty, whether a felony or misdemeanor, or any crime which reflects so negatively on Company as to be detrimental to Company's image or interests; (G) Employee shall commit insubordination or refusal to comply with any request of HIS supervisor or the Board of Directors of Company relating to the scope or performance of Employee's duties; (H) Employee shall possess any illegal drug on Company premises or Employee shall be under the influence of illegal drugs or abusing prescription drugs or alcohol while on Company business or on Company premises; or (I) Employee shall conduct HIMSELF in a manner that, in the good faith and reasonable determination of the Senior Management and/or the Board of Directors, demonstrates Employee's unfitness to serve. 7. Proprietary Information. Employee agrees that, if HE has not already done so, HE will promptly execute Company's standard employee proprietary information and assignment of inventions agreement. 8. Arbitration; Attorneys' Fees. If any dispute arises under this Agreement or by reason of any asserted breach of it, or from the Parties' employment relationship or any other relationship, the Company, at its sole discretion, may elect to have the dispute resolved through arbitration, so long as all of the arbitrator's fees and expenses are borne exclusively by the Company. The arbitration shall be conducted pursuant to the rules of the American Arbitration association, with the arbitrator being selected by mutual agreement of the parties. Regardless of whether the dispute is resolved through arbitration or litigation, the prevailing party shall be entitled to recover all costs and expenses, including reasonable attorneys' fees, incurred in enforcing or attempting to enforce any of the terms, covenants or conditions, including costs incurred prior to commencement of arbitration or legal action, and all costs and expenses, including reasonable attorneys' fees, incurred in any appeal from an action brought to enforce any of the terms, covenants or conditions. For purposes of this section, "prevailing party" includes, without limitation, a party who agrees to dismiss a suit or proceeding upon the other's payment or performance of substantially the relief sought. -4- 5 9. Notices. Any notice to be given to Company under the terms of this Agreement shall be addressed to Company at the address of its principal place of business. Any notice to be given to Employee shall be addressed to HIM at HIS home address last shown on the records of Company, or to such other address as Employee shall have given notice of hereunder. 10. Miscellaneous. This Agreement shall be governed by the laws of the State of Colorado as applied to contracts between residents of that state to be performed wholly within that state. This Agreement is the entire agreement of the parties with respect to the subject matter hereof and supersedes all prior understandings and agreements. This Agreement may be modified only by a written document signed by both parties, except that the Company, in its discretion, may modify any policies, guidelines or other directives, none of which shall constitute a binding agreement or impose any contractual obligations. This Agreement shall be binding upon and shall inure to the benefit of the successors and assigns of the parties. IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and year hereinabove written. HESKA CORPORATION By: /s/ Robert B. Grieve ---------------------------------------- Title: Chairman and Chief Executive Officer ------------------------------------- EMPLOYEE Name: /s/ Dan. T. Stinchcomb ---------------------------------------- DAN T. STINCHCOMB -5- EX-10.41 6 ex10-41.txt EMPLOYMENT AGREEMENT - CAROL TALKINGTON VERSER 1 EXHIBIT 10.41 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement") is entered into by and between Heska Corporation, a Delaware corporation with its principal office at 1613 Prospect Parkway, Fort Collins, Colorado 80525 ("Company") and CAROL VERSER ("Employee"), effective as of MAY 1, 2000. W I T N E S S E T H: Whereas Company desires to employ Employee to act as its VICE PRESIDENT, INTELLECTUAL PROPERTY AND BUSINESS DEVELOPMENT in an at-will capacity; and Whereas Employee wishes to act as Company's VICE PRESIDENT, INTELLECTUAL PROPERTY AND BUSINESS DEVELOPMENT as an employee in an at-will capacity; NOW, THEREFORE, in consideration of the mutual covenants and warranties contained herein, the parties agree as follows: 1. Employment. Company hereby employs Employee as its VICE PRESIDENT, INTELLECTUAL PROPERTY AND BUSINESS DEVELOPMENT, and Employee hereby accepts such employment. 2. Duties and Responsibilities. Employee shall serve as VICE PRESIDENT, INTELLECTUAL PROPERTY AND BUSINESS DEVELOPMENT of Company, with such duties and responsibilities as may be assigned to HER from time to time by HER superior officers (the "Senior Management") and/or the Board of Directors of Company, and with such on-going daily duties and responsibilities as are typically entailed in such position. The Senior Management and/or the Board of Directors shall be entitled to change such title, duties and responsibilities from time to time, in their discretion. Employee shall devote HER full time and energies to such duties. 3. Compensation. Company shall pay Employee, as compensation for services rendered under this Agreement, a "base salary" per year, the amount of which shall initially be $140,000, which may be increased from time-to-time by the Company in its discretion. If for any reason during any given year, Employee does not work an entire year, other than normal vacations as provided hereunder, the compensation will be prorated to compensate only for the actual time worked. 4. Expenses. Company shall reimburse Employee for HER reasonable out-of-pocket expenses incurred in connection with the business of Company, including travel away from the Company's facilities, upon presentation of appropriate written receipts and reports and subject to the customary practices and limitations of Company. 5. Employee Benefits. During the term of HER employment hereunder, Employee shall be entitled to receive the same benefits that the Board of Directors establishes generally for the officers and other employees of Company. These may include, from time to time, medical insurance, life insurance, paid vacation time and medical disability insurance. -1- 2 6. Termination. (a) At-Will. This is an at-will employment agreement and does not bind either of the parties to any specific term or duration. (i) Employee is free to terminate employment with Company at any time, for any reason, or for no reason, for cause or without cause, and without any prior notice. (ii) Company is free to terminate the employment of Employee at any time, for any reason or for no reason, for cause or without cause, and without any prior notice. (b) Termination "Without Cause" -- Separation Benefits. (i) Upon "involuntary termination" of HER employment with Heska Corporation for other than a "change of control", as defined in Paragraph 6(c)(iii) below, Employee will be entitled to severance pay as provided in Paragraph 6(b)(ii) below, unless SHE is terminated for "cause", as defined in Paragraph 6(d)(ii) below. Employee's entitlement to any severance pay is dependent on HER execution of a complete release of claims against Company and its affiliates. (ii) In the event that severance pay is due to Employee as a result of the "involuntary termination" of HER employment "without cause", Employee will be paid six months' "base salary" at the rate in effect immediately prior to the termination in six equal monthly installments (subject to all applicable taxes and other deductions), with the first such installment due 15 days after the date of such termination and with the following five installments due no later than monthly thereafter on Company's then regular payroll dates. The Company will also pay the employer contribution and administrative cost of the health insurance premiums for the medical and dental insurance coverage previously maintained by the Company for Employee and HER eligible dependents during this six month period or until Employee is provided or obtains medical and dental insurance coverage by another employer or entity, whichever first occurs. (c) Change of Control -- Separation Benefits. (i) Upon "involuntary termination" of HER employment due to a "change of control" of Heska Corporation, Employee will be entitled to severance pay as provided in Paragraph 6(c)(iv) below, unless SHE is terminated for "cause", as defined in Paragraph 6(d)(ii) below. Employee's entitlement to any severance pay is dependent on HER execution of a complete release of claims against Company and its affiliates. (ii) For the purposes of this Employment Agreement, "change of control" is defined as the merger, acquisition or sale of Company or all or substantially all of its assets with, into, or to a previously unaffiliated third party entity, other than a merger in which the shareholders of Company prior to the merger, by reason of such shareholdings, own more than 50% of the outstanding shares of the company after the merger. -2- 3 (iii) The parties agree that for the purposes of this Employment Agreement, an "involuntary termination" due to a "change of control" will be deemed to have occurred when Employee is no longer employed by the Company's successor following a "change of control" because the Employee's position is eliminated within nine (9) months of the "change of control" or when Employee's job responsibilities are materially and negatively changed within nine (9) months of the "change of control", and Employee elects to resign. (iv) In the event that severance pay is due to Employee as a result of the "involuntary termination" of HER employment without "cause" due to a "change of control", Employee will be paid one (1) year's "base salary" at the rate in effect immediately prior to the termination in twelve equal monthly installments (subject to all applicable taxes and other deductions), with the first such installment due 15 days after the date of such termination and with the following eleven installments due no later than monthly thereafter on Company's then regular payroll dates. The Company will also pay the employer contribution and administrative cost of the health insurance premiums for the medical and dental insurance coverage previously maintained by the Company for Employee and HER eligible dependents during this one year period or until Employee is provided or obtains medical and dental insurance coverage by another employer or entity, whichever first occurs. (d) Termination "For Cause"; Voluntary Resignation. (i) If Company or its successor terminates Employee for "cause" or if Employee's employment terminates for any reason other than a termination by the Company "without cause" (as set forth in paragraph 6(b)) or due to a "change of control" (as set forth in Paragraph 6(c)), Employee will not be entitled to any severance pay and shall only receive pay and benefits which Employee earned as of the date of termination. (ii) The parties agree that for the purposes of this Employment Agreement, a termination for "cause" will be deemed to have occurred when Company terminates Employee's employment because of the occurrence of any of the following events: (A) Employee shall refuse to accept a change or modification of HER title, duties or responsibilities by senior management and/or the Board of Directors; (B) Employee shall refuse to accept a reasonable transfer not arising from a change in control to a position with comparable responsibility and salary with any affiliated company that does not involve commuting more than fifty (50) miles each way from the Company headquarters in the Fort Collins, Colorado area; -3- 4 (C) Employee shall die, be adjudicated to be mentally incompetent or become mentally or physically disabled to such an extent that Employee is unable to perform HER duties under this Employment Agreement for a period of ninety (90) consecutive days; (D) Employee shall commit any breach of HER obligations under this Agreement; (E) Employee shall commit any breach of any material fiduciary duty to Company; (F) Employee shall be convicted of, or enter a plea of nolo contendere to, any crime involving moral turpitude or dishonesty, whether a felony or misdemeanor, or any crime which reflects so negatively on Company as to be detrimental to Company's image or interests; (G) Employee shall commit insubordination or refusal to comply with any request of HER supervisor or the Board of Directors of Company relating to the scope or performance of Employee's duties; (H) Employee shall possess any illegal drug on Company premises or Employee shall be under the influence of illegal drugs or abusing prescription drugs or alcohol while on Company business or on Company premises; or (I) Employee shall conduct HERSELF in a manner that, in the good faith and reasonable determination of the Senior Management and/or the Board of Directors, demonstrates Employee's unfitness to serve. 7. Proprietary Information. Employee agrees that, if SHE has not already done so, SHE will promptly execute Company's standard employee proprietary information and assignment of inventions agreement. 8. Arbitration; Attorneys' Fees. If any dispute arises under this Agreement or by reason of any asserted breach of it, or from the Parties' employment relationship or any other relationship, the Company, at its sole discretion, may elect to have the dispute resolved through arbitration, so long as all of the arbitrator's fees and expenses are borne exclusively by the Company. The arbitration shall be conducted pursuant to the rules of the American Arbitration association, with the arbitrator being selected by mutual agreement of the parties. Regardless of whether the dispute is resolved through arbitration or litigation, the prevailing party shall be entitled to recover all costs and expenses, including reasonable attorneys' fees, incurred in enforcing or attempting to enforce any of the terms, covenants or conditions, including costs incurred prior to commencement of arbitration or legal action, and all costs and expenses, including reasonable attorneys' fees, incurred in any appeal from an action brought to enforce any of the terms, covenants or conditions. For purposes of this section, "prevailing party" includes, without limitation, a party who agrees to dismiss a suit or proceeding upon the other's payment or performance of substantially the relief sought. -4- 5 9. Notices. Any notice to be given to Company under the terms of this Agreement shall be addressed to Company at the address of its principal place of business. Any notice to be given to Employee shall be addressed to HER at HER home address last shown on the records of Company, or to such other address as Employee shall have given notice of hereunder. 10. Miscellaneous. This Agreement shall be governed by the laws of the State of Colorado as applied to contracts between residents of that state to be performed wholly within that state. This Agreement is the entire agreement of the parties with respect to the subject matter hereof and supersedes all prior understandings and agreements. This Agreement may be modified only by a written document signed by both parties, except that the Company, in its discretion, may modify any policies, guidelines or other directives, none of which shall constitute a binding agreement or impose any contractual obligations. This Agreement shall be binding upon and shall inure to the benefit of the successors and assigns of the parties. IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and year hereinabove written. HESKA CORPORATION By: /s/ Robert B. Grieve ---------------------------------------- Title: Chairman and Chief Executive Officer ------------------------------------- EMPLOYEE Name: /s/ Carol Talkington Verser -------------------------------------- CAROL VERSER -5- EX-27 7 ex27.txt FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM THE REGISTRANT'S CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) INCLUDED IN THE COMPANY'S REPORT ON FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000. 1,000 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 5,650 7,232 11,419 (264) 11,853 36,476 26,633 (11,761) 54,011 14,670 0 0 0 199,397 (164,878) 54,011 26,137 28,606 17,886 17,886 22,041 0 (215) (11,632) 0 (11,632) 0 0 0 (11,632) (0.35) (0.35)
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